Sitting Down To Figure Out An Estimate

healthyhomes

As some of you here may know, I am new to the business. I want to know how exactly you guys go about figuring out the price of a job. I am going to list how I do it, and please point out any flaws, or offer suggestions!

1. Figure out scope of work in terms of time, material cost, and sub trade costs

2. Add material costs marked up by 10%

3. Add subtrade costs marked up by 10%

3. factor in employees wages including what it actually costs to pay someone $18.00 per hour! (In canada anyways...)

4. Add in overhead costs which I have broken down into an hourly rate

5. Add in what I want to make for a profit.

Voila! I have an estimate. How's this sound?

Also, do you guys use some sort of checklist to make sure you havent missed anything when writing an estimate?

Thank you

john elliott

In my humble opinion, you are not taking the right approach at all.

First and foremost, you need to think about what it is you are selling. What is it that is in limited supply? Not materials, you can call and order materials by the truck load.

What you are selling is your TIME. The single most important thing that you will ever sell (apart from kids and limbs) is your time. There is only so much of it and you can't order any more.

Let's start the estimating process again.

How much of your time will it take to do the job? Let's say it's going to take 2 weeks. Now, how many weeks of your work can you sell in a year. Let's say 40. (THIS IS AN EXAMPLE!). Now, how much money do you need/want to make in a year, to cover your own income and to pay for all your overhead? Let's say $80,000.

Now you are ready to produce some numbers. $80,000 divided by 40 = $2,000 a week. This job is 2 weeks, therefore $4,000. All this stuff could be done by the day or hour if preferred.

OK, so all you need to do now is to add up the costs of doing the job, materials, subs, direct labor, add $4,000, and that's you bid right there. No need to mark up any materials or subs, markups confuse the issue and are, in any case, hopelessly inaccurate.

John

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Ed the Roofer said "John too, in his crass and blunt demeanor.............."

orson

Not familiar with wages in Canada but this sounds low. Do you have labor burden accounted for? labor burden= taxes, insurances,vacation, retirement plan, sick days, etc.

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DEAD_ONConst

John,

I think you are right on with your estimating formula. Doing it your way allows a lot mor accountability and enables you to track where you can increase your profit or reduce overhead and prevent wasteful spending. Also, it allows you to keep tabs on your expenses and adjust "on-the-fly" as necessary.

Good work!

Mike Finley

Until you add an employee. Or until you start dealing with all the expense variables that change in a construction business based upon what you are doing. Until your customer changes the specs on materials, until an employee calls in sick and changes your schedule, until a sub gets his schedule all bunged up and screws up yours, until you factor in warranty work on call backs, until you factor in the tools you need to replace, the transmission that went out in your truck the gas prices that raised....

john elliott

Most of that sounds like overhead to me. I expect your fuller explanation is coming later

John

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Ed the Roofer said "John too, in his crass and blunt demeanor.............."

Mike Finley

Nope, there's no need to explain. I'm not saying there is only one way to estimate, only that there are many, and the most effective one depends upon your circumstances.

john elliott

Employees can be treated as overhead, or as a variable cost. Probably best to treat as direct labor cost (see my post above)

Sounds like something that would be taken care of under 'how long it takes to do the job'

Cost of materials I reckon. Change order?

taken care of under 'how many weeks can you sell a year',

Overhead for the first three and variable job cost, or materials even (consumed in the course of carrying out the work) for the last item

John

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Ed the Roofer said "John too, in his crass and blunt demeanor.............."

CatAlii

I think this is key.

Over our years in business we have tried and failed with different methods of estimating until we found what worked for us. It's important to evaluate your methods periodically to figure out what's working and what isn't.

What works best for us, as a corporation and a general contracting business where we do most of the work ourselves (hands-on by the GC) is this:

Figure out job costs, add markup and voila...job bid. It's the details that are tough. You have to figure out your overhead and then you have to figure out what you want your profit to be to come up with a a markup.

Job costs can include time spent on the job by you or an employee (only if you pay yourself by job or have to hire someone hourly SPECIFICALLY to work on that job, an hourly employee that works 40 hours per week for your company should be part of the overhead/markup costs), subcontractor costs, material costs and miscellaneous fees like permits, engineering, waste removal, etc.

Overhead should be the amount of money that it would cost you to operate your business (that includes your salary!) if you had zero jobs. Add up all the costs (licenses, insurance, vehicles, education, industry affiliations, advertising, owner/director salaries, employee salaries, payroll taxes, business income taxes (if you are a Corp), etc.) and that is your overhead.

Profit should be a percentage of your sales.

Overhead + Profit is your markup.

There are many ways to apply your markup to your job costs to arrive at a bid price. Just a couple examples....
1. You can take your annual overhead+profit, divide by 52 and come up with a weekly markup - if a job will take 6 weeks you add 6 weeks markup.
2. Another way is to take your total annual sales minus overhead & profit to get your annual job costs. Then divide your total sales by your job costs to get a markup value. For example $100K in sales minus $40K in overhead & profit equals $60K in job costs. 100 divided by 60 equals 1.67. Then for every estimate you would take your estimated job costs X 1.67 to arrive at your bid price.

Michael Stone's book Markup & Profit goes into the 2nd method in detail. The key is to finding a markup value that works for you and your business, a flat 10% markup won't work for everyone.

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john elliott

One of the problems with markup, apart from the complexity, is the fact that it doesn't produce consistent results. This is easy to demonstrate-

Job A. Materials $10,000. Time taken 1 week. Markup produces ( for example) $1,000

Job B Materials $20,000. Time taken I week .Markup produces $2,000.

