You thought this article would be about the square foot pricing for drywall ceilings, or pricing for tape and bedding as a subcontractor, or how to select the right size stud for a 25-foot high run of demising walls? These are not those numbers. This article is intended to intrigue you. Ask questions. Find one or more areas of costs that peak your interest for more information. Most importantly, this article will help you ask the right questions when you meet with your accounting, project managers and office staff to review costs. If you add this concept of gathering more numbers to your SOPs, you will have hit the proverbial home run!
This series will take a deeper dive into the concept behind true project estimating numbers. The hope is to not only remind you of things but also bring to your attention many areas where contractors have ‘busted’ in the past.
You will be introduced to several important category numbers that are often “ball parked” that you should strive to account for in the future. They are indirect costs, direct costs, material handling, vendor/subcontractor costs and the actual cost of equipment.
Indirect costs: What the heck are these?
The correct definition is “who knows!” No one has the same description. Generically, the indirect costs are costs that are not consumed directly into or at the project site. Examples of indirect costs include office overhead, general company liability insurance, bond premiums, shop labor, off-site fabrication labor, and transportation of materials to the site, project managers, accounting, office rent and marketing.
Why do we care?
We don’t! (Or do we?) Well why do you think it’s important? One reason might be that your company uses the term indirect costs to include all those things listed here. Great, your company is managing budgets with accurate numbers. What if your bid almost covers these costs, except office overhead? Not so good.
To achieve the best “real cost” estimate for your project is to understand what each of these items represents. When was the last time you discussed the actual definition of indirect costs in your staff meeting?
Examples include supervision on site, labor on site, materials on site, equipment used on the job site, temporary utilities, portable toilet rentals, trailers and fencing. Do you and your company have a written description of direct costs? How do you account for workers who are in the shop several days per year because their projects didn’t start on time?
What kind of “lessons learned” does your company use? Meaning how often do you as the estimator receive positive or corrective feedback from the project management group? Do you meet after a project to see if you caught all the direct costs?
If the field purchases a special widget for each project, but you thought and were told to include 1/12th of a widget per project, what is the process for you to receive this feedback?
The widget might be only a cut-off saw, but at $210 each, using the 1/12 number will have undercut $1,925 on your estimate. This is just one small example. Do this ten times and it adds up to an extra $20,000 that your company should have been compensated for.
“Well, that is just the cost of George bringing deliveries to the job site since this is a local project.” Have you ever been able to analyze how many trips “George” actually made to the site compared with the estimate? Would you be surprised that it’s normally three times more? Calculate the cost of one trip by George. The wear and tear on the vehicle he uses, plus gas, insurance, taxes, license, tolls, highway accidents, travel time and his labor rate. What about the shop foreman’s time to load the truck? Add it up! One client told me a story of how they purposely tracked their George for three months. It turns out they over spent their allotment of George’s time by nearly five times in just three months versus what they had been including in their estimates.
Vendor and subcontractor costs: Finally something easy!
(Not quite.) If you are a trade contractor, subcontractor, general contractor, developer or self-general contractor or owner, this category means something different for each role. We hope these points will give you something to think about. How do you create your scope of work to send out to those firms who will bid on your work? Do you use a generic tool or scope? How many times have you had a bust with a contractor that you hired because they thought you were providing the scaffolding and you thought they were? What kind of checklist do you use to assist you in managing this function? Do you spend enough time on each project combing through the drawings to pick up all those nagging little details that a particular bid package must have included? Do you include wood blocking by the carpenter or the drywall contractor? Do you have a form or software that asks you to confirm tax, shipping and delivery to the job site? Does your crew or the vendor unload?
Actual cost of equipment
That pick-up truck that makes runs to every job, every week was paid for last year. You think you are doing well because you include the gas plus a little more in your estimate to cover this piece of equipment, but where is the accumulation of those dollars to replace the vehicle included in your estimate? How do you account for the maintenance, registrations or other costs?
Maybe you were told to include $85 per hour, but have you stopped and asked why the number $85 was chosen? Where are all of these other ancillary costs attributed? Does your company use a portion of generic overhead to set aside for new equipment that isn’t part of estimating? When was the last time you sat down with accounting to ask them how these things are allocated or accounted for?
How many times, before today, did you simply input the $85 or the 8 percent and wonder why the boss kept cutting your bid fifteen minutes before bid time, every time? Well, the reason is that your boss (like many) has lost track of many of these essential details, because they know that the estimate has “built-in fluff” or they know, “We always work faster than the estimate.”
Well, imagine if you and your company spent the time, not in one day, but methodically, over six months to develop and document the true meaning and costs of these numbers? What impact might that have on your bid at bid time? Would you have developed an estimate of your true costs showing real productivity rates, actual subcontracted costs and true overhead costs?
Stay tuned for the second part next time for details on true labor rates, foreman productivity, project management costs and more.
Now, we made it easier for you with a toolkit that provides a checklist to quantify those takeoff numbers correctly that, when you assign true costs, generate accurate bids without any fluff. Get the free Estimator’s Toolkit.