The art of pricing a job could be considered among the toughest elements of running a contracting company. Whether you are a veteran with a lot of experience or you are an industry newbie, estimating a project can be a worrisome task, with good reason. Setting the right price for each project you bid on will have a big effect on your ability to maintain cash flow and your ultimate success.
There are no standard answers for how much to charge for a job. Your prices and estimates will depend on how you run your business. (For example, how much overhead do you have?)
Construction contractors normally prepare quotes or tenders to contend for an agreement award for a job. To prepare the bid, initially a cost price quote is prepared to identify the costs and then develop the rate. In construction contracting, an expense estimate is usually prepared to submit a bid or tender to contend for a contract award. This includes evaluating the project’s plans and requirements to produce a take off or quantity survey, which is a listing of all the products and items of work needed for a construction project by the construction documents. Together with costs for these parts, the measured amounts are the basis for calculation of the direct cost. Indirect expenses and profit are added to come to a total quantity.
Costs You Should Always Build into an Estimate
There are four categories of costs contractors should build into any construction, renovation or repair project estimate: material costs, labor expenses, profit and overhead costs. Estimating is the process of itemizing your core labor and product costs. Then, you build on that base with your overhead and profit goals. Let’s look at each of these in detail:
- Material expenses are identified by the type of products and materials needed, the amount required, and their purchase cost.
- Labor expenses are identified by the type of work being performed, rates of pay, and your staff or subcontractor’s productivity (the amount of time needed to do every job).
- Overhead is unique to each business and includes the things you need for your business to function, from telephone service to advertising, leasing, utilities, your income, and so forth. Without understanding your overhead numbers, it would be impossible to correctly estimate the costs of a job.
- Profit goals are another factor unique to your business objectives. As stated before, if you don’t understand the particular profit objectives for a business, it is simply not possible to effectively bid for a job.
The cost of these four categories will be different by company. As a result, any effort to price a job without knowing these numbers, especially your material and labor costs, is pretty much worthless.
[tweetthis twitter_handles=”@ContractorsHQ”]Rule of thumb: 50% (minimum) of any construction project estimate should be overhead & profit.[/tweetthis]
Gross profit and net revenue are NOT the same. Gross profit is what you take in after your material and labor costs. However, if you don’t cover your overhead and profit, you are actually losing money. Do that enough times and you’ll be out of business.
It doesn’t have to very complicated. If you know your subcontractors can do a certain task in 30 minutes, and you have 5 of those tasks to do on a job, then you know how many hours of labor your need. Add in the materials needed to do the job. Add your overhead and revenue to these base expenses and you will arrive at the price for the job.While the above example is rather generalized, a similar concept applies to each contracting project– from simple and little to big and complex, regardless of your specialty.
When you ask yourself what you should charge for a project, know that you are really asking what your overhead is, your revenue, material and labor costs. The only person, then, that can answer is you. Anything else is just a guess. That said, there are software tools that can help you put together accurate estimates based on the particulars of your business.
Pricing a job correctly is not brain surgery; however, it shouldn’t just be a best guess or based on some other businesses’ numbers. Concretely estimating a project for bid takes some work, but who ever said it was easy to become a hugely successful contractor?
Estimating a Project…the Old Fashioned Way
Lots of building contractors continue to rely primarily upon manual methods, paper copy files, and/or electronic spreadsheets such as Microsoft Excel. In reality, a lot of general contractors still rely specifically on spreadsheets! While spreadsheets are relatively simple to master and provide a way to produce and report a building cost estimate and or expense designs, accuracy is not necessarily enhanced and performance is not made the most of with simple spreadsheets. Entering data can be tedious and error-prone. It’s common for mistakes to be made with formulas. Plus, collaboration and info sharing are restricted.
Building Estimating Software makes doing this essential job easier.
Do You Need Construction Estimating Software?
General contractors, specialty contractors, designers and engineers are transferring to sophisticated expense estimating and management systems. The level of collaboration, transparency, and information reuse made it possible for by Cost Estimating and Efficient Project Delivery Software drives decreases in procurement cycles, 6 to ten times faster estimating, lowers total job times, as a substantial reduction in modification orders and the virtual removal of agreement relevant legal disputes.
