This newsletter series will give you insights and techniques to help you build a better business no matter how large or small yours is. I always say that success comes from working on your business as opposed to in your business. I want to share with you the systems and philosophies that have been successful for me over the years.

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A good percentage of work is acquired through the estimating process, and most jobs are awarded to the contractor who has the best 'perceived' price, but not necessarily the lowest. Because of the demands to have the best-perceived price, profit margins are limited. This allows for only the smallest of margins for error in the estimate. A proper estimate must accurately determine your cost in completing the job according to the customer’s needs. This price must be acceptable to your customers while ensuring sufficient profit for you to stay in business. Aside from helping to determine the selling price for a job, the estimate is used as the foundation for project management.

Determining the selling price for a job is actually two separate components:

• The estimate, which determines the cost of the job.
• The bid, which determines the job’s selling price.
  

It is critical that you understand the difference between an estimated cost and a bid price. Estimating is determining your cost and bidding is determining the selling price.

The purpose of estimating is to determine the cost of a project before you actually do the work. Estimating must take into consideration job conditions, the costs of materials and labor, direct job expenses, and management costs (overhead). Once you know the estimated cost of a project, you can determine the selling price of the job. Determining the selling price of a job is called bidding.

There are several types of bid requirements that you might experience. They include:

• Competitive bid
• Design build
• Negotiated work
• Time and material (fixed fee)
• Unit pricing

Competitive Bid—This type of bid can be for private, public, or government projects. These projects can be found in the newspapers in the classified section under Public Notices, as well as trade publications. These publications list projects by category (such as residential, industrial, commercial), and by total expected project price range. Be careful when bidding municipal, government, or other public work because these are typically funded by taxpayers dollars and solicitors are required to shop for the lowest bid price.

Design Build—(or 'As Built') Sometimes an electrical contractor is given a general floor layout without much detail and requested to design and construct the electrical wiring according to written specifications. To be successful with design build, you really need to know your customers’ needs and the electrical Code.

Negotiated Work—Negotiated work is generally not advertised and there are a limited number of contractors requested to negotiate the bid price. The contractor and the customer negotiate a price that satisfies both parties.

Time and Material or Fixed Fee Proposal—Time and material pricing, sometimes called fixed fee, is required when existing conditions make it difficult to provide a fixed dollar bid. This type of bid is based on a given rate-per-hour for labor (including benefits, overhead and profit) with the material billed separately at an agreed markup, such as 20 percent above cost. A variation of the fixed fee method is a fixed lump sum price for labor only, with materials billed separately using the percentage markup.

Unit Pricing—Some jobs are awarded on a unit price basis, where the unit price includes both material and labor cost. This is often the case when the customer is not quite sure of the quantities of the specific items. Unit pricing is used for almost all types of construction, such as renovations, office build-outs, change orders, etc.

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 structured so that the amount billed for any section of the job is at least equivalent to the sums paid out. Without this safeguard, cash flow would be negatively impacted, and unanticipated financing costs may be incurred. This is especially true for larger and lengthy jobs.

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 material quantities on hand results in unproductive time in waiting until replenishments are received. Keeping too much stock on hand increases inventory shrinkages and could also create storage problems. In addition, a lot of extra material is left at the job after the work is completed. 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 un-billable 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, workers’ 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 when preparing an estimate. For increased accuracy, always use labor-units in your bids. Don’t forget to research factors in the job you are bidding, particularly the variables.

The above content is extracted from Mike Holt's Business Management Skills Program.

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