You know what I really hate as a general contractor? It’s when we negotiate a nice project to build with a loyal customer at a great price and good contractor fee. Then after the job is completed, we spent more money than our estimated budget and didn’t make the gross profit we should have. When we negotiated the guaranteed maximum price contract, the customer trusted us and didn’t question our costs. And then after project completion, the final job costs significantly exceeded the budget. This is a contractor’s worst nightmare!
What’s Your Estimator’s #1 Priority?
- Estimate jobs
- Price jobs
- Win work
- Negotiate jobs
- Be competitive
- Make a profit
- Don’t miss anything
- Good subcontractor and supplier coverage
- Know what things cost
- Accuracy
Winning Work is NOT the Estimator’s Top Priority
The #1 priority for all estimators must be accuracy! A perfect bid estimate is when the final job cost is exactly the same as the estimate. As a contractor, your estimator’s top priority must be to calculate accurate job costs and not miss anything required to complete the contract scope of work. Winning work is not the role of estimators.
Profit Builder Circle to Develop Accurate Estimating
1. Calculate Accurate Estimates
Accurate estimates are based on the real field production costs of labor and equipment to complete each task required by the project plus materials, tools, supplies, supervision and subcontractors. The estimated costs are based on a detailed take-off of all the parts and pieces combined with accurate field labor production rates with no guesses.
To calculate accurate estimated costs of work, the labor and equipment required must be based on similar past jobs and what it took to complete them. Estimators must keep a detailed, up-to-date cost history library of all past jobs sorted by job type, difficulty, special conditions, city, customers and inspectors.
A. Accurate Labor Burden Rate—An accurate labor burden rate is essential. 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 benefits, age, dependents or tenure at the company. Be sure to include accurate taxes, worker’s compensation insurance, medical insurance, liability insurance, vacation, union dues, safety training, small tools, overtime and downtime.
B. Accurate Crew Bid Rate—Excellent estimators use different crew rates to bid different projects based on what or who the job needs to perform different types of work. 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.
C. Accurate Equipment Rates—Good estimators know what equipment can perform per hour and what it really costs. Calculate the actual ownership cost for each piece of equipment from pickup trucks to compressors, cranes, backhoes or forklifts. 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. Add your overhead and profit markup, then keep track of how much work or production a typical piece of equipment can perform per hour.
D. Accurate General Conditions and Mobilization—Accurate estimating must include a review of what general conditions or mobilization actually costs utilizing input from the field.
E. Accurate Overhead—Your company overhead is a fixed amount of money spent for the year to run your business. 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 your overhead expenses for the year.
F. Accurate Profit Markup—Profit is the annual fixed amount of money you want to earn for 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 is to aim at a net profit mark of 40% to 50% return on your total annual overhead budget. 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.
2. Job Start-Up
Hold a pre-job turnover meeting where you turn the job over from estimating to the project team. Gather the estimator, project manager, superintendent and foreman together to review the estimate, scope of work, inclusions, exclusions, schedule and contract terms. Develop the project goals, set the budget, select the required cost codes to track, and develop the job specific timecard for the labor production items you want to track.
3. Track and Review Job Costs
To develop accurate cost information for current job costs and estimating data to bid future jobs, job hours must be current and correct. 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 project manager’s responsibility to ensure field workers and foreman are filling out timecards correctly.
4. Completed Job Cost Review
At the completion of every project, the estimator and project team must get together to review and discuss the actual final costs and hours spent versus the job budget and bid production rates estimated for each cost code. This will allow the estimator to adjust the cost history library and improve the estimated bid production rates utilized on future bids. Making this process a priority will develop increasingly more accurate bids.
George Hedley, CSP, CPBC, helps contractors grow and profit as a professional business coach, popular speaker and peer group leader. He is the author of “Get Your Construction Business to Always Make a Profit!” and “Hardhat BIZSCHOOL Online University,” available on his website. Visit www.hardhatbizschool.com for more information.