Other advantages include the following:
- Making use of standardized databases for expenses and other data
- Expert looking reports
- Speed, accuracy, and general process standardization
- Advanced functions, such as saving data for reuse and trade-specific computations
IPD, JOC, and SABER Integration
There are estimating software programs for building construction that include libraries and program functions for standard builders. Sophisticated, expense estimating and efficient project delivery software systems are likewise readily available to incorporate various construction approaches such as Integrated Project Delivery (IPD) for large projects, or Job Order Contracting (JOC) or the Air Force SABER system. In some cases these are called IPD-lite.
JOC and SABER allow owners, contractors, subcontractors and other building professionals to really take part in long term collaborations and to proficiently and effectively manage many repair, restoration, renovation, and small construction projects that consume more dollars per sq.ft. than new construction. JOC enables owners and professionals to reduce procurement times and expenses, provide front end information, work together making use of common information, such as from an RSMeans Unit Price Book, and just get more building projects accomplished on-time and on-budget with practically no change orders or legal issues.
Trying to use JOCs or SABER in spreadsheets for expense estimating cannot be done transparently and productively. JOC and SABER are based on partnership and supporting technology, and shared information. Today, thousands of estimators and business owners in the building trades participate in billions of dollars of JOC and SABER contracts and associated construction projects. If you are not aware of this market and opportunity, you could be missing out on a major source of revenue for your business.
Types of Construction Estimating Software
These are the critical kinds of software application that you require to cost and price quote tasks for bid, and you have choices offered as commercial software and as open source software application.
Takeoff Software Applications
Take off software application refers to sophisticated integrated visual estimating and quantity take-off (QTO) tools. It is software that provides measurement from paper or electronic plans and sends the measurements to your spreadsheet calculator. Takeoff software programs permit you of the expense estimating procedure in the building market. Professionals use blueprints, handbook or digital to begin taking off the quantities of parts needed from construction plans to be able to create a portion of the estimate.
Examples of potential takeoffs consist of how many lights are required in a building or the quantity of wiring required for electrical jobs. Estimators perform manual takeoffs from field sketches, some conduct on-screen take offs making use of construction estimating software application, and some utilize digitizers, electronic devices that take measurements from hard copies of blueprints and drawings. When takeoffs can be viewed on a screen, calculations and measurements can be handled automatically, enhancing efficienc, speed and accuracy.
Expense Database Software
Built-in expense databases. This offers reference expense data which might be your very own or may originate from a business source, such as RS Means. A cost database is a computerized database of cost estimating information, which is normally utilized with building estimating software application to support the formation of cost estimates. An expense database might likewise simply be an electronic referral of expense data. A cost database includes the electronic equivalent of an expense book, or expense referral book, a tool used by estimators for several years. Cost books may be internal records at a specific company or agency, or they may be commercially released books on the open market.
Construction Spreadsheet Software and Templates
Building estimating worksheets are the spreadsheets where the genuine work occurs, supported by computations and other features. The building estimating spreadsheet consists of solutions to track cost quotes, real expenses, variances, payments, and balances due. These worksheets can be used as a checklist for budgeting to make sure very important products on the list are represented in your initial budget plan.
A checklist for estimating making sure all items get into your detailed price quote.
Tracking approximated vs. actual expenses for each line item (called “task costing”)and for tracking payments and quantity due to all suppliers and subcontractors
While it is a real thing that many home builders prefer spreadsheets over more complicated estimating software applications, as the formulas within spreadsheets become more complex, spreadsheet errors end up being more frequent. These can be general formula mistakes and cell-reference mistakes which typically result in cost overruns that hurt your bottom line.
Should you choose an all-in-one software?
You can get each of above three types of software application applications individually or you can buy software application suites with all these applications and far more fully integrated. Getting them in an all in one suite might seem like a no brainer, but there’s a learning curve. There are good reasons why many contractors continue to use spreadsheets (familiarity, simplicy, ease). As an example, you might wish to continue dealing with Excel and just desire a system that can work well with it, bringing icons and buttons to Excel that permit you to embed and take measurements from on screen illustrations and provide them straight to your spreadsheets. However, graduating to a full suite estimating software package will allow you to do a lot more.
Construction Estimating Software – Comparing Critical Features
Below are other features you should look for before committing to buy a construction estimaing software application. Contractors can utilize this list to help compare the quality and utility of building pricing and estimating software.
