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Discussion Starter #1
Hi Guys,

After having been in business for a while know and struggling year after year guessing trying to estimate jobs some successfully and some not, I have a window between jobs right now so I decided to sit down and once for all eliminate this problem.

Thanks for the great info you can find here on CT, I stumbled upon the Sticky: Material Cost+Labor Cost+Overhead+Profit

I will appreciate your output based on your experience, as I got confused with the numerous info online with the Total Revnues and Margins etc.

1.Material Cost: A lot of contractors mark up the materials, Why? and How do I determine the %?

2.Labor Cost: in most instances if it is an employee he will cost in taxes about 40% in addition to his wage.
I was also confused about the labor markup, Why? and How? do I get the %

3.Overhead is pretty straightforward but the thing is my salary is included in the overhead and in my case that's the biggest item in my company overhead.
My company is small and I work in the field with my crew quite a lot, so should I pay myself as a skilled worker($$) which is at least 40 hours a week and in the same time owners salary ($$)?

4.Profit. I guess the most common number and the lowest I guess would be 10%. So in that case is it something that is related to the amount of my sales, and again I've heard on multiple occasions the Total Revenue which I can't possibly calculate as we built different projects and quite often provide just labor to big builders and GCs.

I'd like to stay competitive but I'd also want to be in charge and have a thorough numerical understanding of where I am going, so I understand these will sound like silly questions to most of you, but I am ok to look like a dummy now instead of 10 years later)

So, to recap 1. I am calculating materials+sales tax+??Mark up??

add 2. How many hours it will take my crew to do the job ( salary + 40%) I don't mark up the labor, but should I? Isn't it in the profit already, what's up with the labor mark up talk?
Add my billable hours working on the job site?

add 3. Overhead( insurances, licensing,gas, ?my Salary calculated salaryx40x300?)

add 4. Profit I guess whatever the market is willing to pay but no less than 10%
I do a lot of labor only jobs, and the jobs vary from decks to custom house framing so, Total Revenue is really, I'd say impossible to plan.

What am I doing wrong?
 

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Nobody has the magic pill to cure the problems with bidding jobs and I find that most of the contractors I know do a terrible job when bidding jobs.

Another thing I find that most contractors do wrong is they don't spend the time necessary to break down jobs. The way we bid jobs is we get exact costs for everything down to a few drywall screws. While we can never tell the exact number of hours a job will take we always add no less than 20% to 30% for the unexpected. We always add 10% to 15% for the unknown. After everything is totaled we add no less than 20% for profit and I usually add 30% for profit.

We developed our own database for bidding and it automatically calculated the overhead cost, insurance and tax burden. We punch in the total contract amount that we want and then we work the numbers forwards and backwards until we feel comfortable that we are in the ballpark and will make a good profit.

You will get more jobs when you develop a system where you can get exact numbers, work with the numbers and generate reports that are understandable.

There are thousands of ways to come up with totals for a bid, but as you stated yourself you only need to know the total for all expenses and how much profit you want to make. NO rocket science is necessary. No contractor in the world knows exactly what every job will cost because there are always the delays and unknowns. We can only use educated guesses and make sure we add enough for a cushion.
 

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Discussion Starter #3
Nobody has the magic pill to cure the problems with bidding jobs and I find that most of the contractors I know do a terrible job when bidding jobs.

Another thing I find that most contractors do wrong is they don't spend the time necessary to break down jobs. The way we bid jobs is we get exact costs for everything down to a few drywall screws. While we can never tell the exact number of hours a job will take we always add no less than 20% to 30% for the unexpected. We always add 10% to 15% for the unknown. After everything is totaled we add no less than 20% for profit and I usually add 30% for profit.

We developed our own database for bidding and it automatically calculated the overhead cost, insurance and tax burden. We punch in the total contract amount that we want and then we work the numbers forwards and backwards until we feel comfortable that we are in the ballpark and will make a good profit.

You will get more jobs when you develop a system where you can get exact numbers, work with the numbers and generate reports that are understandable.

There are thousands of ways to come up with totals for a bid, but as you stated yourself you only need to know the total for all expenses and how much profit you want to make. NO rocket science is necessary. No contractor in the world knows exactly what every job will cost because there are always the delays and unknowns. We can only use educated guesses and make sure we add enough for a cushion.
Do you use Excel for tracking of the expenses and other accounting?
 

