Written by small-business expert and author Michael Stone
Many of our coaching clients are telling us they’ve done better recently than they have in several years, and that’s good. But one common concern is that their profit margins still aren’t what they wanted or expected. When profits are low, missing the estimate on jobs is almost always part of the reason.
So let’s go back to some of the basics. When you do an estimate, you must be prepared. Part of that preparation is mental. If you approach estimating as a royal pain, it will taint your thinking, your approach, the time you give the project and everything else involved with the process. Rather than considering it a royal pain, look at estimating as a necessary part of getting the job and making a profit.
Creating an estimate is similar to framing a wall. First you determine your dimensions. Then you figure out the load bearing points and the structural requirements. Then you get the proper sized materials together, cut and nail them all together and you have a new wall.
When you do an estimate, you first find out what the potential client’s budget is for their job. You could say that’s when you get your dimensions in place. If the owner’s budget is not enough to cover the costs of the job, your overhead and a reasonable profit, you’ll never sell the project, so why waste the time doing the estimate? Instead, you’ll hear the famous “Your price is too high!” Too many contractors miss this step and spend a lot of time estimating jobs that can’t be sold.
Now that you have the dimensions, with a project description and plans that fit with the budget, you figure out what is going to be included in the work. That’s your list of things you need to do, similar to compiling a material list for the exterior wall. Using an estimating form is mandatory to be sure you don’t forget anything. The form also helps you identify those things you won’t do. Determine all the assemblies that will go into building the job and put a figure on each. The figure will includes labor and materials. If you’re going to use a subcontractor to provide labor and materials to do any particular assembly, then you include their quote for that assembly. You then finish that assembly by adding in any “other costs” such as rental equipment needed.
Don’t forget to consider separate “assemblies” for costs that aren’t specific to any particular assembly, such as design, permits, port-a-potties, fencing, etc.
One last step before applying your markup. Add your miscellaneous factor or error factor, whatever you want to call it. You should know your error factor for each category on your estimate sheet. That means you should know your labor, materials, subcontract and other error factors. Then you add that percentage onto the total cost for each category to get a more accurate estimate.
An example would be checking your last dozen jobs and finding out that your actual labor costs exceeded your estimated labor costs by an average of 7%. So, on future estimates, total all your labor for the job and multiply that number by 1.07. Now you have compensated for your normal error. (Trust me, a 7% error on labor is a low error factor.) Use that multiplier on every job until you see at least 3 – 5 jobs in a row where your actual labor costs match your estimated labor cost (before the error factor). Now you can start reducing your error factor and keep your estimates dead on.
When you have all your numbers on your estimate sheet, you can then apply your markup or gross margin and get to your sales price.
A few more points on estimating. You must be ready to do an estimate when you actually sit down to compile your numbers. Go where you won’t be distracted. Turn off the phones, get your reference materials ready, and get started. The important thing is to stay focused on what you’re doing and make sure you don’t allow distractions.
If you use an organized method of compiling your numbers, you’ll find that you can get your estimates done and get back to your customers in a timely manner. That gets the estimating monkey off your back, and estimating becomes a job that makes you money. Making money makes the whole process a lot more enjoyable.
“We are what we repeatedly do. Excellence, then, is not an act, but a habit.” — Aristotle
This article originally appeared here.
Michael Stone, author of Markup & Profit: A Contractor’s Guide, Revisited, Profitable Sales: A Contractor’s Guide; and the DVD class “Profitable Estimating,” has more than five decades of experience in the building and remodeling industry. Stone offers business management assistance to construction-related companies in the U.S. and Canada with books and training programs available on his website, as well as coaching and consulting services. He can be found on the web at www.markupandprofit.com and can be reached by email at firstname.lastname@example.org or by phone at 1-888-944-0044.