Pricing, Estimating, And Success

 
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Old 10-13-2007, 03:53 PM   #1
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Pricing, Estimating, And Success


One of the most challenging aspects of running a contracting business is estimating jobs. For someone with little experience, estimating can be a rather scary endeavor (it can also be scary for someone with tons of experience). After all, the accuracy of the estimate will have a huge impact on the contractor’s success.

This, I believe, is the primary reason we see so many questions asking what to charge for a job. But such questions are misdirected, because what I (or anyone else) would charge is completely irrelevant and doesn’t address the real issues.

The price of a job is comprised of 4 basic components: labor costs, material costs, overhead, and profit. Estimating is the process of identifying the labor and material costs. We add our overhead and profit to those costs to obtain our price.

Overhead—advertising, rent, insurance, utilities, phone, owner’s salary, etc.— is completely unique to each company. Without knowing these numbers, it is impossible to properly price a job.

Profit goals are also unique to each company. Again, without knowing the specific profit goals for a company, it is impossible to properly price a job.

Consequently, any attempt to answer a pricing question in the absence of these two key numbers is essentially meaningless. More to the point, pricing questions ignore the fact that a large percentage (often more than 50%) of the job’s price should be comprised of overhead and profit. (My suspicion is that those who pose such questions don’t know their overhead, and mistake gross profit for net profit. But that’s a different issue.)

As I said, estimating is the process of identifying the labor and material costs for the job. Labor costs are determined by the type of work being performed, the production rates of the company’s workers (the time required to perform each task), and pay rates. As with overhead and profit, these numbers will be unique to each company. Material costs are determined by the type of materials required, the quantity required, and their purchase price.

For example, let us say that a painting contractor knows that his painters can prepare and paint a certain style of door in 30 minutes. He looks at a job that has 10 of these doors. He knows that his painters can prep and paint these doors in 5 hours. He can also calculate the materials required by the spread rate of the product he will use. The contractor can now determine what his costs will be for the job. By adding his overhead and profit to these costs he will have his price for this job.

While the above example is simple and uses a painting project, the same principle applies to every contracting job—large or small, simple or complex—regardless of trade.

What should I charge for X? really means: what is the total of my labor costs, material costs, overhead, and profit? And the answer to that question requires a substantial amount of additional information. Providing an answer without that information is simply a guess.

Accurately pricing a job is not rocket science, but it shouldn’t be based on conjecture, blind guesses, or another company’s numbers either. Certainly accurate estimating takes effort, but owning a successful business isn’t easy. Asking what to charge for a job is asking for a short cut, but there are no short cuts to success.

Such questions about prices for a job are inappropriate, because they ignore the many factors that determine the price. Providing a price in response to such questions is also inappropriate, for the same reasons.

It is a documented fact that 90% of small businesses fail within 5 years. Of those that make it 5 years, another 90% will fail within the next five years. Which means, 99% of small businesses fail within 10 years. One of the primary reasons for failure is not charging enough. Contractors are as guilty of this as anyone.

There seems to be no shortage of hacks willing to work for dirt cheap prices. Nor does there seem to be a shortage of replacements when they inevitably fail. One of the most effective means for avoiding failure is to know your numbers. Asking what to charge for a job is simply an admission that you don’t know your numbers.

I hasten to add that there is nothing wrong or inappropriate with asking how to price a job. But how to price is different from what price to give. Learning the process is a good thing. Looking for an easy way out isn’t.

Putting paint on the wall is a trade skill. Pricing a job is a business skill. A skilled craftsman does not necessarily make a good businessman, because different skills are required. The owner of a contracting company does not necessarily need to have trade skills, but it is imperative that he have business skills if he is to succeed. The longer you wait to obtain those skills, the closer you move to joining those 99%.

Brian Phillips


EDIT:
See this thread as to why we don't allow pricing questions here:
http://www.contractortalk.com/f11/wh...r-talk-100555/

Last edited by angus242; 09-06-2011 at 08:35 PM.
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Old 10-13-2007, 04:20 PM   #2
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Re: Pricing, Estimating, And Success


very nice

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Old 10-13-2007, 04:28 PM   #3
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Re: Pricing, Estimating, And Success


RACK EM'..Make it a sticky!
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in texas with framing and cornish people will do it for 3.00 a foot. What do yall think about that? Just laber
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Old 10-13-2007, 05:30 PM   #4
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Re: Pricing, Estimating, And Success


Hey Brian,
Very well put, this or similar should be read by every contractor out there. Short and to the point, an easy read.
Good Job
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Old 10-13-2007, 05:40 PM   #5
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Re: Pricing, Estimating, And Success