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Do you use Excel for tracking of the expenses and other accounting?
I hate Excel with a passion. Although, Excel can get the job done. The problem with Excel is it doesn't give good reports and it doesn't have good search capabilities and it doesn't the ability to work with hundred of records.

I will try to post a copy of the software I use within a few days. I keep promising, but haven't had the time that I need to make it so it can be uploaded and downloaded. My software does so many things it takes several hours to explain what it does, how it works and why it is better than canned software.
 

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Discussion Starter #5
pcplumber said:
I hate Excel with a passion. Although, Excel can get the job done. The problem with Excel is it doesn't give good reports and it doesn't have good search capabilities and it doesn't the ability to work with hundred of records. I will try to post a copy of the software I use within a few days. I keep promising, but haven't had the time that I need to make it so it can be uploaded and downloaded. My software does so many things it takes several hours to explain what it does, how it works and why it is better than canned software.
Interesting, I am still at the point where I am amazed at what Excel can do)
 

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Here is a copy of one piece of software that I created and this software runs my construction business. This is the only software I use for the construction portion of my business and I do not use Excel, Quicken nor other software because this does everything I need it to do.

This software is an entire system that includes bidding jobs, creating invoices, statements, RFI's, Change Orders, tracking daily service calls, creating proposals, a program for tracking phone numbers and a lot more. I left one sample record on the software for an actual bid I did last week.

The 'To Do' portion of this program is a very critical piece of the software that we use daily to track our service calls for the current day and for a long period of time. While you can find phone apps that do many things, I will argue with you forever by stating that it is better to have a simple piece of software that everyone can access and print the information they need. The important thing about our To Do portion of the software is once a call comes into our office we will keep that call active on our list until we complete the call and many times by not losing the call they turn into thousands of dollars.

This software was designed with MS Access 2003 and it works with all versions of Access, but it Access 2003 is cleaner. Sometimes, with newer versions of Access you have to do some whatever you call it to get it to work. This software is well-worth paying the price for Access 2003. Buy it on ebay if you don't have it.

If you do not have Access you can download this Access Runtime for free. This will give you use of the software, but you will not be able to modify it. To download the Runtime open the zip file and open the file 'data1'

www.bestlineplumbing.com/runtime.zip

To download the software:

www.bestlineplumbing.com/businesssoftware.zip

This software is simple to modify and well-worth buying a simple book for Access 2003.

This software is not complete and will never be completed. There will always be some reports or forms that will not work because I am always making changes to the software.This software does not include my software for our database.

If you can't get the software to work for you then contact me and I will try to help. I am not a professional software developer, but what I do works great for myself. The software was developed for Windows and I know absolutely nothing about Apple computers. Maybe it will work on them. Never tried.
 

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Let me start with a disclaimer, I'm going to answer with what I know I should do, and usually have done in the past, not necessarily what I'm doing now. With a stable business and two young kids, my actual business management effort is at an all time low. I say this because it's important that we're honest with each other, on CT, about how hard it is to stay sharp in our business practice and, also, because I'm probably going to use the past tense and "should" a lot.;)

1. I mark up materials for three reasons, the percentages will be different for you(just like for every other stage) but the concept is the same. The first is to account for sales tax, I'm not kidding, I've seen a lot of guys forget to add this when estimating. The second is to account for necessary extra material and for sundry materials, you always need a little bit more than the exact amount of most materials and I just put that in my markup so I don't need to calculate it, the same goes for basic things materials I need to replace on a regular basis, these could also go under overhead. The third is for liability. When I'm responsible for materials I assume the liability for the material being the correct one and in good condition. Sometimes it's not and I need to replace it or I need to go to the supplier three times to get the right one.

2.Labor expense is pretty easy to calculate if you have it broken out in your accounting software. My nut is almost exactly 150% of wage, including WC. To figure out what you should CHARGE for labor is more of an art. You need to decide what's going into your overhead and what's going to get attached to markup. I like to have any flexible costs attached to that line item so I don't have to spend much time figuring out overhead. These costs are stuff like, unbillable hours and mileage.

3. Your actual labor pay should be under your payroll expense, preferably at a realistic rate for your skill set. Owner's draw should come out of net profit.

