Let’s face it, when it comes to bidding, there is nothing more important than obtaining accurate project estimating numbers. Right? OK, forget for a minute the square foot price of drywall ceiling. What you should be concentrating on is how all construction costs—from direct and indirect costs to labor rates and overhead and profit—are calculated. If your estimators, accounting department, project managers and office staff are still ball-parking numbers, they should take a step back and examine how they arrived at these figures.
Calculating Indirect and Direct Costs
Let’s start with how you count indirect costs; i.e., those construction items that are not consumed directly into or at the project site. These can include office overhead, general company liability insurance, bond premiums, shop labor, offsite fabrication labor, materials transportation, office rent and marketing.
What if a construction firm forgets the office overhead? The only way to achieve the best “real cost” estimate for a project is to understand what each of these items and categories represents. It is important to discuss and review with the team how various indirect costs are defined.
On the flip side, does the firm have a written description of direct costs, such as labor, materials, equipment, temporary utilities, portable toilet rentals, trailers and fencing? For example, if a field manager buys a cut-off saw for every project and the office manager underestimates its cost, this could quickly add up to thousands of dollars lost. This is why once a project is complete and the dust has settled, it is important for the estimator to go over these direct costs with the team to ensure the number is accurate and to avoid repeating errors.
Make Sure to Count all Equipment Expenses
Let’s look at a contractor’s pickup truck that makes runs to every job, every week. Since the truck was paid for last year, the estimate may include gas, plus a little extra. But what about replacement cost, and maintenance, registration or other costs? If the estimator includes $85 per hour, the office needs to make sure this number is accurate.
Understanding True Labor Cost
Many estimators take shortcuts when it comes to understanding the cost of construction labor. Maybe they just assume it is the base wage plus 26 percent.
Estimators should invest time with accounting to determine what makes up true labor cost —not just the actual labor burden, taxes or insurance. Labor burden is the actual cost for a contractor to have an employee, aside from their salary. This includes taxes, pension costs, all types of insurance and other benefits. In fact, many contractors fail because they simply focus on payroll and payroll taxes and neglect to consider the entire actual cost for an employee to perform their job.
Get Real with Overhead and Profit
No doubt, if a construction firm keeps estimating numbers the same way over and over, it will end up making the same mistakes over and over. Professional fees, attorney and legal costs are other items not typically charged directly to a project, but do they count as overhead? Maybe these expenses should be set up as line items and calculated into the overhead line item on the bid.
Is the company allocating correctly between field and office for computers, phones and copiers?
Similar to indirect cost, the definition of profit is different for all construction firms, but should it be? Profit is the cash you end up with at the end of the project after all bills are paid, including rent. This is what the business can use for other purposes to grow the company—not the excess cash needed to get you through your next wave of projects.
When any project is complete, make sure the estimator meets with the project management group to review whether the project caught all of the costs. When contractors adjust numbers based on lessons learned, they will always see stronger profits.
Ready to learn more? At On Center Software, we make it easy with a toolkit that provides a checklist to correctly quantify takeoff numbers. When you assign true costs, you can generate more accurate bids—without any fluff.