Author: Paul Van Metre
Ouch! Missing the mark on time estimates hurts. So fix it.
Estimating accurately and pricing work right is critical to the success of every shop. Many shops don’t put enough focus on accurate time estimates and send targets that are too low to the shop. This leads to problems with trust between office and shop floor employees which can lead to poor performance. By fixing estimating problems, shops can improve trust, performance and profitability.
Estimating in job shops can run the gamut from a quick swag to a detailed breakdown of each operation and tool. In smaller shops, the estimating process is often done by the owner. In larger shops it’s often done by a person or team of people in the sales/estimating department. From glancing at the drawing and/or model and ball parking “That’s a $56 part!”, all the way to building a program to define cycle time down to the second, there are many ways to determine a price. The differences in industry vary widely and we’ve seen hundreds of shops do both extremes and everything in-between. It takes a different approach when quoting a quantity of 1 piece that is needed ASAP, vs. 100,000 pieces per year for a 5-year contract. There are too many variables to suggest that there is one correct answer in how to bid jobs and how much time to invest in the estimating process.
It's important to establish a competitive price, but just as important is establishing accurate setup and run times which will be used on the shop router. Many estimators will adjust the times to get a price that they think will win the job (I’ll admit, I’ve done it myself plenty of times). They know a setup will take 3 hours, but they put in just 1 hour into the estimate. They justify it by saying “The client isn’t willing to pay us the true amount of time it will take.” Perhaps they’re bidding a large contract and they plan to make it up on future orders.
Part of establishing accurate targets is the need to differentiate between recurring and non-recurring time. Examples of non-recurring time include:
Many ERP systems have no ability to track these categories separately from the recurring time:
When there isn’t a focus on estimating accurate times, either because time is used to adjust price, or because there isn’t an ability to differentiate non-recurring times, this can result in a number of undesirable consequences including:
I believe that the last problem is the most cancerous to an organization. When the shop floor employees are given unrealistic time targets, not only do they resent the fact that they aren’t given enough time for their work, but they may come to believe that the people developing the times don’t know what they’re doing. A culture of mistrust and animosity can develop between the shop floor and the office, and eventually the shop employees will discount any targets given by the office. At best they will roll their eyes every time a new job hits the shop with unrealistic times, and at worst they will stop trying to meet the targets and work will take longer all the time. This downward spiral of trust and performance is very damaging to the culture and profitability of a company. Employees are also more likely to leave companies who they don’t trust. After all, they know that they will be judged on how well they perform against the targets that are set for them when it comes to raises, bonuses, and promotions in the company. Most shops I talk with admit this dynamic exists in their companies.
By separating out time estimating from pricing, and focusing on accurate estimates, this relationship can be repaired and a culture of accuracy and trust can be built. The first step is to stop using time as a lever for manipulating price. Focus on establishing the MOST ACCURATE time estimate you can (given the amount of time you have to spend on the quote). If you think it will take 3 hours to set up a machine, then put 3 hours in the estimate. If that makes the price higher than you’d like to charge for the job, then adjust your profit margin down, or reduce the hourly rate you’re using for your calculations of price. The reality is that if you are estimating fewer hours than it will actually take, what you are doing is accepting a job with a lower (or negative) profit margin. This may be an entirely reasonable decision to make. If you have open capacity in your shop, then it’s better to run something at a lower margin than have machines sit idle (unless your gross margin is negative). If you expect lower margins on the first order, and higher margins in the future, then that could be a great decision as well. Be realistic about how much time the job will take. Don’t skimp on the time and believe that low targets are an incentive to work faster. They aren’t!
By honestly discussing the problem, and working together to dial in the accuracy of estimates over time, the company can rebuild trust, and even become more aware of the types of work it is good at. Invite feedback and open dialog on any future inaccuracies. Sometimes there is a genuine difference of opinions on how long a task will take, on the scope of work, interpretation about the details, or ideas about how to approach the job.
With an open channel of communication between the sales/estimating team and the team executing the jobs, and a respectful culture of trying to achieve clarity, understanding and learning from mistakes, all companies can develop that important trust, and focus on continuously improving their process for estimating and pricing their jobs. This is an idea that everybody can get behind and will result in more accurate estimates, higher levels of trust, and even helping focus on the right types of jobs that your company can successfully execute.
How can ProShop help with this?
Having run our own CNC machine shop for 17 years, we’ve learned a ton from our own estimating mistakes, and we built that learning into the estimating features within ProShop’s estimating module. Here are a few very specific examples of the tools we built to solve the problems discussed above.
The Adder category is to acknowledge any time you know it will take the first time you do the job that you aren’t going to charge your customer for. Maybe you’re deciding to eat all the startup costs on a huge contract because you believe your client isn’t willing to pay all those startup costs. All shops deal with this issue and it’s important to not sweep it under the rug. ProShop allows you to be very precise about this.
None of these fields are mandatory, but all can be very important. This allows you to estimate as accurately as possible by modeling the time requirements for any possible scenario you can imagine. And when you use our powerful template system, you can create super accurate estimates very quickly.
When you estimate accurate times, the result may be a price you’re not happy with. That’s when it’s time to lower or raise the price by adjusting margin or rates to achieve the price you want to charge. By manipulating these numbers, you have the ability to determine what price you want to charge and see what that means for the profitability or margin you may expect on the job. By allowing this level of control we are taking the important step to separate out our decisions about price from the process of estimating time.
When you’re ready to convert that estimate into a quote, options exist to quote a separate NRE charge, or amortize those costs into the unit price. Just choose the format you’d like to use for the quote. Regardless of how you choose to format your quote, when the job is won, ProShop will copy the estimated target times over into the part module which are the basis for the Work Order time targets. Any non-recurring and adder time will only be included on run #1, and will automatically be removed on run #2 and thereafter. This allows the schedule to be as accurate as possible so you can see the real time commitments.
Most importantly, our tools allow shops to build accurate estimates, therefore building trust between the office and the shop employees and improving performance and profitability.