Book SummaryA Revolution in Construction Estimating, by Terry Morrill

1-Page Summary1-Page Book Summary of A Revolution in Construction Estimating

Understanding the fundamental concepts of financial management as they specifically apply to the construction sector.

This section underscores the importance of establishing a solid foundation in the essential economic principles vital to the successful operation of a construction enterprise. Understanding these essential principles is crucial for precise cost estimation of projects and maintaining financial stability. Morrill emphasizes that a construction company, like any business, must generate profit to sustain operations, pay employees, and ultimately reward the owner for their efforts.

Tracking the flow of capital and the creation of revenue in a company focused on building and infrastructure development.

Morrill outlines how a construction firm generates income from clients for completed projects, thereby starting the flow of finances within the organization. Revenue is diminished by costs, which are divided into two types: the initial category includes expenses directly tied to the execution of work, referred to as the Cost of Goods Sold (COGS), while the second category encompasses the ongoing costs essential for maintaining the company's operations, irrespective of whether a job is finished or not, commonly known as Overhead (OH). After taking into account the specified expenses, the remaining sum will reveal whether the revenue exceeds the costs or vice versa, signifying a profit or a loss.

Differentiating among the various financial categories, such as Total Revenue, Expenses linked to the manufacturing activities, overhead costs, Earnings Before Taxes and Deductions, and the Final Profit once every subtraction has been accounted for.

Morrill provides a comprehensive grasp of the core financial concepts crucial for the effective administration of a construction business. The company's overall earnings, which are referred to as Gross Income or Gross Sales, encompass all income before deducting any expenses. The Direct Costs, which are also referred to as Variable Expenses, encompass all expenditures specifically associated with the execution of a project, including the price of materials, payment for workers' efforts, extra personnel-related expenses, fuel for employee transportation, and commissions derived from the project's immediate sales. Morrill clarifies that contractors should consider the direct costs of carrying out a project as the equivalent of the cost of goods sold.

Costs that persist even when there are no ongoing projects are known as Overhead. Operating expenses cover a range of costs including lease payments, utility bills, communication fees, expenses related to transportation and machinery, insurance premiums, office supplies, and salaries for administrative staff, as well as marketing costs. Additionally, Morrill classifies consistent financial obligations, including the salary of the owner and allocations for future costs or taxes, as ongoing expenses which must be covered by the firm's income, and he describes these as "Fixed Cost Supplements."

The remaining amount from the overall income, once direct expenses are deducted, is commonly known as Profit or Gross Profit. It represents the initial level of earnings before considering the company's operational costs. The ultimate indicator of financial gain, Net Profit, is determined by deducting the combined expenses of goods sold and overhead from the aggregate gross income. Terry Morrill highlights the distinction by presenting a simple formula: Gross Profit (GP) minus Overhead (OH). The firm's ultimate earnings are established after considering all expenses. A construction company needs to continually ensure a substantial net income for its long-term prosperity and stability.

Other Perspectives

• In some accounting practices, revenue is recognized when earned, not when cash is received, which can lead to differences between reported Total Revenue and cash inflows.
• Direct costs are not limited to manufacturing activities; they can also include services and other operational activities that are not traditionally classified as manufacturing.
• Overhead costs are not just a function of having no projects but can also be influenced by the scale and scope of the projects undertaken, which can lead to economies of scale and affect the overall overhead rate.
• The phrase "remaining amount after deducting direct expenses from total income" could be interpreted as gross profit rather than Earnings Before Taxes and Deductions, which could lead to confusion in financial reporting and analysis.
• Final Profit may be influenced by accounting practices and choices, such as inventory valuation methods or revenue recognition policies, which can vary from one company to another, affecting comparability.
• Gross Income typically refers to the income from sales plus any other income from investments or secondary operations, which might not be included in Gross Sales; thus, equating the two could oversimplify the financial picture.
• In some accounting frameworks, the cost of goods sold is calculated differently than direct costs, as it may not include certain indirect costs that can be directly attributed to specific projects in construction accounting.
• The list does not account for variable operating expenses that fluctuate with the level of business activity, such as shipping costs or credit card processing fees.
• Fixed costs are typically understood to be expenses that do not fluctuate with the level of production or sales, and while the owner's salary may be a consistent obligation, it could be argued that it is not a fixed cost if it can be adjusted based on the company's profitability or strategic decisions.
• The definition does not account for adjustments from changes in accounting policies or corrections of errors, which can retrospectively alter Net Profit figures.
• The emphasis on substantial net income might overshadow the importance of ethical business...

A Revolution in Construction Estimating Summary The adoption of the AIMM System is essential due to the inherent limitations of traditional estimating methods.

This section of the text emphasizes the shortcomings of the dominant estimating methods within the building industry, especially those dependent on unit pricing and the method of calculating estimates through the addition of a markup percentage. Morrill argues that the intrinsic limitations of these systems can result in inaccurate estimates, which might lead to underpriced bids and ultimately result in projects that are not financially successful. These flawed approaches typically overlook the significance of time when evaluating profitability, leading to an excessive emphasis on the individual costs or the percentage added to the cost price, while ignoring the time needed to complete a task.

The publication uncovers deficiencies in conventional approaches that depend on applying a fixed proportion for cost estimation.

Morrill examines the hazards of relying exclusively on single metrics like square footage, linear footage, or per unit for cost estimation. This approach, while widely used and simple, does not provide a detailed breakdown that enumerates labor hours and material expenses. Contractors frequently estimate unit costs by averaging out expenses from multiple...

A Revolution in Construction Estimating Summary Putting the AIMM Estimating System into practice.

The publication progresses by initially delving into the foundational concepts of the AIMM System and then meticulously examining its practical implementation within a construction company's operations. The book emphasizes the importance of implementing a standardized and holistic approach to estimating the costs of construction projects, considering every factor that might affect the material costs and the time required for labor.

Developing a standardized approach for job takeoff that precisely pinpoints the tasks and determines the necessary hours for completion.

Terry Morrill presents a methodical strategy to implement the AIMM Estimating System, starting with an uncomplicated clarification of fundamental terminology.

• The concept of a 'Job' encompasses all construction tasks performed at a particular location, without distinction between residential or commercial projects.

• A variety of interlinked elements, each with its own associated expense, make up a project and these elements can either bolster a wider effort or operate autonomously.

• An element represents a completed segment of a project, which includes different activities like constructing a fire pit,...

A Revolution in Construction Estimating Summary Methods to improve productivity and economic benefits for teams in the construction sector.

This part of the book highlights strategies that can be implemented to enhance the efficiency of construction crews, recognizing that even the most carefully developed and accurate estimates are rendered futile if the execution by the team on the ground is lacking. Terry Morrill emphasizes the need to boost efficiency by carefully organizing, using the right tools, following the correct sequence, and mastering the technical aspects of their work.

Recognizing the vital role of planning, tools, sequences, and technical expertise in driving crew productivity

Terry Morrill categorizes the six key elements that constitute crew efficiency.

1. The flawless execution of tasks is contingent upon the significance of thorough preparation, which necessitates careful structuring. The successful completion of the project is contingent upon a thorough understanding of its scope, securing all necessary materials, making certain that each individual on the team is aware of their distinct responsibilities, and organizing the work sequence to reduce downtime and enhance productivity.

2. The book highlights how having the right tools and equipment can substantially affect the time needed to...