Вы находитесь на странице: 1из 199

Page 1 of 199

ELECTRICAL
CONTRACTING
ESTIMATING,
QUOTATIONS,
CONTRACTS, PROJECT
MANAGEMENT AND
BUSINESS OPERATION

EDITION 3 June, 2010


KEN POSTILL
Copyright Ken Postill

Page 2 of 199

CONTENTS
Introduction, purpose and overview

Page 3

Part 1
Estimating and quotations for electrical work

Page 15

Part 2
Contracts, project management and financial
control for electrical work

Copyright Ken Postill

Page 133

Page 3 of 199

PURPOSE
The purpose of this book is to provide information and mechanisms for electrical
contractors to use as tools in the operation of a successful business.
The rules for successful trading in electrical contracting work apply to all other trades
where a service combining the supply of labour and materials is offered for payment.
Substituting labour and material quantities associated with any such trade makes this
book applicable to that trade.
Working for yourself can be a rewarding experience, both financially and emotionally.
The direct reward for effort that is available to self employed persons is an essential part
of why most contractors choose to be self employed. However, there are many risks in
the electrical contracting industry, such as non payment by the client, that require a level
of business acumen for success.
In some areas of the industry, prices are too low to support a correctly run business,
resulting in contractors working long hours to produce a return that may not be
comparable with wages.
Part of the training offered in this book covers the development of a method to provide
minimum acceptable levels of return. Where the market will not provide work at these
rates, it is important not to try to operate at the prices dictated by that part of the market.
If the market will not permit prices that give a return commensurate with the
responsibility and risks of self employment you must try another area of the contacting
industry, or give up the idea of self employment and become a wages employee with an
established contracting company.
The people that do well out of the electrical contracting industry are those that think
as contractors, and not as electricians.
An underpinning philosophy of successful contracting is that correctly prepared
quotations are the foundation of success.
The most important function of estimating and the preparation of quotations is to
ensure that the job provides for a profit. Many uninformed electrical contractors
operate at unrealistic low prices, often not covering hidden costs such as overheads and
on costs, leading to a high level of business failure among electrical contractors in
Australia.
An equally important area of successful trading is the preparation of the quotation,
or offer, to the client, which forms the basis of the contract between the client and the
electrical contractor. Where the quote is poorly formulated, the contractor is in danger of
being unable to pursue the client for payment, should the client be unwilling, or unable,
to pay for the work.
Poorly formulated offers to clients demonstrate a lack of professionalism by the
contractor, and are a major source of misunderstanding between the parties, resulting in
disputes and the loss of further work with that client.

Copyright Ken Postill

Page 4 of 199

OVERVIEW
Part 1 of this book covers preparation of quotations, which involves the following
considerations

estimating the cost of materials to complete the work


estimating the labour hours to complete the work
adjusting estimated labour hours for productivity factors
calculation of labour costs, including on costs
calculation of business overhead burdens
calculation of minimum gross profit margins
calculation and forecasting of nett profit margins
the effect of labour/material ratios on quotations for specific projects
consideration of market forces
contract law
standard conditions of tender
preparation of a written quotation

Part 2 of the book addresses operating the business, covering areas such as managing
each job as an individual project, involving
organising and planning labour
purchasing and supply of materials
costing of labour and materials
management of contracts
variations and associated claims
progress and final claims
management of sub contractors
management of penalty areas such as liquidated damages
retention and other deductions
reconcilliation of actual costs to estimated costs
assessment of estimating accuracy and job productivity
compliance with sales targets
Other areas covered in this part include developing sales budgets, taxation requirements,
business structures, management of overheads, etc.
Blank pages are intentionally inserted for future expansion, or for use as notes recording.

Copyright Ken Postill

Page 5 of 199
Time is the most important of all resources for a contractor. The most difficult of all
resources for contracting is time because it is a fixed value that cannot be expanded. Time
wasted on duplicating effort or rectifying mistakes is lost forever.
For a contractor, time and money are interconnected.
The labour resource of a contracting operation is difficult to expand or shrink without
problems. Labour time expended on low profit work is time that could be used on other
work where acceptable profit margins are available.
Operating a successful contracting business means using the time resource wisely. This
means that you should

