As part of my ongoing effort to provide free resources for the electrical industry I want to share with you my methodology for electrical estimating. This is a skill that can make or break a career, and make or break a company, and I want to help you understand the estimating and bidding processes so that your business can be profitable.

In this monthly newsletter series on electrical estimating, I'll explain how to determine the material cost, labor cost, and the calculation of direct job costs, overhead and profit, so that you know going into a job how you can avoid failure - which in some cases might mean not taking the job!

The following content is extracted from Mike Holt's Guide to Electrical Estimating.

A collapsing market may make it difficult to win jobs because of the increase in competition. You might try focusing on your area of expertise rather than bidding on jobs with which you have no experience.

Most electrical contractors are concerned about their ability to be competitive, make money, and stay in business. To be competitive and profitable, he or she must offer the customer a quality service at a reasonable price. To accomplish this, the electrical contractor must control the job and administrative (overhead) costs so they are within the estimated budget.

Factors that affect a contractor’s competitiveness include:

• Competition
• Cost of Material (Buying Power)
• Experience
• Labor Cost and Productivity
• Management Skills
• Overhead
• Selling the Job at Your Price

Competition
Make it a point to know who your competitors are, and what their capabilities are. Look at their Website and visit jobs they have done so you can see their quality of workmanship and areas of specialization. Talk to your crews in the field, as they are often a gold mine for this type of information.

Consider the number of contractors bidding the job. When possible, try not to bid jobs that have more than four competitors. This is because the greater the number of competitors, the greater the chance that someone will make a mistake and have a “low-ball” price. On the other hand, if there are fewer than three competitors, you can probably raise your profit margin and still be competitive. Be knowledgeable about your competitions’ capacity and their work on hand relative to that capacity.

Small contractors cannot be as price-competitive as larger contractors because the overhead for smaller contractors is higher (as a percentage) in relationship to material and labor costs and they are not able to purchase material at the same level of discount pricing that large contractors can receive. Small contractors often have poor management skills but might have better focus and service. Fortunately for the smaller contractor, larger contractors do not always fish in the same pond, nor do they typically offer the personal service that some customers demand.

Cost of Material
Suppliers seldom acknowledge it, but they offer different prices to different contractors for the same material. What can you do to be offered the best price? Start by becoming a good customer and making it in the suppliers’ best interest to give you the best price. A few simple rules for receiving the best price are to shop around and check prices. Also, pay your bills on time so you can take advantage of any discounts offered. Some suppliers will give their best paying contractors lower prices during the estimating period.

Did you know that it costs more to pick your material up at the supply house counter than Notesit does to have it delivered? Do not pick up your material if you have the option of having it delivered. You should check with the supplier to be sure that the cost will be the same but realize that you have to cover the cost of your labor if you pick up material as opposed to having it delivered.

Some contractors buy commonly used commodity items in large quantities to obtain a lower price which they can use in their estimate. They weigh the cost of financing, storage, and double handling against their price advantage.

Author’s Comment: The lowest price is not everything; you will want a relationship with a supplier who will help you solve your problems and who will be there when needed. Always remember the big picture (just like you want your customers to do).

Experience
The more experience you and your employees have with a given type of construction, the fewer mistakes will be made and the more efficient and productive the job will be. This means you will be able to do the job with less labor time, resulting in a reduction in the estimated cost. Each job carries a degree of risk which can be affected by the amount of experience you have with that type of job.

To be competitive in a market you are not familiar with, you need to educate yourself by attending seminars, reading trade magazines, and watching training DVDs. Do whatever you can to minimize your inexperience. But the labor cost for the first job in a new market will always be higher than following jobs.

Another factor that must be considered when determining the bid price of an unfamiliar type of work is risk, particularly the risk that labor will be higher than you estimated. The greater the perceived risk, the higher the profit margin needs to be in order to offset possible losses. If you bid work with which you are experienced, your profit margin can be higher, and your bid can still be competitive.

When you have submitted a bid and you are not awarded the job, ask the customer for a briefing to review your costs and technical approach. This will help build valuable estimating knowledge for a particular type of project and customer to help you be more competitive on future bids.

Labor Cost and Productivity
Competitiveness between contractors based on different pay scales can be significant; some pay rock-bottom wages and others pay union scale. You need to pay your electricians a competitive salary and provide suitable benefits to discourage them from leaving for greener pastures. The salary should compensate them for their abilities and their contribution to your company’s bottom line. By paying top dollar with benefits, you should be able to hire and retain highly skilled, motivated, educated electricians to work for you for years, if not a lifetime.

