The Cost of a Job: An Ever-Moving Target

Words: Sam Chapman, DRP Masonry, LLC
Photos: DRP Masonry, LLC

I look at a well-functioning estimating department and think, as I imagine most do, of the age-old question: "What came first – the chicken or the egg?" How do you know how much it costs to do a job before you do it? The truth is that pricing a job is an ever-moving target. The approach I take begins long before the first brick or block is counted. Instead of looking at estimating on a job-by-job basis, I like to look at the company as a whole and see how much money it is going to take to get that job to fit in. Because let's be real, we'll do any job for the right price. I am going to discuss calculating overhead, deciding what to bid, direct and indirect labor, materials, and proposal writing.

Calculating Overhead

We have all seen the general contractor's CO template that says our overhead is 7%. How do they know? Overhead is the price you pay to be in business; these are costs that cannot be assigned to a specific job. Rent, utilities, vehicles, tools, equipment, accounting, estimating, management; all their benefits, taxes, and liabilities just to scratch the surface. If you want an "honest" jumping-off point for this, I suggest pulling out your itemized tax return. This can be a grueling process, but while you are taking the time to do it, consider your company's potential and your long-term goals. Of course, these expenses are going to vary based on the amount of work you do. Let's run some numbers. Say performing $1 million a year is going to cost you $200,000, while $2.5 million would cost you $250,000, and $5 million would cost $300,000. Your overhead markup for $1 million, $2 million, and $5 million is 20%, 10%, and 6%, respectively. Although these numbers suggest that booking a bunch of work right now is the solution, you may not be in the position with manpower or financing to handle it at this time. While Wall Street tells us to "Grow. Grow. Grow," there is honor in supplying long-term job security to a small group of faithful employees. Set your goals based on what is meaningful to you.

Selecting What Jobs to Bid

Now, where do I find the opportunities? And what do I bid? For a good estimator, communication and organizational skills are as important as math skills. Ask around, find out what companies are good to work for, call their main number, ask for estimating, and get put on their bidders list. After one day on the phone, you will be surprised with the amount of opportunity out there, but don't feel you have to bid every invitation you solicit. When reviewing an opportunity, call and ask questions. Most people hesitate to do this out of fear that they are going to come across as ignorant. Don't worry about that. Running through the details will give you and the prospective client a comfortable feeling about working together on the project. Summarize and organize the potential projects in a manner that you can review them all at once, then prioritize them based on what fits your goals and your probability of success. I have an "estimating" email that is reserved for invites only. Once I review a job, I right-click on the email and "categorize" it as "bid" or "no-bid." Then when a new invite comes in, I search for the name to see if I have reviewed the project before— to prevent doubling my efforts. I currently use the app Monday.com as a digital whiteboard, but for the last 20 years, a physical marker board got the job done. When an opportunity makes the cut, all files are downloaded and put into a job folder consisting of three subfolders: RFQ (everything from the client), Estimate (all my work), Proposal (everything sent to the client).

Detailed Estimates

Now it's time to start the takeoff. This begs the question: "How detailed does it need to be?" My father always told me, "You don't go broke $10,000 at a time; you go broke $10 at a time. If you don't believe me, look at your credit card statement." This rings true with regard to productivity as well. If I can save 15 seconds on something I'm going to do 100 times, that is 1% of my work week. Do some detailed estimates, then analyze the data to see where you can cut out efforts. For example, I don't take out standard doorways when doing a block count. Some labor/materials are removed, some are added, but it comes out to a wash. While I don't, by any means, encourage everyone to shoot from the hip, here is my current approach. I count block (wall square footage), then apply factors to them for conditions. I have a standard price based on a count of 25,000 – 8” standard block with rebar on 48”, in my backyard. If it's half that, I add a dollar, if it's twice, I subtract a dollar, add a dollar for every 100 miles away, add a dollar for 24” on center, and another for 16”. I have found that this allows me to bid five times as many jobs, and you can't win jobs you don't bid. I do recognize that this takes my accuracy from +/-2% to +/-4%, so I add 2% to the bottom line to ensure I'm covered. I do express: Do your own research and decide what you are comfortable with. The numbers above are rounded to convey a philosophy. Be sure to include indirect labor costs (general conditions) in these calculations, i.e., job setup, mobilization, housing, rental equipment, general labor—not just material, labor, overhead, and profit.

Proposals

Now for writing a proposal, and I know what you are thinking: "Why bother, they don't read them anyway?" I strongly encourage having a standard proposal template. In addition to the efficiency of eliminating repetitive typing, this serves as an ever-growing list of "lessons learned." Over the years, there have been so many things I never knew I needed to qualify or outright exclude until I was awarded the project and got burned. I have a title page with the company name, price, and scope (Drawings & Specs dated and Amendments). An "Inclusions" section and an "Exclusions" section. On my template, I have everything listed, including the kitchen sink, in both, and delete what doesn't apply. Then there's the stuff the lawyers overcomplicate, seemingly to justify their existence. Terms and Conditions! I was taught that there are five that really matter: back charges, limitation of liability, warranty, liquidated damages, and payment terms. Here is a little aside on payment terms. The average business line of credit is around 8%. If a general contractor can negotiate Net 60 terms in lieu of Net 30, that saves him 0.67% on his overall project. If he is running a 5% profit margin, that move increases his overall profit by 13%, at your expense. Before you negotiate these, be sure you understand their impact. Despite my previous jab at lawyers, don't hesitate to talk to one about things you don't understand.

In summary, I would like to address what is wrong with kids these days, and perhaps us old people alike. Two strikingly bad habits I see in estimators are a lack of organization and the reluctance to pick up the phone and call the client. Organization is one of the most professional characteristics, saves time, and prevents costly mistakes. I can't tell you how many times I have thought to myself, "Oh, I'll remember to exclude that," then forgot to. Take notes; store them in the proposal folder. Many times, an estimator has come to me with a question, and I respond with, "Call the client." Only to walk by their office an hour later to find them still digging through drawings looking for an answer that isn't there. When a big GC has an intern call me, his first day on the job, to see if I'm bidding on a project, I can't help but wonder if they are doing that to break him of the fear of picking up the phone. In closing, I would like to leave you with an Owen Wilson quote from the movie Armageddon that I believe accurately describes the feeling of chasing a big job.

“I got that excited/scared feeling. Like 98% excited, 2% scared. Or maybe it's more - It could be two - it could be 98% scared, 2% excited, but that's what makes it so intense.”

The Cost of a Job: An Ever-Moving Target

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