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’re estimating construction, 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.
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses and their lives. He is the author of the books Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations as needed.
Really getting in to all of your books and find them amazing. This is what we have been trying to solve for years in our business. The content is so relative and has given us a simple approach to running a profitable business. Having all the speadsheets makes things simple and we are slowly turning our business around. Thank you. Nik
Our business volume has almost doubled in the last year, so things have been a little crazy. A lot of time has been spent on our business manual and that includes our forms for estimating. We have almost 200 line items for our bathroom renovations. They included everything possible you can do in a bathroom. We display both what is and ISN’T included on our firm price quotations. This is very helpful so we avoid clients claiming they thought something was included. We are spending more time than ever up front planning and it is translating into better run projects that are increasingly profitable. Thanks as always for your topics Michael!
As the saying goes, “Money is made in the office but earned in the field.” If you don’t estimate accurately you can have the best crew in the world and still lose money. It’s the most important part of being profitable in my view. Great topic, Michael!
As a small time remodeling contractor, one on the most important estimating tools for me is my custom made proposal template. A blue collar spread sheet of lines and columns.
Starting with design and architecture and ending with misc. The line items are in the order in which the jobs are built. (Design, permits, protective products, demo, disposal, rough frame, plumber ect.) The fixed price proposal for a total home make over that I am working on now has 27 line items. I perform the design, demo, drywall and trim carpentry and the other work is subbed out. By dividing my tasks up it allows me to really focus on each one bite by bite. My sub contractors are emailed a customer approved scope of work and a plan and I schedule an on site “sub meeting”. I give plenty of notice as to the time of the meeting so no excuses for not attending. It usually doesn’t take more than 2 hours as everyone has their marching orders in hand. Limiting the sub meeting to 1 morning I don’t have to keep going back to the home with individual trades and disrupting the customer. When I receive the quotes I simple type their specs into the template with a cost column and add my mark up. This column is deleted on the customer copy of course.
I also keep track of every hour that it takes to plan, design, figure and meet. Those hours are included as well in the General Contractor Duties.