As we enter the last month of the year, many contractors will finally have some time to spend thinking about strategy and how to run their businesses better next year.
If your estimating process has been a guessing game rather than a professional skill, now’s the time to think about how to do it better. And building a consistent system is the best way to take the guess work out of your estimates.
There’s one main pre-requisite to building an estimating system though. You need to be able to estimate your actual costs to perform work. At a base level, this means understanding your costs for labor, materials and overhead, so you can set a standardized rate you can use to estimate your costs to perform work.
There are detailed ways to calculate all these numbers, but for the sake of time, you may want to start by focusing on getting started quickly. With this in mind, here’s three simple cost estimating tricks you can use as a starting point.
To understand labor costs for any job, requires you to know your “labor productivity”, the average work your team can do in an hour of labor, and your average cost-per-hour to employ this labor.
Per-Hour Labor Costs
Per-hour labor costs are easy to calculate by adding up your actual costs for wages, taxes, and benefits.
You can get a rough estimate of productivity using work you’ve already completed. Take the total volume of work on a specific job site and divide by the amount of labor it took, to “back into” an average production rate to use for estimating. If you can isolate different parts of a job to and estimate your production rates for different specific tasks, even better!
Material Cost is the total cost of materials (Mulch for example) needed to complete a job.
Some crews pick up supplies on the way to the job site and can cost out materials on a ‘per-job’ basis. But calculating average material costs will still help them with forward-looking estimates.
Take a look back at past jobs and find a blended average for the prices of each material, then apply this number to future estimates. This method blends in cost changes that happen over time and levels out price variations between different vendors you use.
All the other things you pay for that help get crews onto the jobsite are overhead, and they have cost you need to account for too. These include fixed costs like leases, and insurance and variable costs like fuel and utilities.
A simple way to calculate overhead costs is to add up your fixed costs over some time-period (a year for example), then divide the total cost by your billable hours over the same time. This number will be the average overhead cost per hour of labor, which is easy to apply to job costs when calculating your “Real” costs.
Perfect, vs ‘Good Enough’
There are more accurate and more-detailed ways to calculate each of these numbers, and, if you have the time, you may want to use them.
The most-accurate way to get labor productivity, for example, is by benchmarking, literally following crews around with a stopwatch and testing how much work they can do per hour/minute and using this “real-world” data to set goals.
But simple, rough estimates provide a useful starting point and allow you to introduce a consistent quoting system into your operation. As you begin tracking numbers, you can adjust your rates up or down to dial in on a better estimate, or you can apply more-detailed cost accounting methods later and update your numbers as time permits.
The End Goal
The important thing is to start building a consistent quoting system now, so you’re not guessing as you prepare quotes next season.