When my client Joe and I met a while back, he shared with me his recent revelation that has caused him to completely re-think how he bids projects.
It all started while reviewing his financial results (prompted by his concern over a declining bank balance). It didn’t take long for him to see a pattern… his company’s gross profit margin was steadily dropping. Joe knows that construction companies live and die by gross profit margin, which meant he needed to dig deeper. As he did, here are a few things he discovered..
1) Pricing in the estimate for materials was not the price they actually paid. There were two reasons for this:
a. The price paid for materials were not what was in the estimate. It’s easy to let this happen, especially if you do long term projects like Joe’s company, where there’s a lag time in between writing an estimate and placing a purchase order.
b. The quantity of materials purchased was over what was in the estimate. When they were self-performing the work (as opposed to using a subcontractor), the final material take off had far less material than they actually needed as shown in the plans.
2) The estimated hourly cost of labor for different positions was too low. This was only affecting the work that was self-performed. So the work done by subcontractors was profitable, but self-performed jobs were losing money.
In today’s video we’re going to talk about why this type of problem occurs on porjects and in bidding, and what you can do to make sure it never happens to you.
We’ll tackle one of the biggest challenges construction companies face when bidding jobs, and I explain how to always make sure you’re pricing for profit.
Creating profitability in your construction company starts with bidding jobs with accurate costs. So how do you estimate construction costs accurately?
Let’s go back to the problems Joe discovered. I’ll share what changes he made to address them and my own recommendations to make sure you’re pricing for profits.
In order to be more effective at estimating materials, get a foreman or production manager to look at the bid as a second set of eyes. It’s important that the production team is involved in the estimate to make sure nothing is left out or underestimated. They will help make sure the full scope of materials is included.
Second, do purchase orders at the beginning of projects so that the estimate is based on fixed and agreed upon prices. This is especially important if you do long-term projects because the cost of materials may go up between making the estimate and doing the work.