4 ways to improve cost estimates
One of the biggest mistakes independent construction contractors make is not knowing how to improve cost estimates and underpricing jobs.
It’s one thing to knowingly underbid one job to win a strategic account. It’s quite another to routinely underestimate labor and material costs and fail to mark up overhead expenses before submitting a proposal to a customer.
“Contractors don’t make money doing the work,” argues remodeling business coach Shawn McCadden. “They make money selling the work. If you estimate correctly, you know when you are making money or not making money. If you are the lowest bidder, you are the biggest loser. You will lose money, and when you don’t get paid on one job, you will have no money because you are paying for yesterday’s job with today’s money.”
McCadden has dedicated his life to helping contractors become more profitable by following a simple formula to improve cost estimates: markup percentage= (overhead expenses + desired profit) / cost of goods sold.
Using the formula, contractors can determine how much to mark up costs for every job to ensure they reach their profit goals. Many construction consultants recommend small contractors mark up their costs a minimum of 50 percent and work toward 67 percent.
The tips below will help you to improve cost estimates so you can meet your profit goals. For detailed instructions on how to to improve cost estimates of painting jobs, read this two-part series on “How to do better painting quotes.”
Check material costs and availability. While it’s still too early to tell what impact the Trump administration’s tariffs will have on U.S. lumber, aluminum and steel prices, forecasters are advising contractors and subcontractors to price the risk of higher prices and later deliveries into their bids. “More than just cost, it will likely increase construction timelines, given domestic production cannot meet demand and several manufacturers are stating shortages of steel construction products,” wrote Carolina Cavalcante, business intelligence director at CRH Americas, one of the largest suppliers of building materials in North America. “I expect lead times to increase, increasing construction timelines.” If you are specifying custom or specialty materials in your estimate, this makes it even more important to account for expedited shipping fees to ensure timely delivery.
Make an allowance for wasted materials. Thanks to the internet, checking material costs has never been easier, but factoring in the costs of wasted material remains a challenge. Many contractors up their material cost estimates by ten percent to allow for waste, with higher allowances for drywall work and lower allowances for casings and other types of interior work that require fewer angle cuts. This becomes even more important given that CRH forecasts that prices for drywall and other gypsum products willincrease six to seven percent this year.
Subcontract or consult a construction cost book. Creating an accurate quote is relatively straightforward when the contractor who is estimating costs is an expert and will be performing all the work. The difficulty arises when the contractor is not familiar with a task and/or will be relying on someone else to finish it. One good way to minimize risk in such instances is to subcontract the work at a fixed price. “Don’t guess what they are going to charge you,” advises McCadden. “Get a price from the sub in writing.” If that’s not an option, consider investing in a remodeling construction cost book from RSMeans/Gordian ($59.99) or BNi Building News ($119.95). Both books provide labor and material cost estimates for all types of home remodeling projects. You can check out the guides online via free trial subscriptions.
Mark up your full labor costs. If you plan to use employees on a job, include all the costs incurred employing them to improve cost estimates. In addition to their hourly wages, these include taxes and benefits paid by the employer that can easily add 25 percent to the cost of employing people. These so-called “fully burdened labor costs” must either be treated as an overhead expense or included in the labor rates used to estimate job costs so that they can be marked up.
“Eighty-five percent of construction contractors have no idea how all this works,” said McCadden. “Unfortunately, as a result, they use what is called the ‘WAG method,’ which stands for the ‘wild-ass guess method,’ to price projects. They never know if they are selling or buying projects.”