Estimating + Best Practices
President’s Letter – February 2018
A year ago, we talked about the goal of increasing the professionalism of our membership. We want our NTCA brand and logo to carry a respected and positive meaning in the marketplace. One of the many ways we can contribute to this goal is to seek out and incorporate industry best practices into daily use in our businesses.
This month let’s look at best practices in estimating every job we bid, and identify some ways we can improve outcomes. In other words, sell more jobs and increase bottom line profits.
If your experience is anything like mine, there seems to be any number of competitors out there willing to work for wages rather than a profit. I often scratch my head and try and figure out how another bidder could have arrived at a price for a defined scope of work that’s 15%, 20% or even 30% less than mine. Once I get beyond the emotional response of, “They must have missed something” or “They are wrong and will lose money on this job,” I begin the process of checking my take-off quantities and pricing in hopes that I will find the mistake. Sometimes the error becomes obvious, but often it remains a mystery. There are many reasons that can account for these types of pricing differences and most often it’s a combination of several factors.
Let’s look at some of the basic elements of estimating best practices:
Have a written guide – It is essential that you have a written guide outlining every step in the process. This will help to eliminate many of the most common mistakes in compiling an accurate cost estimate.
Understand the scope of work – It’s critical to understand the scope of work to be priced. This may mean collecting and reading all the contract documents including the specifications, drawings, contracts, general conditions, special conditions, RFIs and addenda. Or, it might mean visiting the site and inspecting, measuring and identifying every aspect of work required to meet the customers’ expectations.
Begin estimating the cost of the work – Once this is completed we know what will be required and can begin the process of estimating the cost of the work. This is an area where significant costs can be overlooked if we aren’t careful. If a contract requires that we include items such as composite clean-up, safety orientation, daily stretch and flex, maintained protection of completed work, full-time supervision, 30-hour OSHA classification, delivery during non-standard hours only, and many more, we can lose significant amounts of money. The way we perform our take-offs should be very consistent from job to job. Whether you use a scale and pencil or a digital system, use it the same way on every job. Work your way through each room, area and level of the building the same way each job. Look at every page, read every note. Repetition and consistency are your friends because they help to reduce omission errors.
Begin the pricing process – Once the quantity take-off is complete, we can begin the pricing process. Again, this needs to be standardized so that you approach every bid the same way. I recommend using a system where all the items normally found in a job are pre-listed. After pricing all the direct costs including materials, freight, sales tax, delivery charges, labor, payroll taxes, insurance and labor burden, equipment, trucks, and a factor for miscellaneous small tools, remember to add all the indirect costs. These costs could be a factor of annual costs spread across all your projects such as safety training, supervision, craft training or apprenticeship. Overhead should include all your infrastructure costs such as office, warehouse rent, and all the costs associated with it. Remember to include management, estimating, human resources, regulation compliance, licensing, accounting, etc. This should be the total of all your fixed cost of doing business that is not actually installing tile work.
Break out the questionable costs – WFG, crack-isolation membrane, epoxy grout etc. – in fact, anything in question. GCs have said they prefer this type of break-out vs. leaving these items out of the bid. Being the expert to the architect and GC makes the knowledgeable tile companies an asset that every good client needs. When they have a question, who do they call? You? Are you building loyal partnerships or just trying to get another job? Build to last.
Calculate your profit margin – Now comes the fun part! Calculating your profit margin. Please see this video for a detailed explanation of Mark-up vs. Margin calculations. https://www.youtube.com/watch?v=BCo5i1mMO3E&t=527s or http://bit.ly/2r7wFL5.
Here is the formula:
Sales Price minus Costs of Goods Sold divided by Sales Price.
Example: $125 sales price – $100 costs/$125 sales price =
20% gross margin.
At this point, there are two main things every business owner needs to determine: how much do I spend on overhead each year and how much profit do I want to make each year? If you spend $100,000 each year on overhead, what must your sales be at a 15% gross margin to break even? The answer is $666,666 or 100,000/.15.
Now how much net profit margin above overhead do you want to make each year? Let’s say it’s 10%. If your cost of goods sold is $566,666 the sales price must be $755,555 to produce a 25% gross margin that will pay your $100,000 overhead and give you a net profit margin of $88,888 for the year.
Here’s one more thing to think about. Let’s say you forget to install expansion joints in two jobs and they fail and you’re required to replace them at a cost to you of $50,000. How much more work must you sell and perform at a 25% gross margin to breakeven on that loss? $50,000/.25 = $200,000 more or an additional 26% more work than your normal annual volume – and you don’t even make anything for it; you just replaced the $50,000 loss. It pays to do it right the first time.
Let’s work smart and seek to be more profitable in 2018 by setting up a system of consistent estimating procedures – even if you’re doing them on the kitchen table – and make sure we price them with the correct margins to make a reasonable profit. NTCA University has several estimating courses in development – look for them in 2018!
Keep on tiling!
Martin Howard, NTCA President
Committee member, ANSI A108