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When you bid jobs or products, you may have a profit percentage, gross profit dollar margin or a specific net profitability estimate in mind.  Initially you probably know what you need in order to make an acceptable return.  Because you spend so much time estimating your bids for your customers, that effort deserves the same amount of detailed attention in analyzing the final result.  Start this today and find out how close you were but more importantly discover where you went wrong.

Measure your estimating accuracy multiple ways:

• Select enough data: Determine enough actual sales to properly analyze your bidding accuracy.  Pick a month or quarter of sales, select 100 jobs to review, choose a specific type of customer to evaluate or choose another segment of your business that is large enough to yield relevant information. You decide the group to measure but try to do it several ways. You will most likely uncover other unknown problems.
• Select finished products/jobs: Select jobs that are finished, products that are completely shipped or some other activity that has a final conclusive cost determined that can be compared to your initial gross profit bid estimate.
• Select a relevant time period: Run this listing of jobs or products for a determined period of time (one month, one quarter, one year) and get subtotals by product code and customer name.
• Compare actual versus estimated GP $: Review the jobs and compare the actual gross profit earned versus the original estimate of gross profit. Sort the list by the largest dollar variance regardless of the percentage.  You want to know which jobs or customers are impacting your overall weighted average the most.
• Sort by percentage difference: Sort the list by the percentage differences to see which are below each customer’s overall weighted average. You might have equal winners or losers or a mixture of extreme winners and losers obscuring your operation or estimating problems. You can have jobs that were profitable but that need work to improve their gross profit margin percentage.
• Sort by dollar variance: Sort the list by the dollar variance between the estimated gross profit % and actual gross profit %. This will tell you quickly which jobs are ruining your overall weighted gross profit margins. It also tells you how bad you are at estimating your costs.
• Review details to find offsetting variances: Notice that if all of the jobs for a customer were bid at 30% gross profit and the estimated gross profit was 30%, this is not necessarily acceptable. Look at the details. You could have 20 jobs in that total that were badly estimated offset temporarily by five or six larger temporary one-time jobs that exceeded the other twenty’s shortfall. The trouble with these results is that when the profitable jobs end, you would lose money on this customer and not understand what happened.  Without looking at the details, one might believe there was nothing wrong with this customer’s results.
• Look for common areas of losses: When you analyze these jobs or products, determine whether the jobs share the same types of losses (i.e. all jobs contained excessively high freight costs, most were bid with inadequate setup time or possibly the estimator used a wrong labor dollar amount to apply labor costs).  Note these procedural problems to correct when reviewing these jobs with estimating.
• Have estimating personnel determine the problems/solutions: Include the estimators to help determine why the jobs were bid incorrectly, or why the jobs did not turn out profitably as planned.  These employees need to see their errors and help to determine how to repair them along with production personnel. They will benefit from the process.
• Determine the jobs/products or customers that need price hikes: After analyzing some jobs and deciding those products’ costs cannot be cut, decide the necessary price increase that must be presented to the customer in order to benefit the company’s overall weighted average gross profit percentage and dollars.
• If the customer accepts the price increase, your company wins: Your company wins when your sales person asks and receives a price increase. This raises the overall company gross profit margin and ultimately boosts your net profit.
• If the customer declines the price increase, your company wins: If your customer decides to go elsewhere and not pay your requested price increase, your company now will not have a low gross profit job(s) dragging down the overall weighted gross profit average.  More importantly, you have time now to find better more profitable customers and earn better margins.
• Run these analyses often and have your estimators to do the necessary due diligence: Analyze these results on a regular basis.  These assignments for the estimators will be beneficial. The analyses will cause them to find their errors, confront cost reality and make them much better estimators. They will discover on their own how they are estimating incorrectly.

Benefits of estimators evaluating their own bidding estimates against actual results:

• Estimators may see the limitations of currently owned company equipment. It may force them to make recommendations to the company to buy new faster equipment to cut production costs.
• Estimators may be surprised at the actual scrap rates incurred and come up with different production approaches or tooling.
• Estimators may determine the cost of certain purchased materials seem high and will properly request purchasing to go out to the market to obtain further bids on current materials and possible material substitutes.
• Estimators may see additional costs they forgot in the estimates.
• Estimators may discover actual current labor rates are higher than their cost models.
• Estimators may realize that freight rates to deliver the finished goods are excessively high which may make force production plans to be changed for the goods to be produced in other company plants located nearer to customer’s ultimate delivery points.

 

 

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