Estimating Errors Reduce Profit

Estimating the cost of a project accurately is critical if you want to be profitable. When you miss items, or underestimate how long a task will take, the job will cost more to build than anticipated. That additional cost comes out of your profit.

The one problem area I hear about most frequently is estimating labor. This is a problem primarily with remodeling and specialty contractors, but to some degree it also applies to those building new homes.

Most contractors I talk to estimate labor by the hour. They look at the job and decide how much time it would take them to do the work. Then they sell the job and hand it off to their employees, who always seem to take longer than the estimator thought would be needed. There are many reasons for this, but the end result is the labor estimate being either a little bit too low, or way too low, for the work that was done. And just like that, the profit is gone.

Consider trying something different. First, let’s talk about your labor rate. Most companies have a one, two- or three-man crew doing the work. Set your hourly rate for the crew working as a unit. Now remember, the rate is figured using the fully burdened rate for each person on that crew. Here is an example:

Your crew is Pete and Sam. Pete is paid $20/hour and Sam is paid $16/hour, but we need their fully burdened labor rate. The fully-burdened labor rate is the actual cost for an hour’s labor. It includes payroll taxes, worker’s comp, vacation pay, health insurance, and any other benefits or expenses related to employment.

If you have no idea what your fully-burdened labor rate is, multiply the hourly rate by 1.35 and that will get you close. It’s better to calculate your own fully-burdened rate because it will vary widely based on what you’re required to provide (worker’s compensation) and the benefits you choose to provide (vacation or sick pay, retirement plan, etc.) In California, I’d recommend multiplying the hourly rate by 1.48. Your best bet is to ask your CPA for the right rate for your business. I’ll use 1.35 in this example.

  • Pete’s pay is $20 an hour so 20 x 1.35 = $27.00 an hour
  • Sam’s pay is $16 an hour so 16 x 1.35 = $21.60, let’s round it up to $22.00 an hour

Add them together, and this crew costs $49/hour. If you have more than one crew doing the same work, with one crew costing $49/hour and the other crew costing $52/hour, use the $52/hour rate for all of your estimates.

Now, let’s talk about the time estimated to build the job. Don’t estimate by the hour; estimate in 4-hour blocks. If you have a demo job that you think will take your crew 10 hours, put 12 hours on your estimate sheet. If you have a small 1, 2, or 3 hour job, put 4 hours in the estimate. If you think your crew will take 19 hours, put 20 hours in your estimate.

When you estimate 12 hours for Pete and Sam to do the demolition at $49/hour, the estimated cost for demolition is (12 x $49) $588.

Don’t tell me this will push the cost of the job up so you can’t sell it. It won’t. Once you try this method, you’ll quickly see it won’t make one iota of difference in your ability to sell jobs, unless you’re trying to sell price. If you’re selling price, your estimate doesn’t matter anyway.

As your estimates get closer to actual costs, you may be tempted to go back to estimating on an hourly basis. Don’t do it! Stay with this method until you have at least five or six jobs in a row with correct labor estimates. Then and only then, consider estimating in 2-hour blocks instead of 4-hour blocks.

It’s easy to blame all cost overruns on production, but if your labor estimates are consistently too low, it’s your estimating. This little trick forces you to get on top of your numbers and stay on them.

Some of you are working as hard as ever, the current situation hasn’t affected your company. Others are waiting at home for the all clear from their government so they can get back to work. If that’s you, take the time to improve your estimating skills. We have a 12-hour class on estimating that has helped many contractors improve their estimating so they can price jobs more accurately and make more money. Combined with our Fast Track Estimating software, once you know how, you can create your estimates more quickly as well.

Let us know if we can help.


Related Article: Estimating Labor in Construction


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Nancy
April 29, 2020 5:29 am

What a timely post for us! The “discussion” my husband and I get into is – if he uses the burdened labor cost, does he still apply the markup to it? Years ago, his well-meaning uncle contractor said he would be double-dipping if he applied markup to the burdened labor. So he uses actual labor costs (which I didn’t know and – well, you know….) and applies the markup.
What are your thoughts on that? Thanks and I always look forward to your emails!

Paul Choate
April 29, 2020 10:40 am
Reply to  Nancy

It’s simple: If labor burden costs were included in the markup when you figured out what your markup should be then then you just use the base hourly wage in the estimate prior to marking it up. If the labor burden costs were not included in the markup then you include them in the estimate. You do one or the other not both.

Paul Choate
April 29, 2020 5:27 am

I’ve been doing it that way for a long time. You’re right Michael, the added expense (or so it seems) has little impact on selling the job. If I lose a job because the labor portion seemed a little too high then I wasn’t going to get it anyway! That said, I lose a ton f work that I used to think is due to my “high prices” but I realize now it’s more because I’m not a great salesperson. I’d rather improve on being a good salesperson than to lower my prices as I know my prices are right.

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