In my last column, we discussed the value triangle as it relates to developing a cost estimate. This month, let’s talk about another form of estimating: the ubiquitous “budget estimate.” As contractors, we all have been asked to provide this type of cost, which can also be termed a “ballpark estimate.” Before we go into more detail, let’s define the term; and, as always is the case, the definition is in the eye of the beholder.
One formal definition comes from BusinessDictionary.com: “Budget estimate - an approximation of the cost of an activity, job, program or project, prepared for budgeting and planning purposes only. Not accurate enough to provide a basis for a firm commitment, it represents only the budget maker’s understanding of the scope and expense of what needs to be done.”
If you are the project owner, your definition of the budget estimate is: The absolute maximum amount of money to allocate for the project, regardless of any upfront data gaps and/or changes in scope during the work.
Budget estimates for drilling jobs should include as much detail as available, and account for variables like a job’s start date and materials costs. It’s also a good idea to make sure budget estimates make clear what’s not included, so contractor and client have the same expectations. Source: iStock
As contractors, most of the time our definition includes various four letter words (SWAG comes to mind), but it usually goes something like this: A request by our customer, usually at the last minute, to provide a cost for work, which will be started some unknown distant date in the future, on a scope that has not been defined; and, by the way, if we do not provide the budget estimate, we will not get the chance to bid on the final scope of work.
Based on the definitions, what is the best way to manage the request for a ballpark or budget estimate? If your estimate is too high, the project could get delayed or canceled. Worse yet, the client may consider the high estimate to show that: 1) you do not want to perform the work, 2) you are unable to perform the work, or 3) you do not care about him enough to help. All three thoughts by the client can exclude you from further consideration on that specific project. Finally—and we have all had this happen—you provide a budget estimate on short notice and without all of the project details. Then, by some small miracle, you are awarded the project and find that things are not what they seemed. The work will cost much more than the original budget estimate.
So, now what? How do you handle that ballpark estimate request that just hit your desk?
First, get as much information in writing about the project as you can. Ask for project details in a quick and dirty email or fax. Heck, some of us even have the text option thing on our phone—use that. If you have data in writing, you are limiting the amount of guessing you have to do and it provides back up documentation in the future when the scope changes. Second, manage expectations and be incredibly obvious in how your costs were obtained. If no information was provided for the type of well materials, be specific in your estimate. State that the costs are based on schedule 40, 4-inch PVC with 20 feet of screen. Don’t assume that the client wants PVC on this estimate because that’s what he asked for last time. Remember, this quote is most likely a last minute thing; if you did not get the materials list in writing, the client may have only thought he told you 6-inch stainless steel. Not only must you be specific in what is included in your estimate, be explicit in what is excluded. If you are not including well vaults, pumps and drill mud disposal, put all of that in a list of items not included in the costs.
Lastly, try and make the budget estimate as accurate as feasible. If you can get detailed information in writing, and manage expectations as detailed above, you are more than half way there. But, here is the big kicker in the budget estimate process: TIME. When will the project start and at what time of the year will the work occur? In many instances, the start date of the project is unknown and could be months if not a year from the date of the original budget estimate. This potential long lead time makes estimating very difficult. Fuel and material prices seem to always go up over time, so how can we account for those costs increases in our estimate? There are several ways to deal with the time issue but, again, you have to be specific. Place a time limit on the estimate, state clearly that the estimate is only valid if the project starts within “x-number” of months. You can also tie the cost to the price of fuel or materials by clearly stating that if the price of fuel or well materials rises over x-percent, the proposal is not valid or you have the right to increase the cost of the work. Finally, don’t forget about project start dates. Many times during the estimating process, the work is scheduled to start at the ideal time—for instance, February in the Mojave Desert. But, we all know that a February start date in the desert really means Aug. 3. Again, be specific and state clearly that the estimate is based on the start date you provided in your proposal.
In the drilling business, budget or ballpark estimates are not going to go away. Unfortunately, they are a fact of life. How we respond to the budget estimate request is important. Remember, the definition of the term is not the same for the driller, owner and contractor. We need to obtain as much information as possible, manage the client’s expectations and account for time issues. If we don’t control these issues, the owner may be looking at the ballpark not from the parking lot across the street, but from outer space.