How first principles estimating software can enable construction firms to control their costs.

The construction industry is a highly competitive environment that operates on very tight margins at the best of times. The sector has been under pressure in South Africa for some time now and the worldwide Covid-19 pandemic has added a squeeze to construction companies throughout the continent and most of the world.

In March, the Harvard Business Review wrote: “We’re seeing the most rapid organisational transformation in the history of the modern firm.”

In January 2020, Andrew Skudder, CEO of Construction Computer Software (CCS), a leading provider of software for the construction industry, wrote that the construction sector is one of the least digitised industries in South Africa and around the world. At the time, he noted that the power of data could no longer be ignored.  With this forced transformation, how can construction companies, including small and medium-sized contractors, benefit from the power of digital solutions?  Skudder says that in difficult times the ability to manage costs and have intimate control of budgets is imperative for competitiveness and survival, and that software can enable this.

“CCS has been in this space for 35 years and we have been in the trenches, so to speak, practising as estimators and project managers and developing software to enable first principles estimating through technology,” explains Skudder.  

First principles estimating is a method of pricing projects where rate per unit build-ups are derived from identifying, analysing and combining basic resources. Skudder says that by embracing estimating from first principles, construction companies place themselves in a better position to budget, control and manage their costs.

“A misconception out there is that first principles estimating simply increases the workload for small and medium-sized contractors. Purpose-built software takes what would otherwise be a laborious spreadsheet task and empowers companies to unlock the significant benefits of this type of project estimating,” says Skudder.

He says there are several benefits of first principles estimating.

1. It is intuitive. “By way of analogy, assume you want to so a small renovation to your home. You are going to go through a first principles estimating process. You will ask: what material, tools and labour do I need to do this renovation and then price each resource from there. It is intuitive.”
2. It is defensible. “You have unpacked exactly what the scope of work is, considered which elements you are going to contract out, priced the resources required to complete the project, put in contingencies for risk and been able to adjust your margins appropriately for the risk and return that you want to get,” he says. “Then, if someone ever asks how you got to this final estimate number, it is defensible because you have all the information.”
3. It is credibe. “It enables a lot more credibility because you have visibility into the basis of the estimate - for every cost element in the tender”.
4. “It also helps you to mitigate the risk of getting the tender or the estimate wrong because every component of the project is estimated or calculated in its individual element, and so if you get one element wrong, it doesn’t impact the whole price,” explains Skudder.  “For example, if you are building a concrete structure, one simple way of estimating the price of concrete is using a overall value per cubic meter. Imagine you used a rate per cubic meter, and you applied that to all the elements in the entire structure. Now imagine that as a result of known soil conditions you require more wastage on the concrete in your foundations element. What impact could that have?  That adds increased cost and if it hasn’t been priced individually, you are going to get the whole thing wrong, which is why it is better to break it down into appropriate elements.”

This is vital, says Skudder, because if your understanding of the cost base for a project is down to detailed quantity and rate resource levels, you unlock the ability of downstream control. For example, an estimator can consider all the materials and know exactly what quantities and rates they have allowed for within an element in a particular project, meaning the project managers and procurement teams can procure against those quantities and rates independently.

“You have two measures of control against each resource which gives you deeper control. This is significant downstream control. And this is where purpose-built software incorporating first principles estimating gives you that edge - it enables intimate control of all your project costs,” says Skudder.

Often when speaking about the benefits that digitisation can bring to the industry, stakeholders speak of “unlocking efficiencies”. Skudder says that another benefit of using first principles estimating, through software specifically designed for that purpose, is that companies can re-use project estimates and budgets in different projects if the scopes are similar. This enables experience and knowledge from previous projects to be built into new projects.

“So, you build up these first principles estimates which are eminently reusable. If you are doing that in a spreadsheet, it is a lot more difficult and subject to error. But if you are using industry specific software like our Candy or C5, you can use what we call “reference projects” over and over again. You build up an enormous knowledge base and develop what we call a set of estimating masters that you can reuse so that your best practise and all your learnings from each project gets baked into your future estimates,” explains Skudder.

It is the manner in which software defines and calculates resources when estimating from first principles which provides such a compelling business case for its use. Resources in the construction environment generally fall into four categories. These are material, labour, plant and subcontractors.

Resources range from simple to varying layers of complexity, and the cost estimation evolves in complexity, too. For instance, to consider how resources are built up from first principles, concrete provides a good example, says Skudder. “It is made up of sand, stone and cement. Sand, stone and cement are simple resources. You combine the three of them together and you get a complex resource - concrete. You then combine that with a mixer and you get another level of complex resource - mixed concrete.”

Now consider a dumper, its operating costs, the labour to operate it, and how these resources build onto the existing complexity of mixed concrete, for example. “It is important to understand this complexity of resources and the build-up of prices in first principles estimating, and how software can help you manage this easily, compared, say, to doing it in spreadsheets.”

Ultimately, says Skudder, the point of technology using first principles estimating is to improve business. “Whichever software is chosen needs to be able to provide real-time and accurate information to help businesses make informed decisions, be that with estimating or project control”.

The entire purpose of digitising processes is to contribute positively to the bottom line for each project through improved efficiency, reliability and accuracy of information management.”

Read more: Construction World