avoid low profit work by operating at rates that are viable. If a sector of the
industry will not permit acceptable levels of profit, avoid operating in that
sector.
know what profit margins are required to allow successful trading. Profit
margins need to cover all costs, including overheads, and return a profit.
use the sale of materials to provide profit. Work involving the sale of
materials can be rewarding at lower profit margins than those required for
labour intensive work.
avoid labour intensive work as this limits the amount of sales/profit that can
be achieved in a given time frame. Alternatively, use a charge rate that
compensates for the loss of profit from material sales.
use the take off sheet as a tool for planning labour. When estimating, the
time required to perform the various stages of a project has been estimated
through careful study of plans etc.. Avoid replanning the labour requirements
by studying the job plans - use the estimated values.
use the take off sheet as a tool for purchasing materials. When estimating,
the materials required to perform the various stages of a project has been
estimated. Avoid replanning the materials requirements by studying the job
plans - use the estimated values.
use a purpose designed computer program to operate the contracting
business. These programs will automatically keep track of costs, sales and
profit margins, plus provide a reconciliation between estimated and actual
costs to report on the accuracy of estimates. The use of purpose designed
computer programs will ensure correct processes within the contracting
business, optimising profit while reducing time used on administrative
functions.
ensure that a fair contract is used so that the customer is not placed in a
position that can disadvantage the contractor
avoid disputes with clients by following all required contract procedures, and
keeping the client informed on all aspects of the contracted works. Disputes
consume large amounts of time, robbing time from profitable applications.
maintain customer satisfaction, using this as the primary source of work
operate to a planned trading structure, including the use of a sales budget,
planned profit targets, management of overheads, etc.
Copyright Ken Postill

Page 6 of 199
MANAGING AN INSTALLATION PROJECT
The following flowchart shows the procedure for correct financial management of an
individual project.
ESTIMATED LABOUR HOURS
ESTIMATED
MATERIAL
COSTS

ESTIMATED LABOUR COSTS

ESTIMATED
DIRECT COSTS

ADD DESIRED PROFIT


MARGIN

OVERHEADS AND
MARKET
INFLUENCES ARE
CONSIDERED

SALE VALUE

OFFER TO THE CLIENT

TRADING
CONDITIONS ARE
CONSIDERED
AND DETAILED

CONTRACT

WORK
PERFORMED

CLAIMS
SUBMITTED

MONIES
COLLECTED

PROGRESS
OF THE
WORK IS
COSTED

ADJUSTMENT
FOR
VARIATIONS

MATERIALS COSTS
ARE RECORDED

LABOUR HOURS
AND COSTS ARE
RECORDED

FEEDBACK
TO
ESTIMATOR
ON THE
ACCURACY
OF LABOUR
AND
MATERIALS
ESTIMATES

ACTUAL COSTS ARE


DETERMINED

RECONCILLIATION PROCESS,
COMPARING ACTUAL COSTS TO
ESTIMATED COSTS

Copyright Ken Postill

Page 7 of 199
The primary professional association for persons involved in the electrical contracting
industry in New South Wales is NECA (National Electrical Communications Association)
which has affiliated organisations throughout Australia and New Zealand.
NECA provides a wide range of services to members, including, but not limited to

advice on contracts
advice and assistance with debt recovery
minimum recommended trading rates
advice on correct wage rates for various industry agreements
advice on employee leave and other entitlements for various industry agreements
advice and legal assistance in the event of dispute with a client
production of a unit rate book for estimating
production of pro forma contracts for use with a range of jobs
training in industry developments
alerts on emerging trends in contracts or industry
provision of local member meetings
provision of annual conferences
provision of industry awards for excellence in a range of trading categories

Attending local meetings of NECA members provides a wide range of information and
support through general discussion with other contractors, without compromising the
competition that is inherent within the industry. Areas of discussion include developments
in OH&S, innovations in installation methods, use of sub contractors, etc.
Discussion of customers that do not enjoy a reputation as worthwhile trading partners is
also useful, as it may result in avoiding entering into a contract with a customer that is
risky as a source of payment.
NECA NSW also operates a successful group training scheme for electrical apprentices,
providing a service to members that wish to use the resource that apprentice labour
provides. Under this scheme, NECA Group Training provides an apprentice to the
contractor on the understanding that the contractor will provide the required training,
while enjoying the benefit of lower wages cost. NECAGT provides the selection and
recruitment of the apprentice, and the facility for the contractor to return the apprentice if
work reduces, or the apprentice is unsatisfactory.
At the time of writing, NECAGT is the largest employer of electrical trade apprentices in
New South Wales.

Copyright Ken Postill

Page 8 of 199

ABOUT THE AUTHOR


My qualifications for producing this book are as detailed below.

An apprenticeship in heavy manufacturing


Several years working as an electrician with a major contracting company
One year working with a small contracting company.
Eleven years self employed, initially in a three way partnership, then evolving to
the sole operator of a Pty Ltd company. During this period the crew ranged
between three and sixteen.
Five years as installations manager with a major contracting company. During this
period I initially built the crew up from eleven to in excess of fifty and maintained
this for the remainder of my time with the company.
Twenty years as a teacher in TAFE, including a long standing involvement in
curriculum and training in contracting related areas.