Very informative and to the point. Highly agreed with.
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Old 10-13-2007, 06:08 PM   #6
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Re: Pricing, Estimating, And Success


I tend to think people use square foot numbers as an umbrella for trades. I personally hate that but I think the mindset is different skill levels or niches in different installs pay better than others. It is assumed some areas are better rewarded for thier hours punched. A square foot number for a framer is a better covered umbrella than say drywall. One has many unpredictable hidden responsibilities while the other is has to be done very fast because the performance is more predictable. I agree about every business needs what they need but these sqft #'s set the table for what ballpark you or your competition should be in.
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Old 10-13-2007, 07:23 PM   #7
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Re: Pricing, Estimating, And Success


Where did you find that Brian. Interesting read
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Old 10-13-2007, 07:39 PM   #8
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Re: Pricing, Estimating, And Success


You said that so well, you could or should write a book, or teach a class.

That knowlegde you speak of is exactly what very few in the trades know anything of. The fact is, unfotunatly, most get into these buinesses from the installer side because they got tired of making thier boss rich, or so they think that, and decide they can and should do it for themselves.

The result is alot of ditch diggers with ditch digger heads.

Few people in the trades actualy have a buisness and so they dont realize it, but they actually own a job.

Financial education should be a prerequisite of anyone thinking of going into any buisness and there should be a real test on it prior to issuance of a license. Then, only with that license on file at a supply house or plant could they be allowed to obtain what they need.

If this were done we could all make a much better profit for our efforts.
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Old 10-13-2007, 08:08 PM   #9
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Re: Pricing, Estimating, And Success


Quote:
Originally Posted by copusbuilder View Post
Where did you find that Brian. Interesting read
I didn't find it, I wrote it.

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Old 10-13-2007, 08:47 PM   #10
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Re: Pricing, Estimating, And Success


really good Brian I have seen a lot of contractors do really well with thier business and not have a clue how to build a house. I can build the house, sure wish I could make the money work in business
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Old 10-13-2007, 09:17 PM   #11
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Re: Pricing, Estimating, And Success


You think they will read this and not still ask? I hope so. From now on I will just post a link to this sticky whenever someone asks a pricing question.
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Old 10-13-2007, 09:55 PM   #12
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Re: Pricing, Estimating, And Success


Quote:
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From now on I will just post a link to this sticky whenever someone asks a pricing question.
Yep, that was the point of making it a sticky.
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Old 10-14-2007, 04:30 PM   #13
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Re: Pricing, Estimating, And Success


"The price of a job is comprised of 4 basic components: labor costs, material costs, overhead, and profit. Estimating is the process of identifying the labor and material costs. We add our overhead and profit to those costs to obtain our price."

I think something else that should be added to the reason for being or not being successful is to add an additional column in for "time spent on estimating" then contractors would understand how important salesmanship is....
If you are right bang on with your costing, and you are a master at what you do, and you go up agaist another contractor that is a master and can sell popsicles to a snowman you will lose.....even if you compeditor is higher..

Feel free to add too these steps.

Changing an exterior door
One man operation working out of his home and garage
The process of creating an estimating formula
  • Sourcing and picking up material.
    • Drive to lumber store
    • Waiting for service
    • Loading material
    • Driving to the project
  • Setting up to work on project
    • Loading the equipment required to complete project.
    • Delivering the equipment
    • Unloading and setting the equipment up
  • Steps required to complete project
    • Required demolition
    • Disposal
i. Time to clean up and secure all waste material for disposal pickup
ii. Cost of disposal pickup
    • Measuring and preparation to start job
    • Create a game plan
    • Cut jamb and threshold to required dimensions
    • Hinge gain and secure joinery
    • Shim jamb in opening
    • Hang door
    • Adjust and secure jamb
    • Drill and install locksets
    • Insulated and weather proof frame
    • Install exterior trim
    • Install interior trim
    • Preparation and chalking for paint
    • Prime trim and door
    • Paint two coats trim and door
  • Cleaning up after the project
    • Loading carpentry tools up and securing them on the truck
    • Loading and putting painting material away
  • Daily/hourly or by the minute costs, even if nothing is being done the machine cost money to sit…
    • Phone
i. Purchase cost
ii. Monthly rental
iii. Per-call cost
iv. Phone book listings
    • Office
i. Percentage of home square footage and cost incurred
ii. Business licensees
iii. Approved signage
iv. Office supplies
v. Office machine purchases and rentals
vi.
    • Tools
i. Wear and tear
    • Vehicles
i. Lease cost
ii. Insurance
iii. Maintenance
iv. Fuel and oil

Last edited by woodmagman; 11-04-2008 at 11:45 AM. Reason: Added too
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Old 10-14-2007, 07:51 PM   #14
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Re: Pricing, Estimating, And Success


Quote:
Originally Posted by eagleandbaby View Post
What to you know/think about web based estimating sites? I have seen two. Having spent a minimul amount of time on them, one seemed good and one bad.

