by George Hedley
You know what I would really hate as a general building contractor? You negotiate an easy project to build with a great repeat customer. They trust you, don't question your costs and then award the job at your price. Then, seven months later, you discover your estimator didn't have enough in the budget for labor to complete all the work and you don't make any money. This is your worst nightmare! All the time and energy invested building this trusted customer relationship allowed your company to negotiate the project is now wasted!
So, you ask your estimator 'what happened?' He blames it on the project manager, or the superintendent, 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 bid lots of work to keep the pipeline full. Now what?
What is 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
- Maximize sub-bid coverage
- Be competitive
- Know what things cost
- Make a profit
I want accuracy!
As a general contractor, my estimator's top priority for is to arrive at 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 profit mark-up. Excellent estimators know what things cost. Their bid estimates versus final actual job costs don't vary more than one percent. They look at their past bids and compare them to the final results to see how they did, and then make adjustments for their next estimate. They're in constant contact with field superintendents, foremen, erectors, installers and crews to review how they should arrive at estimated costs. 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 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 time shown is for the work done in each 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, you are too expensive or if it's not complete you'll bid too cheap. Each employee has a different rate based on their age, dependents or tenure at the company. Review all of your field employee's burden raters for accuracy and be sure to include accurate: taxes, worker's compensation, 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 people, 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 will find your bid rate varies considerably for different crews and teams.
4. Accurate Equipment Rates - Excellent estimators know what equipment really costs. Calculate the cost for each piece of equipment your company uses from the pickup truck to compressors, welders, cranes or forklifts. Total the initial purchase price, interest, maintenance, gas and insurance over the life of the equipment. For each piece of 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.
5. Accurate General Conditions - Most estimators either guess at the actual costs of job start-up, mobilization, move-on and move-off, managing, supervising, temporary facilities and closing out projects or they use a percentage to figure their general conditions budget. And the unit prices often used are outdated or inaccurate. (When is the last time you looked at a job toilet invoice? It varies by 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 your general conditions really cost and then an accurate budget based on input from the field.
6. Accurate Overhead - Your company overhead is fixed cost and does not vary as you get more jobs. It is not a percentage of your 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. First you must know your total annual overhead cost. Divide this projected overhead amount by your total projected annual job costs for all jobs 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% 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.
7. Accurate Profit Mark-Up - Profit markup is not determined by what you can get in your market. It is a fixed amount of profit you want to earn by the end of the year. Sit down and decide how much pre-tax net profit you want to make over the next year. 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 goal 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!
Want to make lots of money? Make you bid more than a guestimate. Be ACCURATE! Make each estimate an exact prediction of what it will take to build every project.
ABOUT THE AUTHOR
George Hedley is the best-selling author of "Get Your Business to Work!" As a professional speaker and business coach, he helps entrepreneurs and business owners build profitable companies. E-mail: email@example.com to request your free copy of "Everything Contractors Know About Making A Profit!" or signup for his e-newsletter. To hire George to speak , attend his 'Profit-Builder Circle' academy or find out how he can help your company grow, call 800-851-8553 or visit www.hardhatpresentations.com
3300 Irvine Avenue #135
Newport Beach, CA 92660
Phone (949) 852-2005
Fax (949) 852-3002
Email: firstname.lastname@example.org website: www.hardhatpresentations.com
George Hedley owns a $75 million construction and development company and
Hardhat Presentations. He speaks to companies on building profitable businesses,
leadership, and loyal customers. He holds 3-day in-depth "Profit-Builder
Circles" open to construction company owners in an interactive roundtable
format every 3 months. His "Profit-Builder System" includes proven
tools to always make a profit, build equity, create wealth, win profitable
jobs, motivate your people, and enjoy the benefits of owning a profitable company.