4.You're pretty much on your own with profit. It depends on what the market will bear on the high end and how little you can afford to make on the low end. I firmly believe that enough profit should be charged to allow the business to retain earnings enough to cover an emergency fund and at least a little bit of an "opportunity fund" to take advantage of those unexpected opportunities that come along from time to time.

If you know your average annual sales then you can use that to calculate the actual percentage of your minimum net profit. I think 10% is a pretty common low end goal in remodeling but I'm always skeptical when things break down to even numbers.
 

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There is a snag you will run into when you use the portion of the software called Breakdown. This is the part that I use for estimating the cost when bidding and I use this to compare our bid with actual costs. This part also has forms for many calculations i.e. the amount of soil that has to be removed and the amount of soil, rock or concrete that has to be imported.

The problem with this portion I never had time to solve was how you make a record active. On the top row on the very right side of the portion that contains the Project Name is a button with two squares in it. To make a project active click on that button and change the 'Active' field to a '1' for Active or a '2' for Not Active. Do not have two fields that are Active or the software will combine that number of records together.

After you change the Active Field to a '1' close the form and click on the 'Active Record' button. This will close the previous Active Record and open the correct record. Eventually, when I get time I will make this easier.
 

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I like what Ethan said, but in addition to his advise you would probably benefit from purchasing the book from Michael Stone titled "markup and profit". It's written specifically for contractors.

I've read it multiple times, really help put things in perspective. I also agree with charging what the market will bear. When I get busy my prices go up and quick. It's interesting what happens next, my close ratio plummets but my profit skyrockets
 

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The biggest thing I got from markup and profit is to think annually instead of by the job. Then question becomes how much are you GOING to make and HOW are you going to do it.

Its a mind set shift to finding the marketing that will meet the sales targets instead the idea that when the phone rings Ill bid what I think I can to get the job.
 

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Discussion Starter #14
I like what Ethan said, but in addition to his advise you would probably benefit from purchasing the book from Michael Stone titled "markup and profit". It's written specifically for contractors.

I've read it multiple times, really help put things in perspective. I also agree with charging what the market will bear. When I get busy my prices go up and quick. It's interesting what happens next, my close ratio plummets but my profit skyrockets
So I bought the book Mark Up and Profit by Michael Stone, who claims to have been "mud on the boots contractor" , but yet again come across the "factory production style approach" with the Mark up formula.

I understand that to get to say 10% profit and pay all the overhead the actual mark up number is going to be different( Mark up=Total Volume Sold/Job Costs), but what i don't understand is how the price of the installation of a certain product will depend on the actual price tag of the material.
My labor cost doesn't vary whether I am building a cheap PT deck that's gonna take the crew 50 hours or IPE deck with Timbertech Railings that's gonna take the same 50 hours.

I could probably see how these formulae work for manufacturing t-shirts, but still a little confused at this point.

I bet somebody figured it out, what am I missing here.
 

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Dmitry,

I too struggled with your quandry till I read the article below in JLC (Journal of Light Construction) in 2002.

Perhaps this article will help you also.

FWIW, I mark up the materials 10% in addition to putting all of my overhead costs in with the hourly rate. You should make something on it if you supply it. If everything goes well, it goes to extra profit. If not, it is a small cushion if you underestimated either labor or materials.

BTW, your "loaded" labor rate will probably be up in the same area as a car dealership labor rate per hour.
 

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Discussion Starter #16 (Edited)
Dmitry,

I too struggled with your quandry till I read the article below in JLC (Journal of Light Construction) in 2002.

Perhaps this article will help you also.

FWIW, I mark up the materials 10% in addition to putting all of my overhead costs in with the hourly rate. You should make something on it if you supply it. If everything goes well, it goes to extra profit. If not, it is a small cushion if you underestimated either labor or materials.

BTW, your "loaded" labor rate will probably be up in the same area as a car dealership labor rate per hour.
That should be sticky!
And that's how I calculate my prices, I am able to charge less though per hour as I am field worker/owner who is exempt from WC and both of my brothers are officers.

But still lately I've been underbid so much, It really got me thinking.
It feels good I am not the only one who doesn't grasp the idea of tying the material cost to the forming of the installation/build price.
For some reason though the idea is pushed everywhere I look, but it just doesn't make any sense to me whatsoever.

