Knowing Your Numbers for Estimating

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:

Employee Costs 

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!

Crew Costs

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 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.

Job 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.

Mark up

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!

Tom Dunn

Principles of Estimating

Principles of Estimating

Have you ever heard the phrase…

“It’s not the job you lose that puts you out of business, it’s the job you won.”

I know you’re nodding your head in agreement. We all have taken on a job that we shouldn’t have and it cost our company dearly from a time, team morale, equipment or profit standpoint. Many times, all four of those items suffer and our company regresses.

The importance of proper job estimating in the tree care industry is undeniable. In order to become and remain successful, your company must be proficient at providing accurate estimates to win profitable jobs. When your team begins to feel confident with their estimating skills it is easier for them to walk away from a job that won’t meet your profitability numbers. I wrote an article on the power of saying no to certain jobs in November of 2018. You can read it here: The Power of Walking Away.

So what goes into job estimating? How can you get your sales team to produce profitable jobs for your company? Let’s begin by looking at the steps in the estimating process.

Steps to job estimating for the tree care industry:

Discussion with Property Owner – Obviously, everything begins with setting clear expectations with the property owner for the work that is desired. This also means specifically describing what will not be done during this job. When discussing what they want you to do, dig into the emotion of their request. Why are they asking to have those services performed? When done properly, the sales conversation changes and a relationship is born, one that usually produces additional work as well. Read one of my prior articles titled, The Most Important Question to Ask Customers for a simple way to help your sales team connect immediately with the customer.
Assign Number of Hours – Once you have a clear description of the work to be done, you can start to assign the number of work hours necessary for each task to complete the job. Make notes regarding, drive time, site/equipment set up, completing the work, and cleanup. By doing this you can show the property owner everything that goes into performing the job safely and efficiently without damaging anything. Be sure to also include notes on any special equipment necessary for the job.
Signing the Work Order – Once the property owner has chosen your company, get their signature on the work order approving the specific work to be done, the cost for each service (either in time or dollars) and the payment terms agreed upon. This agreement is vital to ensuring both parties know what to expect. As you know, many times the property owner wants to make slight changes or additions to the work once the crew is on-site, so having the initial cost and job specs outlined will help you accurately account for any additional work so you can appropriately bill for the addition.
Job Completion Analysis – Looking back at completed jobs can be difficult to do. Most companies feel they do not have the time to get each job done, much less enough time to analyze how each job went. However, if you do not take the time to look at how your jobs are performing, how do you know if your estimating practices are solid? To do this, simply have the crew foreman complete a post-job analysis that looks at each of the factors from #2 above to see how close the job estimation was to reality. These post-job forms should be brief, but must be completed at the jobsite before the crew drives away. Any jobs that have a large discrepancy on any of the factors need to be looked at further by the management team.
Lastly, if you are not using an integrated proposal building software like Arborgold, ServicePro or SingleOps, get one today. Being able to produce professional looking proposals in the field that automatically sync up with your customer database is invaluable for a tree service. While the software may come with a large price, ask any owner who has made the switch from paper proposals to one of these and you will quickly see the efficiencies that you gain make you much more profitable even with the additional software cost. The software will also help you analyze your estimating process, thereby allowing your team to continually better their proposals and win more profitable jobs.

Don’t let poor estimating practices put your business at risk for failure. Work only on jobs that will produce a positive outcome for your company and you will see your business reach its goals.

Written by: Eric Petersen