Compute and Track Necessary Resources
Capability to establish, track and determine resource expense details for each job: Resources consist of labor, equipment, products, subcontractors, trucking, and any other cost detail items. Labor and devices expenses are internal team costs, whereas all other resource expenses are gotten from suppliers, such as product suppliers, subcontractors, and trucking business. Labor costs are generally computed from incomes, benefits, problem, and workers payment. Equipment expenses are calculated from purchase rate, taxes, fuel usage, and other operating expenditures.
Integrate Multiple Unit Rate Guide Books (UPB)
Capability to deal with information from multiple expense books/guides/unit rate books (UPB) for brand-new building, house enhancement, remodeling and repair work, remodeling and insurance coverage repair service tasks, to name a few: Standardized estimating expense books carefully describe every cost of a project and are changed every year. Existing editions of estimating books from different publishers offer present structure expenses for domestic, industrial, and commercial building.
Estimated costs for every common building material, equipment rates, and the labor expense to install the material and an overall installed cost. For those jobs where you can’t depend on your past experience to estimate, depend on the prices in this national standard of construction expenses to obtain you safely in the ballpark. Estimating books offer man hours, advised crew and team size, and the labor cost for setup of every job and practically every type of material in building. Provides clear descriptions on what is consisted of in the task being approximated so you know exactly what the task and the rates for that job entail. They even provides recommended crew sizes, and devices rates.
Create and Maintain a List of Activities
Item or Activity List: All estimating software applications will consist of a main job window that lays out the various products or activities that will be needed to complete the specified task. Advanced programs can breaking a product up into sub-tasks, or sub-levels. A summary view of all of the high-level and sub-level items supplies a quick and easy method to see and browse through the task.
Create Activity Detail
Item or Activity Detail: The information to each item consists of all the resources required to complete each activity, as well as their associated expenses. Production rates will automatically determine needed team costs.
Estimations: Most estimating programs have integrated computations ranging from easy length, location, and volume calculations to complicated industry-specific computations, such as electrical computations, utility trench computations, and earthwork cut and fill estimations.
Markups: Every program will allow for expense mark-ups varying from flat overall mark-ups to resource-specific mark-ups, mark-ups for general management expenses, and bonding costs.
Detailed Overhead Costs
In-depth Overhead: Indirect costs, such as permits, costs, and any other general project costs can be spread out to billable task items.
Closeout Window: Many estimating programs consist of a screen for manually changing quote rates from their calculated values.
Generate Detailed Reports and Graphics
Reporting: Project reports generally include propositions, detail reports, cost breakdown reports, and numerous charts and graphs.
Exporting: Most software programs can export project data to other applications, such as spreadsheets, accounting software, and project management software.
Track Job History
Job History: Storing past tasks is a conventional function in most estimating programs.
Clone Past Estimates
Clone and reuse estimates: Good software will let you easily duplicate and recycle quotes from past projects.
Job and Subcontractor Tracking
Track job status: Track task implementation from begin to completion, including tasks, status of subcontractors, workers. Link task completion to existing task costs.
Price Quote Comparisons
Automatically compare price quotes: Model different scenarios and straight compare price quotes for the same task.
Copy/paste and edit with ease: You ought to have the ability to quickly copy, move, paste and change information into your program.
Construction Estimating Software Can be Commercial or Open Source
There are actually open source applications for each type of estimating software (takeoff, database and spreadsheet) as well as all in one suites. So you can integrate with Excel or your favorite spreadsheet program or completely replace your current set up. You can even do it for free!
As we’ve talked about on this site before, most small businesses fail within a few years of starting up. The biggest factors have to do with cash flow, not charging enough for the work done and collecting payments in a timely manner. General contractors are not immune to the factors affecting the ability of business owners to survive on a daily basis.
Yes, there are contractors out there who will work for little or nothing. Occasionally you will face them to compete for customers. But they will go out of business while you, submitting bids based on a deep understanding of your numbers (labor, overhead, other costs) will not only thrive but build a successful, lasting company. Focus on the quality of your work, building an accurate estimate and your customers, even the difficult customers, will love you for it. While a general contractor does not necessarily need to master a trade, you must have business skills to remain successful.
Use the available commercial or open source construction estimating software to help you master pricing and estimation. The life of your business depends on it.