It is not necessary to pay all electricians the same wage; higher skilled electricians earn the company more and should be paid more. They also motivate the lesser skilled to become more skilled.

Having motivated, loyal, and skilled electricians who have been with your organization for years will ultimately result in a lower labor installation cost as opposed to having an unhappy and unskilled labor force who feel no loyalty to your company. If you pay low wages, you can expect problems with your employees, the inspector, general contractors, and other trades. This all spills over into the customer’s experience with your company. Remember these are the persons that represent your company and interface directly with your customers.

Management Skills
Successful electrical contractors know how to manage their labor and material in accordance with the estimate. Failure to manage the project in accordance with the estimate means that it is unlikely you will make the profit you projected. Many electrical contractors are electricians without formal business management training; as a result, they do not do a very good job as a business owner. They often prefer to “work with the tools” rather than “deal with the paper work” of the business. But if you want to be a successful electrical contractor, then you need to attend management seminars, watch training DVDs, and become involved with a local contractors’ organization.

Many electrical contractors do not realize that they are not alone in their experiences. By joining an electrical contractors’ organization, you will gain the experience of those who have been there before you. Learning from another contractor’s misfortune is always better than making the mistake yourself. In the construction industry it is a fact that your best friends are your competitors. An uneducated, unethical contractor is the biggest hindrance to obtaining a fair price for your work. In many parts of the country there are local electrical contractors’ organizations that many contractors join.

In addition, there are two well-respected national electrical contractor associations:

Independent Electrical Contractors, Inc. (IEC)
4401 Ford Avenue, Suite 1100
Alexandria, VA 22302
Telephone: 800.456.4324, or 703.549.7351
Fax: 703.549.7448
www.ieci.org

National Electrical Contractors Association (NECA)
3 Bethesda Metro Center, Suite 1100
Bethesda, MD 20814-5372
Telephone: 301.657.3110
Fax: 301.215.4500
www.necanet.org

Overhead
Overhead expenses are those costs that are required to operate the business such as telephones, shop rent, vehicles, advertising, insurance, office personnel, and so on. Since overhead costs represent between 20 and 40 percent of an electrical contractor’s total sales, it is critical to keep that cost as low as possible.

Selling the Job at Your Price
Confidence and professionalism are important ingredients in getting your price. Confidence comes from knowing your price is a good value to the customer and that they will be pleased with the quality of service you provide. Next to confidence is professionalism. Do you come across as a professional by your appearance and the appearance of your workers and vehicles? Many electrical contractors dress and carry themselves as a tradesman rather than a business person. When you are meeting with the customer, dress as a business person. But it does not stop there; ensure that your electricians and vehicles have a professional appearance. If you provide outstanding service at a reasonable price, then you will “close” more contracts if you come across as a professional business organization.

What do the customers want? Do they want a quality installation at a fair price, or are they willing to accept an inferior job as long as the price is low? Price is a major factor, but it is not the only factor - low price, without quality service often results in an unhappy customer. With proper management you can provide a quality installation and in the long run a quality installation at a fair price will be more cost-effective for your customers and better for your reputation.

Many contractors develop a niche (a special place) in the market such as service, housing, medical facilities, banking, commercial buildings, or industrial maintenance.

Caution: The electrical industry is in constant change—parts of the market are expanding or contracting depending on technology, the economy, and customers’ needs. So be careful, do not put all of your eggs in one basket or you might find your niche almost disappearing, as happened when the housing market collapsed in 2007.

New and expanding markets offer greater opportunities to develop new customers, possibly with fewer competitors and greater profit margins. Consider every bid request as an opportunity to monitor the market’s direction, and then decide which path you will choose to follow.

Some electrical contractors, based on past performance (honesty, quality service, and professionalism), have a secure long-term relationship with the customer where they have the opportunity to negotiate the price of an upcoming project. This is a fragile but lucrative market that can be maintained only when the electrical contractor is honest in pricing and provides outstanding service that meets or exceeds the customer’s expectations. Maintaining these kinds of clients requires a higher level of record keeping and client interaction.

This type of bid is similar to negotiated bidding and is used when working with an owner or general contractor. Your goal is to show the value being brought to your customer to support the bid submitted. Compromise on the bid price can be reached (for example) by suggesting less expensive material than shown on the plans and specifications that will still meet the customer’s needs.

We'd love to hear from you about this series, and the ways you're using it. Send us your comments and feedback by clicking on Post a Comment below. Look out for the next part in this series a month from now, and please share with your colleagues.

This content is extracted from Mike Holt's Guide to Electrical Estimating textbook.
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