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  • Writer's pictureTristan Wilson

Thinking, Fast and Slow, About True Cost

Updated: Jul 24, 2022



The adrenaline rush of the winning apparent bid results are far in the rear view mirror. Contracts have been signed. The job has been set up and bought out. Advance warning signs are up on the roadway and preparatory work has begun. The first large equipment spread is delivered to the job site and parked up in the laydown yard. Showtime approaches. In a construction trailer, office, or pickup truck, a B2W or HeavyBid report with production rates is read aloud amongst the project team (PM, Superintendent, PE, Field Managers) responsible for the work. Someone spits into a tiny styrofoam coffee cup. This could go many ways. Here are 2 potential extremes:


1. “Bad” News. The setting deflates with a collective sigh of deep concern. “They” said we could do this in how many tons/square yards/cubic yards/feet per day? There is no possible way… What.The.Heck.Were.They.Thinking? Note: Heck is substitutable with saltier 4 letter words.


2. “Good” News. Cheshire grins and delight. “They” must not know what THIS team is capable of doing. We will crush the budget. Management will be delighted, and we’ll get raises. We can easily double the budgeted daily quantity and coast to victory. We cannot believe we actually won this bid. But sure glad we did. Thanks Estimator!


Similar Oh No! or Oh Yeah! scenarios play out every day across the country. “They” is in fact “We”, or the construction firm responsible for the project. So, how do contractors narrow the gap between budgeted and actual costs on highway work?


First, we should consider two concepts: human biases and alignment of incentives.


Human Biases

Studies like the ones supporting Nobel Prize winning psychologist Daniel Kahneman's book Thinking, Fast and Slow have shown that human fear of loss is greater than appreciation of gain. How does this influence estimating judgment? Well, when contractors lose money on an item, they remember it more than they remember “beating” the budget. It is just how our brains are wired. The discipline to approach each job on its own merits while simultaneously analyzing past, similar items and bids is like walking a tightrope while juggling.


Recency bias, or the tendency to favor recent events over historic ones, can also result in inaccurate costs. A bust on an excavation item from 2 weeks ago does not necessarily mean that crews are incapable of achieving lofty production rates on today’s bid.


Contractors who consistently beat estimated production rates may not know their cost or are unwilling to have the team to get the cost right. The converse is true as well: If costs regularly exceed estimates, the business could be at risk. I have found the former to be much more common: Most highway contractors bid unit price jobs with extra padding in production rates and unit costs. Awareness of our natural biases should improve cost accuracy.


Alignment of Incentives

How do we explain that highway estimates' gap between budget and cost? Let’s think about risk and reward from the Estimator’s perspective. An Estimator may be perceived as reckless if he bids an item more aggressively than crews are able to produce in the field. Money is being lost and people naturally want answers and someone to blame. This creates friction. If the Estimating Department is separate from the Construction Department, typically the field has a louder voice and often the louder voice prevails. Costs exceeding budget leads to losses. If these occurrences become commonplace, the Estimator could lose his job.


Conversely, an Estimator may carry a stigma of not being aggressive enough if he consistently estimates items at production rates lower than what is possible. However, the Estimator’s downside in this scenario is pretty minimal compared to the prior one. Sure, the Estimator may have a lower hit rate. But the cost reports look great on his bids and the field management looks like superstars, so they are not complaining. Estimator job security risk is lower in this scenario. This is why many estimators are not incentivized to think creatively, try new approaches, or bid work aggressively. Submitting a complaint and safe bid is more often than not what is expected. It is implied to win their “fair share”, not leave “too much” money, and to have the costs match up relatively close to the estimate. And more target jobs could go to the competition.


The best estimators are in sync with the field operations, the competition, and past/current jobs. They invite feedback, take measured risks, and are learners. Their bids are not always 15% off on cost and rarely will their actions reflect complacency. They have or will find sound answers to the questions asked to them. You would not want to have to compete against them every day because they pay close attention to each detail and never slack off on a bid.


No one is perfect. There will be good items and bad items. Closing the gap between budget and cost reality is hard work that requires perseverance. With grit, intellect, and the right incentive system, nearly anyone can level up at estimating and bidding work.


Next time, we will discuss Winning Habits in Knowing Your True Cost.


At Edgevanta, we are building a technology to help solve the project acquisition process for our customers. We'd love to hear your feedback as we review the 8 fundamentals.



Sincerely,


Tristan Wilson

CEO and Founder

Edgevanta, LLC


This is the fourth deep dive of a multi-part series on the project acquisition process of the construction cycle for highway contractors.


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