Introduction
Meeting #1 of the mentoring group “Charting The Northwest Passage” discussed the topic: “Determining When The Economics Of A Potential Project Don’t Make Sense (Or Why Napkin Math and Ballpark Estimates Are Key To Staying Out Of Bankruptcy)”
Summary
During the first “Charting the Northwest Passage” meeting, the host discussed the importance of “napkin math” for quickly assessing the feasibility of a project. He shared a story about a potential client who needed a million utility poles inspected by UAV, but was only offering $5 per pole, which was far below a realistic rate. The host demonstrated how to do some quick calculations to determine the offer was not feasible, stressing that it’s vital to know if a potential job is “even in the baseball stadium” before investing time in a detailed proposal. The host also emphasized the need to identify critical assumptions when doing this type of calculation. He also discussed how he has become more selective about the proposals he creates.
The host also presented a second example involving a client who wanted a land survey for a 9-mile route in Nevada, with a budget of $80,000, far below the estimated cost of around $200,000. This example highlighted how quickly costs can increase when considering all the factors involved in a complex project. The host emphasized that being able to do “order of magnitude” estimations is crucial for avoiding contracts with unrealistic budgets. The meeting was interactive, with participants sharing their own experiences.
Key Take Aways
- Napkin math is essential for quickly assessing the feasibility of a project. This involves doing some quick calculations to determine if a potential job is even worth pursuing and if it’s “in the baseball stadium”. This method helps to quickly eliminate opportunities that are not viable.
- Identifying critical assumptions is crucial when doing napkin math. These assumptions can significantly impact the outcome of a project, so it’s important to be aware of them and consider how they might affect the overall feasibility of the work.
- “Order of magnitude” estimations are vital for avoiding contracts with unrealistic budgets, especially for large projects . A small percentage error on a large project can result in significant financial losses. Being able to do these estimations can help you get within 25% of a realistic number.
- It’s important to be able to “gut check” basic pricing because clients will sometimes propose unrealistic pricing. Being able to do some quick calculations will allow you to determine whether the proposed rate is reasonable.
- Getting under contract for a price that is a third of what it will actually cost is not going to turn out well for anyone involved in the project. This can lead to lawsuits and dissatisfaction for both the client and the surveyor.
- Surveyors often lose money on minor subdivisions because there is uncertainty in the process and they don’t price it properly. It’s important to have a conversation with clients about who is handling project coordination and land use planning to avoid this issue.
- It’s necessary to be selective about which proposals to pursue. Preparing detailed proposals can be time consuming and it’s a good practice to only put together proposals that have a high chance of success.
- There are no silver bullet solutions in business. There are always trade-offs and it’s important to learn from your mistakes.