JOB MANAGEMENT - ESTIMATING (Part 2)

Even if the manager does not do the actual estimating, there are certain controls that he or she must exercise in determining the form the estimate takes. The draw schedule should be established so that the amount billed for any section of the job should be at least equivalent to the sums paid out. Without this safeguard, the cash flow would be negatively impaired, and unanticipated financing costs may be incurred.

A bill of materials must be prepared, and the proper amount of materials must be sent to the jobsite to cover the work to be done. Inadequate materials on hand results in unproductive time in waiting until replenishments are received. Shipping too much increases inventory shrinkages. In addition, a lot of extra material is left at the job after the work is completed. Or, if the material is gathered up and returned to the shop, nobody bothers to separate, record and properly restock it.

Don’t underestimate your overhead cost by a simple arithmetic error. Overhead is a percentage of sales, not cost as some estimators believe. Estimators should also be cautioned against allocating a fixed percentage of overhead to a job. Percentages just don’t work. Where a job requires more labor, more overhead must be added to the estimate than for a job with the same dollar amount, but having less labor. This is because the more billable, productive labor the estimate calls for, the more unbillable labor (or shop charge) there will be. This is dead time, which increases in proportion to productive time. You don’t bill for shop time, but it increases your overhead.

Notice on your financial statement that field labor is considered a direct cost, and office labor is an overhead cost. These two types of labor should not only be kept separate, but the residual costs of labor, such as FICA, insurance, workmen’s compensation, etc. should also be maintained separately.

A standard estimating procedure should be established and followed on every job. Benefits of an organized, detailed and formalized job-cost estimating procedure are:

The time required for preparation of each estimate will decrease.
The accuracy of estimates will increase.
Checking of successive estimates will be easier.
Successive estimates will be more consistent.

Always include quotes, specifications and subcontracts. For increased accuracy, always use labor units in your bids. Research factors in the job you are bidding, particularly the variables.

NOTE: This is the second of two newsletters on Estimating. For other closely related topics, be sure to review the sections on Job-Costing (#51 & 52), Change Orders (#62), Estimating Procedures, and Labor Units (to be published later) in this series of articles on Financial and Job Management.

Mike Holt’s Comment: This newsletter was extracted from my Business Management and Management Skills’ Workbook. Watch for our next newsletter, and as always, we encourage your comments and feedback. Send us your real-life experiences. Please respond to Barbara@mikeholt.com.

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