In a perfect world a contractor gauges profitability before they ever start a project by knowing exactly the time, money, and hours that they will be putting into it and the amount of return on investment that they need to justify those metrics. Obviously, estimates usually aren’t perfect and this can lead to frustration for a lot of people down the road.
Here are five of the most common cost-estimating mistakes that put contractors and their businesses at risk and what you can do about them:
1. Stop Focusing on Strengths alone. Understand your weaknesses.
We all have something that we’re awesome at. That’s great, that’s what you should be advertising to all of your potential clients. But, nobody is perfect and we all have something that we might not be the best at. These are the things that can really become issues when working on a job, especially complex ones. You might know everything there is to know about roofing and because of your expertise your estimate is nearly perfect—but you don’t have the same extent of knowledge about doors and windows so your estimate for those is off by a country mile. Your estimate for the whole project is going to be off and that could cost you a whole lot of money. Don’t neglect your weaknesses, be aware of them and make up for them by being prepared.
2. Stop Underestimating Labor Costs!
The cost of labor is one of the most difficult and frustrating elements of the cost estimation process for a job. It’s not as simple as applying an hourly rate per employee and how long the project will take. If only that were the case. No, you might need subcontractors halfway through a project, or an unforeseen issue might require you to put in extra time somewhere. As your performing your cost estimate, be sure to include as much detail in the labor estimate as possible and expect there to be hiccups in the process of completing the job. This way, you can ensure that quantity changes can be reflected in labor costs. Another tip for estimating labor is to look at similar projects and compare the cost per square foot using key figures!
3. Don’t Forget Your Margin Calculation Algorithm.
If you base profitability solely on a fat sales price, such as a 10-percent profit across every aspect of the project, your final cost will differ from your initial bid. Instead, determine how much each of the critical factors, such as labor, materials, and supplies, should contribute to profit and estimate accordingly. For example, if labor is 40 percent of the cost and materials is 8 percent, the sales price should reflect these differing percentages.
4. You Don’t Have to Pursue Every Single Project.
As tempting as it might be, don’t pursue every single project out there. You’re going to want to keep your crews busy and expand your expertise into new areas, but you should know up front which projects are going to require more work and, therefore deliver less profit. This isn’t to say you should bid on only projects that align perfectly with your business and the jobs that you have taken on in the past. Rather, you should know the real costs of each project before you being so there is less chance of surprises midway through.
You may want to sue cost-estimation software that gives you a detailed scope of the project and all related costs across a variety of dimensions including labor, materials, margin, equipment, and financing. Once you understand the costs of each project element you will be able to more realistically project profit margins.
5. Quit Allocating Resources Incorrectly.
Something that can very quickly derail a big project is inaccurately allocating the number of resources needed on various aspects of a job. It’s important to invest the necessary time in the areas of the project that will contribute to the greatest cost in the project. If you make sure to invest enough time at the beginning to make sure the cost estimate is aligned with your business plan and overall expertise you can create a timeline of jobs that will project into profit increases in the future.
Chances are you already knew most, if not all, of these mistakes. The trick is to be cognizant of them when you are getting ready to estimate your costs both internally and to a customer. Our New Year’s Resolution is to make sure you’re aware of these and other industry tips and tricks to ensure you have a happy and productive 2018!