Do you ever feel like you’re just “winging” estimates? Removing the guesswork from cost estimates will save you time and money; not to mention your reputation in the industry. Estimates must be carefully calculated to avoid overestimating and losing bids or underestimating and losing profit. While it may seem cumbersome, the estimate building process is the first step to securing your target profit margin. Follow the seven steps below to cover your bases.
Create a cost catalog with materials that you use on a regular basis and the hourly wages for various types of labor. This initial pricing will serve as a quick-reference when building your estimates. The catalog should include a list of material costs and labor rates for the items you most frequently use. Be sure to check and update your costs frequently so your catalog reflects current market values. It is important to be thorough and to remember that there is no cost too small to include. Screws, tape, and chalk add up quickly!
Use project blueprints, schematics, and job specifications to create a list of all the resources necessary to complete the job. Indicate the unit quantities needed and highlight anything out of the ordinary. Be sure to include the following:
It is important to review all documents for the job so you don’t miss any details that could cost you in the long run. Some job specifications may list project needs that are not shown clearly in the blueprints!
Estimate the time required to complete each task by referring to historic data from previous jobs. Once you determine the hours of labor required, multiply it by the labor rate (for internal employees, be sure to include any related benefits and taxes to your labor rate). Not all projects are completed with the same productivity, and unforeseen circumstances may impede your subs’ and employees’ ability to move through tasks as quickly as you hope, so be sure to account for some additional labor hours in your estimate.
Collect subcontractor quotes for projects you will not complete in-house. Define the scope of work for each task by describing what needs to be accomplished. Be as detailed as possible so the subcontractor understands exactly what you are looking for. Include the following in the quote request:
We recommend collecting at least three bids, especially for larger jobs, and selecting the subcontractor that best meets your needs.
Depending on the needs of the project, the equipment costs can be quite extensive. You may either own, rent, or purchase equipment to meet the needs of each job. Wear and tear on owned and purchased equipment should be accounted for in your overhead budget (see step 7). However, rental costs must be calculated and specifically added to your estimate. While calculating the length of time you will need the equipment, be sure to give yourself a buffer so you can adjust for unexpected delays.
A contractor contingency is the amount of money that will be set aside to cover unexpected expenses that may arise during a construction project. While not necessarily allocated to a specific line item in the estimate, the contingency is usually about 5-10% of the total project cost and is placed on reserve until necessary.
Deciding the target profit margin is the greatest decision you will make when preparing your estimates. Your profit margin reflects how much your business will make after subtracting all job-related expenses. The question that should drive your profit margin percentage is: “how much money should I be making on this job?” Smaller jobs might require a higher margin, while larger jobs might have room for a lower margin. Simple jobs might have a lower margin than jobs that involve a great deal of complexity.
If you are not sure where to start, consider the bids you have won or lost in the past. If you are winning every job, you are probably leaving money on the table and it may be time to raise your margin. If you are not winning enough bids, consider lowering your margin or try these tips for winning more bids without lowering your estimates . It is also critical that you do not confuse “markup” and margin”. Many companies believe markup and margin are interchangable, yet a 30% markup only brings in a 23% profit margin, and this discrepancy can significantly impact your bottom line! Ultimately, your profit margin needs to cover all your costs, including overhead and other business expenses, while leaving some extra funds on the table for savings and to fuel future growth.