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.
Labor is your #1 risk as a contractor. So you want to take the time to estimate labor costs accurately.
Just like with materials, involve a foreman or production manager to reduce the risk of leaving out people or underestimating hours. By taking the time to have a production person double-check estimates for labor hours and materials before they go out, you’re reducing the risk of declining profits.
But how do you make sure you’re estimating the correct amount for labor costs? The problem most construction companies face is that they don’t really know their real cost for employees. That was the case with Joe. He was not clear on his actual costs.
Did you know that the cost of a construction employee has gone up 20% in the last couple of years in some areas of the country? If you’re not accounting for a staggering change like that, you’re losing out on profits.
So it’s important that you get super clear on the base costs per employee before preparing a bid.
Base costs per employee per hour:
- Gross wages
- Employer taxes – FICA, Medicare, Social Security, state unemployment, and city taxes. Combined, these can range from 7.65% to 11%, depending on where you are doing business.
- Worker’s comp – these costs will be higher or lower, depending on the position.
- Benefits – health insurance, 401K, etc. Many companies have offered better benefits recently to compete in the job market, so make sure you add those changes in.
- Union costs– If you’re a union shop, add dues and union benefits.
I offer a free and easy to use Labor Cost Calculator tool on my website that you can use to stick in labor costs for different positions.
When you’re estimating labor, here are my recommendations:
- Always calculate bids based on position – not person – at the highest-paid position in that range, so if the range is $15 to $18 per hour for example, go with $18 per hour on the estimate.
- If you’re bidding on a long-term project, labor costs will go up year by year. Plan that increase in there. You also might include in the estimate that the bid rate for labor is only good up to a certain date before the contract is signed. And if work goes longer than a set amount of time during the contract, labor rates will go up. This is especially true if you’re a subcontractor.
- If you’re a union shop, remember that union dues and extra benefits go up every 12 months, so plan that into your pricing.
It comes down to this… Get clear about pricing. Get clear about scope.
By using these smart strategies, you don’t give away your profits. In my next video, I’ll share how to mark up for overhead and profit on top of the base costs we talked about today.
Toeing the line between bidding competitively and making sure you’re pricing for profit is one of the many challenges of running a construction company. In my book, The Profit Bleed, you can find tools and free downloadable resources that can help you bid accurately and successfully – and all you have to pay is shipping and handling. Make sure to check out the bundle of pre-packaged resources – they’ll help you get traction more quickly.
PS. I’d like to hear from you. Leave a comment about your successful bidding strategies or questions you have about estimating materials and labor costs.
PPS. Don’t forget to grab my free and easy to use Labor Cost Calculator tool that you can use to calculate labor costs for different positions.
Vicki Suiter helps people see their businesses differently, then gives them the tools to do things differently. Since beginning her business in 1990, Vicki has helped hundreds of contractors achieve the kind of success they never dreamed possible. Today, in addition to consulting, Vicki is an in-demand speaker at industry conferences nationally and internationally. Vicki’s articles and opinions have been widely shared in print and across the web. She is also the author of the book “The Profit Bleed” How managing margin can save your contracting business.
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Thank you for the endorsement of the blog – so glad your finding the content valuable!
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I would also recommend the using of hours reports as a job progresses as well as job costing reports. When reviewed regularly, these reports can identify projects that are behind, current or ahead of schedule as well as providing input for progress payments.
Great idea Peter – thank you for your input!