Am I building this estimate to be profitable? Do I know exactly how much I’m going to keep with my estimating process? Cost Plus, T&M, Stip Sum contracts…Which one is most profitable?
These are all questions we hear at the Aspire Institute for Contractors. For most Residential General Contractor companies, we speak to or work with, estimating is one of the TOP profit leaks within the company! Here are the top 3 reasons why:
- LOADED LABOR – Understanding the true, loaded cost of labor and what it really costs you. Tax & Benefit load factors are commonly missed or undercalculated, leaving you with the burden of paying for a percentage of labor that should have been billed to the client. Having a deeper understanding of what an hour of labor actually costs the company can give you better insight as to what kind of pricing strategy may be best for you and your estimates. Without that knowledge, we see tactics like “I just double their hourly rate” applied and that can be a quick way to erode your margins.
- MARGIN VS. MARKUP – Markup is the tool you or your estimating software uses to calculate a margin. However, understanding the concept that if you want a 40% margin on your in-house labor, you would NOT multiply your hard cost by 1.4 (everyone does…), you should actually use a markup of 1.67 to achieve a 40% margin. Even advanced project management and estimating tools will show the markup and not your margin which makes it seem that much more correct. This flaw gives so many GC’s the idea of a profitable estimate but feeling cash flow hungry at completion.
- OWNER, PROJECT MANAGEMENT LABOR – Many General Contractors wear multiple hats in the business, not just “owner”, meaning that a percentage of their salary actually belongs “above the line” or as cost of goods, meaning it needs to be accounted for in the estimate! However, we see too often that owners simply don’t account for themselves in estimates which is really like you’re getting free labor and making you the WORST owner due to the fact you’re not paying an employee every Friday… YOU!!! Accounting for an owner’s time in estimates can add immediate impact to cash flow and impact your bottom line dramatically over the course of a year. Further, if you ever find or dream of hiring someone else to do the aspects of your job that are project-related, it will be a lot easier if you’re already accounting for their salary.
These are just the tip of the iceberg… but it’s a good thing because you can add 5-10% points to your profits by implementing easy business strategies. It’s a bad thing if you do nothing… Contractors need a plan. If your estimates are leaking profit, trying to reach your goals by simply adding more jobs to the books will run you out of business faster, not grow your business.
If you would like to discuss contractor coaching or any other business strategies, please give us a call or contact us!