How to Calculate the ROI of Construction Estimating Software
When your estimators have been relying on traditional methods like spreadsheets to produce estimates, making the leap to construction estimating software can be a big one. Because spreadsheets are a mainstay of every company’s basic software platform, they’ve become the de facto solution for a number of business processes.
But you can’t ignore the risks of relying on them for construction cost estimating. While spreadsheets may be familiar to your estimators, they’re also creating a host of problems. Given that 9 out of 10 spreadsheets have errors, the potential for mistakes in your own estimating spreadsheets is undeniable.
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Once you know that construction estimating software provides a faster, more reliable method of producing estimates, it’s only natural that you’d want to make the switch. But to make the change to construction estimating software, you’re going to have to make a solid business case. Some—like your own estimators—may argue that spreadsheets are good enough. Still others may question how an investment in new software will not only help the business but actually pay for itself.
These are legitimate questions, and ones you’ll want to be prepared to answer. Whenever recommending a new expense, you’ll make a much stronger case if you can communicate the quantifiable benefits, including the return on investment (ROI) that your company can expect. When you can demonstrate how an investment will earn back what you spent on it, you’re also demonstrating that you:
- Have done your homework
- Are looking out for the bottom line
- Want to help your company succeed
Read on to get valuable tips to make your case that construction estimating software is a sound investment.
What is ROI and How Is It Calculated?
Return on investment, or ROI, is a performance measure used to evaluate the efficiency of an investment. ROI tries to directly measure the amount of money you’ll make on an investment relative to its cost. Said another way, ROI helps your company leaders understand the effectiveness of every investment.
The use of the term “investment” is important. While you may look at construction estimating software as a purchase or expense, you’ll want to shift your thinking and language to view it as an investment that delivers a number of concrete benefits, including financial gains. This is a subtle but important language strategy that will help you demonstrate greater value for the investment (see how I did that?) to your company leaders.
The calculation for ROI is straightforward:
ROI = (Financial Gain) - (Cost of Investment) / (Cost of Investment)
But the devil is in the details. The cost of the investment can include additional expenses beyond just the purchase price. Similarly, how you calculate the financial gain of the investment can be highly variable depending on what benefits and outcomes are important and relevant to the particular investment and your company.
How to Demonstrate the ROI of Construction Estimating Software
Follow these guidelines to learn how to calculate the return on investment for your construction estimating software purchase in a straightforward, accurate way.
Step 1: Calculate the Costs
The cost of your investment is the amount of money you spend on implementing and maintaining your new software system. But often there are expenses beyond just the obvious. Looking at the total cost of ownership (TCO) in relationship to the time to value is often a more accurate way to approach this. You’ll want to capture obvious costs, as well as not-so-obvious ones, such as:
- Licensing fees
- Tech support
- Subscription services
- Installation costs
- Training
To show that you’re realistic about what a software implementation entails, you should also consider including some discussion of other “costs” associated with the software deployment. For example, the project will require support from your IT team, and productivity may drop off temporarily until your team is up and running on the new system. You don’t necessarily need to include hard dollar estimates for these more abstract costs, but acknowledging them is important.
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Step 2: Calculate the Gains
Remember, the gains represent the money you’ll make from your investment. And how you calculate gains is relative. But a typical way to calculate this is to first figure out the number of hours your estimating team will save. A good rule of thumb is to expect that you can save 50% of the time it typically takes you to produce an estimate by using dedicated estimating software. This is the equivalent of having twice as much time to produce bids or producing twice as many bids as you do now, which then translates to as many as twice the wins for your company.
This approach also allows you to quantify productivity gains. For example, if your average estimator earns $90,000/year, you’re conservatively spending $45 per hour on that employee assuming a 52-week year, less two weeks of vacation. If the average bid takes 24 hours, you’re spending $1,080/bid (24 hrs x $45/hr). If construction estimating software allows your estimator to produce bids in half the time, you decrease your cost per bid by half as well, effectively saving $540.
To see the ROI you could achieve with construction
estimating software, use this handy calculator.
Articulating the Additional Benefits of Construction Estimating Software
While a quantitative approach (straight dollars spent vs. dollars gained) is a simple way to show how your investment will pay for itself, there are often other qualitative benefits that you’ll want to highlight. In the case of construction estimating software, there are two key gains that you’ll experience that when combined can shift the whole trajectory of your company.
Increased Productivity
While you can quantify some of the gains of increased productivity, you can take this a step further by highlighting the other advantages productivity increases provide. For example, construction estimating software lets you do more with the team you have by automating, standardizing, and speeding up the estimating process—from initial estimate creation all the way through the review phase. By enabling greater efficiency, you increase productivity without having to invest in additional staff, while at the same time minimizing the impact should you lose a key member of your estimating team. Increased productivity also means there’s more time for value engineering—or presenting owners with options to show optimum value—which can help boost the number of jobs you’re awarded.
“Estimating solutions allow us to leverage the
combined knowledge, skills, and talent of the entire
DPR team—past, present and future—by providing a
platform that builds efficiencies into our practices.”—Alan Watt, DPR Construction
Greater Accuracy
Database-driven estimating software also reduces the risk of errors and omissions. Supported by the software’s centralized cost database and customizable work breakdown structures, your estimators have a consistent starting point from which to build estimates. And during the review phase, auditing capabilities allow estimators to find and fix errors easily, eliminating the chance those errors will make it into the final bid. Both contribute to greater accuracy, which translates to better margins, as well as greater confidence to pursue more and bigger projects. That confidence also comes across to owners, positioning you as a reliable and trustworthy partner in the project.
Make Your Business Case—and the Best Decision for Your Needs
To make the switch to construction estimating software, you first want to build a business case for the investment, including spelling out the many ways the software will deliver gains to your company.
But demonstrating the ROI of construction estimating software is just one part of justifying the switch to dedicated construction estimating software. There are several other things to consider to ensure you’re making the best decision for your needs.