Each job took a week, but there was twice as much material markup on job B. Either the bid failed, or the contractor did much better that week. In any case, this shows that markup does not produce consistent results

If he had recovered his pay, overhead and profit based on the TIME the job took, then he would have made the same amount of money on each job. Maybe he would have had a better chance of getting Job B too, because his bid would have been less than the guy using a markup system.

John

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Ed the Roofer said "John too, in his crass and blunt demeanor.............."

Mike Finley

A good friend of mine is a carpet installer, been doing it for 30 years, it's just him and sometimes a "helper" now and again if he can find one sober enough to operate a kicker. He estimates by the square foot and by the stair. $2 more per stair if you want it "hollywooded" instead of "waterfall".

Another good friend of mine builds McMansion spec homes. He buys a property, scrapes the existing house off and puts up a $2 million dollar custom house on it, stages it and sells it (usually before it's done). He has a complex estimating solution that uses a series of excell spread sheets. Subs, materials, material escalations, holding costs, land acquisition, demolition, permits...

Two very different methods.

Mike Finley

If both jobs took the same amount of time and the 2nd job had double the material costs then we can assume that the 2nd job had much higher end materials either that or these two examples are so far apart that they are irrelevant.

If it's the former then higher cost materials fall into the business risk assessment. I will not install a $29 drop in sink for the same amount of money as a $2500 custom vessel sink imported with a 12 week wait time for the same fee. Nobody in their right might should.

Where is it written that 2 different jobs are supposed to yield the exact same profit?

Unless you operate on Time & Materials on everything you do, all jobs are going to vary in profitability. There should be a statistical average percentage of profit, there should be jobs that return a statistical lower average and jobs that return a statistical higher average. The secret is to manage your company well and be in control of the data in order to keep bumping that average upwards over time.

john elliott

I can see your point, but don't see how it relates to what I said. Perhaps you are thinking that I am saying everyone should use my method. If that's the case, relax, I'm not saying that at all.

We are all here giving each other the benefit of our opinions, and it is up to anybody reading them to take them up or reject them as they wish

It's my opinion that the markup method is seriously flawed, and I would be interested to read some defense of the system (and to argue with it)

John

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Ed the Roofer said "John too, in his crass and blunt demeanor.............."

Mike Finley

What is the serious flaw? You agree that there are many methods to arrive at a job cost, but what you are saying is that the markup method just isn't one of them?

Personally I think you are coming at this from a flawed initial perspective that you should be earning profits on a evenly divisible method of $X/ (Year, Months, Weeks, Hours or minutes). The only method I know of that works that was is Time and Materials or being an hourly employee.

The method you are describing is just as "flawed" as any other method if it is scrutinized with a particular set of circumstances designed to make it break down and fail.

john elliott

You must have missed post#10 in this thread? A reminder

That's the serious flaw right there. Innaccuracy. The fact that marking up varying costs produces a varying result.

Didn't say any of that. I agree that there are many ways to arrive at a job cost but if they include marking up a varying cost then the results are going to be variable. If it turns out that the costs don't vary that much then there's no point in using markup anyway.

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Ed the Roofer said "John too, in his crass and blunt demeanor.............."

hammerwhipped

I think what mike is trying to say is that the more $ material you supply and the higher the risk if you warranty the materials you provide. Also it gives you room for error (wrong cuts) , time to pick up materials and so on.
So the markup system is not really flawed it's their to protect you.

john elliott

And what I am trying to say is that there are better, more modern and simpler ways for a contractor to ensure that he makes enough money for what he does.

However, if a contractor prefers to stick with systems that have worked for him in the past, then of course that is what he should do.

New guys might like to have a look at other methods though, as markups are both complicated and inaccurate.

John

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Ed the Roofer said "John too, in his crass and blunt demeanor.............."

AtlanticWBConst

Another point to take into consideration regarding employees, is that you should actually be making money off of them. When starting out in business, I realize that this is not always the case. But, at some point in your business plan, you should be making money off your workers. That means that your budgeted hourly rate will be higher.
Don't forget to include what it will cost you to employ a worker. Do you have other costs that you will be paying out, while they work for you? Example: Workman's comp?

You may have goals, in terms of your desired yearly income (what you would like to make).
Along with this, realize too, that at some point in your business plan, you need to be making money that will be going back into your business. That money should not be coming directly out of your pocket. You should be making your targeted income, and still be making additional business re-investment income.
Examples: Truck? Truck maintenance, multiple trucks, tool acquisitions, tool maintenance, uniforms? advertising, accounting costs, cell phone, etc, etc.
At some point, these expenses should be paid by additional income of your "business" and not your personal income. They should be seperate.

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genecarp

people often complicate this, in time you will hopefully begin to reley on your instincts. your estimates should never be so tight that if something comes up unexpected, you are in trouble. also, the most important thing in estimating is the language you use, inclusions, exclusions, often your profit is in the additional unforseen things that come up. many contractors view unforseen conditions as problems, these are actually profit opportunities

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AtlanticWBConst

That reminds me of another cost to factor into estimates.

Overage.....(Materials allowances) beyond the scope of the estimated material amounts you assume the job requires.

I usually base it on a percentage, per each phase of the job. In other words, I assign an amount as a "fudge factor" for each specific trade, portion, or phase of a project.

On mid size projects, overages can eat heavily into your profit (if they are not accounted for), and you really cannot go back to the client and say, "oops, I underestimated my cut off waste, I need to charge you more...."

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