Is Your Bid Only An Estimate?
You know what contractors really hate? It’s when they negotiate an easy project to build with a great repeat customer. Then after the job is completed, they haven’t made any money. The customer trusted them, didn’t question their costs, and then awarded the job to their company at a fair price. Seven months later, they find out their estimator didn’t have enough money in the bid to cover all the labor, materials, or equipment to do the work required by the plans and specifications. This is a contractor’s worst nightmare! All the time, effort, and energy invested building a loyal customer relationship enabled the contractor to negotiate the project. And now, it’s wasted!
When this happens to contractors, the boss goes and asks the estimator ‘what happened?’ He blames it on the project manager, or the superintendent, or the subcontractors, or the suppliers, or the weather, or the engineer, or the City, or bad plans, or his bad childhood! So, what do you do? You can’t fire him. You need to continue bidding lots of work to keep the pipeline full. Now what?
What’s your estimator’s #1 priority?
When I speak at construction conventions, I get many different answers to this question. They include:
- Bid lots of jobs
- Get lots of profitable work
- Get everything covered
- Be competitive
- Know what things cost
- Make a profit
I want accuracy!
As a general contractor, my estimator’s top priority must be to calculate accurate job costs. I don’t want our bid to be an estimate of what it might cost plus or minus a percent or two or ten. Accuracy is the key. The only variable on any bid should be the overhead and profit mark-up. Excellent estimators know what things cost. Their bid estimates versus final actual job costs don’t vary more than one or two percent. They look at past estimates and compare them to the final actual results to see how they did, and then make adjustments for their next bid. They’re in constant contact with field superintendents, foremen, erectors, installers, and crews to review how they should arrive at estimated costs on future and potential projects. They continually review labor, material, equipment, subcontractor, and supplier costs to insure they know every possibility for differences in jobs they bid. Use this checklist to improve your estimating accuracy:
Accurate Estimating Checklist
1. Accurate Time Cards – Excellent estimators know accurate estimating starts with accurate information from the field foreman and crews who actually do the work. Step one is to insist your timecard is divided into the cost codes you want to estimate with and keep track of. Then, it’s the estimator’s responsibility to insure field workers and foreman are filling out timecards correctly. Regularly meet with job foreman or field superintendents to make sure the work time shown is accurate and for the work done in each task’s cost code category. This will insure accurate job history to refer to on the next bid.
2. Accurate Labor Burden Rate – Do you know how your labor burden rate is calculated? Is it accurate or an approximation of what your accounting department thinks it should be? An accurate labor burden rate is essential for accurate estimating. If your rate is padded, your bids will be too expensive, and if it’s not complete you’ll bid too cheap. Each employee has a different burden rate based on their age, dependents, or tenure at the company. Review all of your field employee’s burden rates for accuracy, and be sure to include accurate: taxes, worker’s compensation insurance, medical, liability insurance, vacation, union dues, safety training, small tools, overtime, and down-time.
3. Accurate Crew Bid Rate – Excellent estimators use different crew rates to bid different projects based on what or who the job needs. A crew on a difficult job needs more experienced workers, while a larger simple project can use less trained crew members. Figure different crew sizes and make-ups to determine your accurate man-hour crew bid rate. I like to calculate bid rates for 2 man, 3 man, 5 man and 10 man crews. You’ll find your bid rate varies considerably for different field crews and teams so be sure to use the right one for each specific job.
4. Accurate Equipment Rates – Excellent estimators know what equipment really costs. Calculate the cost for each piece of equipment your company owns from pickup trucks to compressors, welders, cranes, backhoes, forklifts, or scissor lifts. Total the initial purchase price for each piece of equipment plus interest cost, maintenance, gas, and insurance over the life of the equipment. Divide this total lifetime equipment ownership cost of by the expected number of billable hours you will be able to job charge over the life of the equipment to arrive at your accurate equipment cost per hour. Then add your overhead and profit markup for an accurate bid rate.
5. Accurate General Conditions – Many poor estimators don’t verify what their general conditions really cost on projects. They too often guess at the cost of job start-up, mobilization, move-on and move-off, project management, supervision, temporary facilities, utilities, clean-up, and job close-out. Or they use a percentage of the total job cost to estimate the general conditions budget for a bid. Neither of these methods are accurate. Often unit prices used are outdated, inaccurate, not updated, or don’t match reality in the field. For example, when is the last time you looked at a temporary toilet invoice? It varies by the number of services per month plus the delivery fee. I find on a typical eight month project, our general conditions can vary from $10,000 to $25,000 per month. Accurate estimating must include a review of what general conditions actually cost utilizing input from the field.
6. Accurate Overhead – Your company overhead is a fixed amount of money to be spent for the year to run your business, and is not a percentage of job costs or sales. Excellent estimators know what it costs to keep their company open without any jobs under construction – this is your fixed general and administrative expenses or overhead costs. Starting with your total annual overhead cost, divide it by your total projected annual job costs for every job you will build (not sales volume). This percentage will equal the actual overhead recovery markup you need to use to recover all of your overhead expenses for the year. For example: $800,000 projected total annual overhead / $5,000,000 projected annual job costs = 16.0% overhead markup for overhead recovery. Don’t get trapped into thinking you can use an industry average such as 15% or 20% to cover your overhead costs unless you want to go broke fast. Know you actual and accurate overhead markup you need to breakeven at the end of the year.
7. Accurate Profit Mark-Up – Profit is a fixed amount of money you want to earn by the end of the year. Start every year by deciding how much pre-tax net profit you want to make over the next year. A good rule of thumb for contractors is to aim at a net profit mark of 40% to 50% return on your total annual overhead budget. For example, if your annual overhead is $800,000, a good net profit target is 50% of your overhead = $400,000 net profit. To determine the profit markup required to hit your goal, divide your total annual projected costs by your annual profit goal to determine the profit markup you need to use. For example: if you’re annual net profit goal is $400,000, divide it by your projected total annual job cost projection of $5,000,000. ($400,000 / $5,000,000) = 8.0% required profit markup to hit your goals.
To complete the calculation, now add your total annual job costs to your overhead to your net profit goal. This will give equal total sales required to achieve your financial targets. For example: $5,000,000 job costs + $800,000 overhead + $400,000 profit = $6,200,000 in annual sales. Now ask yourself if you can you hit $6,200,000 in sales at a markup rate of 16% for overhead plus 8% for net profit (total overhead and profit markup of 24%)? In this example, look at the markup rates. If you can’t achieve 24.0% overhead and profit markup in your market, your only solution is to adjust your volume up or your profit markup down (not your overhead!) until you hit your $400,000 profit target. Or lower your profit goal to less than what you want! To help you get started with improving your bottom-line, email GH@HardhatPresentations.com to get your copy of ‘Profit 101 For Contractors!’
Want to make lots of money?
Make you bid more than a ‘guesstimate’ of what it might cost. Be ACCURATE! Make each estimate an exact prediction of what it will take to build every project.