Knowing Your Numbers for Estimating
Written by Joseph Toppi
Business is a game of numbers! It doesn’t matter the industry, this universal law is true. As a business owner, it is vital to the success of your business to know, with clarity, certain business numbers.
In a recent release from the US Department of Commerce, it stated that up to 96% of construction and contracting companies fail in the first 10 years. The top four reasons they noted for this failure rate were: insufficient cash flow, charging too little, lack of agreed upon payment schedule, and insufficient number of profitable sales.
These top four reasons can be avoided at the estimating stage… if the one doing the estimating knows their numbers!
For this week, we are going to first start by looking at the purpose and outcomes of estimating, then look at the numbers to know during estimating so that you don’t become one of the statistics.
What is the purpose of estimating?
Many people think that the purpose of estimating is to get a job. Unfortunately, that is not the purpose of estimating, and the reason so many experience one – or all – of those four issues listed above. The outcome of estimating is getting, or not getting, a job. But the purpose is to recover the costs (the materials, labor, equipment, and job specific costs), recover the expenses (the company’s overhead), and get paid (make a profit) to do the work.
One of the biggest reasons businesses fail to be profitable is because they don’t know what, or how much to recover. We are going to look at the five numbers that every business owner MUST know to be profitable in their estimating:
How much are the employees costing the company? There are many costs associated with employees that are far above their base wage. These costs are divided into three categories: payroll contributions, employee liabilities, and employee benefits. If a business owner doesn’t know what their employees are costing the company, how do they know what they are charging is enough? Knowing the exact costs of employees is the difference between profitability and insolvency!
This plays a different role than just knowing individual employee costs. When looking at a crew, there are other costs that come into play, such as: project management and downtime. Generally there is a project manager that is associated with a crew. How is the project manager’s cost to the company recovered? The best way is to recover it proportionately with the time they spend with that crew. The second is downtime. Every crew experiences downtime – time that they are being paid for, but not billable to the client. How are these costs recovered? Typically there will be a percentage that will be added into the crew costs.
Equipment is essentially for most companies, but most companies are not recovering the costs that come with equipment. If you are running a business with at least one piece of equipment, you are actually running two businesses: an operating business and a rental business. Think of it this way – if you did not have the equipment, you would have to rent it. If you rented the equipment, you would charge the customer the rental fee. So why are most businesses not charging the customer the “rental fee” on their own equipment? If the customer is not paying for it, then who is? Knowing what equipment is costing a company per hour and per day allows the company to start recovering those costs.
With every job, there are other costs that the company incurs. They might be dumpsters, permits, dump fees, porta-potties, travel, or a whole number of other items. When estimating, it is important to ensure that these costs are accounted for.
I want to start this section by addressing three things: 1- mark up is not the same as margin! They are two totally separate things, and they affect the numbers very differently. 2- mark up is not a random number that is added to costs to cover “uh-ohs”, contingencies, overruns, and hopefully profit. Mark up is intended to recover overhead expenses and include profit. 3- mark up is not the same for every company. It is unique to each company, based on their overhead expenses and the profit the shareholders want to make.
It is important for companies to have an overhead budget figured out, so they know how much it takes for them to essentially “break even”. Much like we talked about with employee costs, if a business does not know their overhead, how will they know if they are going to recover it, or better yet, how do they know if they are going to be solvent? Once a company knows what their overhead is, and the amount of profit they want to make, they can easily figure out what the mark up needs to be (to add to the costs of the job) to ensure they are recovering these items.
Knowledge is power! If a company takes the time to figure out these numbers, and starts to implement the formula of recovery in their estimating, they can ensure their future is profitable. It will be the difference between being part of the 94% or the 6%.
If you would like any more help with your sales team, our Thrive Sales & Marketing Package includes four hours of direct one-on-one sales training. For more information, reach out to an ArboRisk team member today!