The bad one was homerenovationestimate.com

The good one was estimatorcheck.com
They may be good for a "gut check" of your numbers, but I would NEVER (did I emphasize that enough???) use them to submit a proposal. You don't know what material costs their numbers are based on, what labor rates they use, what productivity factors they use, etc., so how can they provide accurate enough info you you to submit bids from???
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Old 10-14-2007, 08:13 PM   #15
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Re: Pricing, Estimating, And Success


Quote:
Originally Posted by Brian View Post
I didn't find it, I wrote it.

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Im impressed
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Old 10-14-2007, 08:17 PM   #16
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Re: Pricing, Estimating, And Success


Quote:
Originally Posted by Bob Kovacs View Post
They may be good for a "gut check" of your numbers, but I would NEVER (did I emphasize that enough???) use them to submit a proposal. You don't know what material costs their numbers are based on, what labor rates they use, what productivity factors they use, etc., so how can they provide accurate enough info you you to submit bids from???

thanks
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Old 10-15-2007, 08:29 AM   #17
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Re: Pricing, Estimating, And Success


I agree with everything you said but from time to time I like to get a reality check on something I may be bidding for the first time just to see where my pricing falls. If I ask a group of guys what something costs and they tell me $10,000 but I am guessing $4,000... we have a big problem!

As I said I agree with everything you said, and we should post this link as a reply when ever anyone asks about price, however it's still nice to sometimes know the "going rate".
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Old 10-15-2007, 04:04 PM   #18
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Re: Pricing, Estimating, And Success


Quote:
Originally Posted by Grumpy View Post
I agree with everything you said but from time to time I like to get a reality check on something I may be bidding for the first time just to see where my pricing falls. If I ask a group of guys what something costs and they tell me $10,000 but I am guessing $4,000... we have a big problem!

As I said I agree with everything you said, and we should post this link as a reply when ever anyone asks about price, however it's still nice to sometimes know the "going rate".
I would think perhaps you have a point.

Surely, if you are consistantly loosing jobs because your too high or, conversly, have every job you looked at because your too low, there may be some value to knowing "the going rate". Has this been posted"the going out of buisness rate"

Anyway, I digress. But the point being, and I,m sure you already know this, is that you cant run your buisness for the going rate if thats not enough for you to make profit.

Of course, everything must be in line: expenses not too high, salary not too high(or low), not paying too much on material. Then if its still not right, you gotta take another look at things like market, clients, geographic location.

And if that all looks ok, then you must start making a plan(a buisness plan) that has all components needed to make it work for you.

Back to your point, knowing "the going rate" has its uses, but you must be very carefull to know how to incorparate the info, if you chose to pay attention to it at all.
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Old 10-15-2007, 05:46 PM   #19
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Re: Pricing, Estimating, And Success


Since 99% of the contractors starting business today won't last 10 years, and since most of them aren't charging enough, I'm not sure why knowing the "going rate" will be helpful. The "going rate" is really the "going broke rate".

I suppose it would be helpful in the sense that if I'm charging the "going rate" I better raise my prices.

I'm not very concerned with what others charge. Most of them don't know what they are doing, won't be around in a few years, and certainly don't offer what I do.

I think too many contractors are more concerned about price than the customer is. Too many contractors think the only way to get a job is to have the lowest price. Getting a job is the operative phrase-- they are trying to get a particular job and not build a business.

Anyhow, I appreciate all of the comments, both pro and con.

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Old 10-16-2007, 09:09 AM   #20
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Re: Pricing, Estimating, And Success


Very Good post Brian...You are dead on with what you are saying.
Early in my career I had a guy tell me,
" Don't worry if your price is too high, just worry if it is high enough."

Again this was a long time ago...Initially I thought he had meant "get as much as you can" it took me a while to understand he was talking about what you posted.

If more these "how much" guys would sit down and figure out their fixed cost and overhead cost, company and personal goals. That is 70% of the Great Estimating Mystery.
And that also means being a little bit of a soothsayer.."How much do I need to put back for the kid's college or How many times will I have to bail junior out of the hoosegow...weddings, my retirement, etc.... (pretty big list by the end of it) Also, they need to update and adjust their projections frequently!

I like the term " the going (broke) rate"
Anyway, I am being redundant to what you said....good post
Ya done TEXAS proud.

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