I know exactly what my overhead is per day, per hour and that's how I apply it-based on projected hours the job should take.
What is this 1.63 mark up every body is mentioning? Why do we need it? Where did it come from? (came across the 1.63 in three different sources)

I am just looking to a more scientific and efficient approach to estimating, but it seems that when people start talking about Markup being calculated from Total Volume Sold divided by Job Costs, it just doesn't add up in my head, as the material costs vary a lot and are not tied to the amount of time it will take to install them.

So, what I did, just to play around with numbers is I took my Total Volume Sold as number of hours per year at crew rate and divided by Job Costs( in my case total Overhead) and the Mark Up is 8.7, now that's 8 hour days, if I project 10 hour days the Mark Up is 10.7.

Which means that if I Mark up the occasional materials that we buy and shoot for a slightly bigger profit,-I am not charging enough, and yet I am too expensive, so go figure.

The current profit goal is only 10%.
 

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I can't really speak to the content of Markup and Profit as it's been a long time since I read it but what you're describing is fairly common in a lot of industries. In retail, I know of several industries where they use a fairly consistent markup, regardless of the actual costs associated with the item. Sometimes they're losing money on the item but their focus is on the TOTAL margin at the end of the year.

I'm not advocating the concept but here's an example of how it could work. Say you have a deck project, option 1 would be to build it out of PT and bang it out in 64 man hours with a total materials of $2500, option 2 is the same deck but in ipe with 160 man hours and $10000 in materials.

So if you price it materials and labor(let's just say $50 per hour is your average rate) it could look like this:
Option 1
Materials $2500
Labor $3200
O&P(20%)$1140
Total = $6840

Option 2
Mat $10000
Lab $8000
O&P(20%) $3600
Total = $21600

So Option 1 is 63% markup over materials and Option 2 is 54% markup over materials. You could average out your jobs actual costs over a period of time, years not months, and determine a fairly consistent markup that would work in the long run. It's tough in construction because the lower end jobs usually have a higher percentage of labor than the higher end jobs so you'll feel like you're losing money. At the end of the year, though, the numbers would be the same and you would have spent a lot less time worrying about estimates.

Again, I'm not advocating this method, I'm just explaining the logic, as I see it. A lot of us probably spend hundreds more hours a year on estimates and would be just as well off if we used a blanket number.
 

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The biggest thing I got from markup and profit is to think annually instead of by the job. Then question becomes how much are you GOING to make and HOW are you going to do it.

Its a mind set shift to finding the marketing that will meet the sales targets instead the idea that when the phone rings Ill bid what I think I can to get the job.
All business is run off of annual, right? M & P wasnt the first or last time ive read it.
 

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All business is run off of annual, right? M & P wasnt the first or last time ive read it.
Yes on the annual figuring...

But it was sure cool to finish a good job right before leaving for a hunting or fishing trip knowing you had a wad of money to play with...:thumbsup:
 

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Discussion Starter #20
I can't really speak to the content of Markup and Profit as it's been a long time since I read it but what you're describing is fairly common in a lot of industries. In retail, I know of several industries where they use a fairly consistent markup, regardless of the actual costs associated with the item. Sometimes they're losing money on the item but their focus is on the TOTAL margin at the end of the year.

I'm not advocating the concept but here's an example of how it could work. Say you have a deck project, option 1 would be to build it out of PT and bang it out in 64 man hours with a total materials of $2500, option 2 is the same deck but in ipe with 160 man hours and $10000 in materials.

So if you price it materials and labor(let's just say $50 per hour is your average rate) it could look like this:
Option 1
Materials $2500
Labor $3200
O&P(20%)$1140
Total = $6840

Option 2
Mat $10000
Lab $8000
O&P(20%) $3600
Total = $21600

So Option 1 is 63% markup over materials and Option 2 is 54% markup over materials. You could average out your jobs actual costs over a period of time, years not months, and determine a fairly consistent markup that would work in the long run. It's tough in construction because the lower end jobs usually have a higher percentage of labor than the higher end jobs so you'll feel like you're losing money. At the end of the year, though, the numbers would be the same and you would have spent a lot less time worrying about estimates.

Again, I'm not advocating this method, I'm just explaining the logic, as I see it. A lot of us probably spend hundreds more hours a year on estimates and would be just as well off if we used a blanket number.
That's a perfect example of what I don't want to do.
Might work with somebody who buys same price/grade of materials and same volume pretty consistent, like painters I guess or electricians.
But don't see that working with our trade, it would be as good as just ballparking the price.
 
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