I became self employed through meeting my partners while working as an electrician for a small
contracting operation. We decided that rather than making the boss rich, we could make ourselves rich by
working for ourselves.
During this period of self employment I made many mistakes, often more than once. These mistakes
included trusting too many people, one of whom was the older partner, not checking the outcomes of jobs
against the estimated values, focusing on the technical part of the work rather than the business side of the
operation, not utilizing the information available through NECA, and being nave in the application of
contracts.
Apart from the first twelve months of self employment, after which the older partner left, I did most of the
estimating and accounts management. We did jobs that were very large for the size of our crew, many of a
complex nature that involved significant design work. We had a good customer base, and enjoyed a good
reputation with the supply authorities.
However, we got burnt by a number of customers, sometimes through liquidations, sometimes through the
use of contract clauses, and sometimes through no intention to pay.
I believe that I was typical of many hard working electrical contractors, operating in ignorance of good
procedures, operating at rates that were too low, too busy to stop and review my situation, too preoccupied
with getting the next job.
At a time when I was in a secure financial position I closed the business and took a job with a major, long
established contracting company, starting as a supervisor. I was put into the installation manager role a
short time later, with instructions to expand the crew.
The management were surprised at how little I knew about the business aspects of contracting, and
provided the training. In return, I used my technical skills to expand the installation crew to a level that was
very profitable.
After five years of this work, for family reasons I changed my career to teaching in TAFE.
I became involved in curriculum after twelve months in TAFE, and have maintained a passion for the
introduction of training for the contracting aspects as part of an apprenticeship in electrical trades. Until the
implementation of the current training package in 2006/7, electrical trades has remained one of very few
trades that did not provide this training for apprentices.
I would like to see emerging electrical contractors avoid the tough learning school that I went through. This
book is a consequence.

Copyright Ken Postill

Page 9 of 199

ANECDOTAL TALES
The following anecdotal tales are used at different points throughout this book as a means
of introducing the need to trade in a way that minimises the risk of non payment or loss
of profit to the contractor.
Read these tales in order to gain an insight into instances that occur as part of contracting.
The tales are based on actual occurrences, with the names of characters and businesses
changed to avoid embarrassment or litigation.
Any use names of actual persons or businesses is accidental, and in no way refers to any
real persons.
Remember that there are many successful electrical contracting businesses, returning
good profits to the operators. These businesses operate with correct procedures, including
good contract formulation and procedures and strict financial controls. Electrical
contractors that trade as electricians rather than contractors often suffer financially
from their lack of professionalism.
TALE 1
Kenny, an electrical contractor, observed that his mate Terry seemed to be in serious
financial trouble. Terry was a great salesman, who had gone into business
manufacturing and selling cleaning chemicals to the contract cleaning industry.
Unfortunately, Terry had sold large amounts of stock to cleaning contractors that could
not or would not pay their debts, leaving Terry unable to pay his suppliers.
When Kenny said to Terry I guess you mustnt sleep at night with all these problems
Terry replied what problems? I owe them money and cant pay it they are the ones
with the problems!.
Terry said Thats Murphys Golden Rule whoever has the gold, rules.
i.e. the person that owes the money is in charge of the situation.
TALE 2
Ray, an electrical contractor and air conditioning installer went to the home of a wealthy
client to install a window mounted air conditioner. He did the job without a written
contract. When he had completed the work the client congratulated him on the job, and
said While you are here, I will get you to do some more work, such as ....
This resulted in Ray returning each day for the next week to do more jobs in the premises.
Each day Ray provided an update of the costs.
When all the work was completed, Ray went to the clients office in the adjacent suburb
and presented a carefully detailed invoice for the work, which the client casually tore in
half, handed back, and said Thanks for a good job, pity that I wont pay you for it. You
should have got me to sign a written contract.

Copyright Ken Postill

Page 10 of 199
TALE 3
After serving an apprenticeship and working as a tradesman for eight years with a large
reputable company, Stovie Electric, Bob decided that he would be better off working for
himself. While his wages at Stovies had been good, he had worked a lot of Saturdays to
make the money. This interfered with his family and surfing activities.
Bob decided that he would charge double the $30.00 per hour that he got at Stovies.
He soon built up enough work to keep him busy, at $60.00 per hour. In the beginning,
when the surf was good he postponed jobs and enjoyed himself, which led to unhappy
customers, decreased income, and an ever increasing inability to pay his trading
accounts.
Consequently Bob gave up on the surfing and worked longer hours, but did not improve
his business management methods. Doing more work meant higher trading accounts,
with his debts slowly accumulating.
After two years of trading, in spite of having a good reputation with his clientele, Bob
was in serious financial trouble. So he took out a loan with his bank, using his house as
collateral, and paid out all his supplier debts. He now needed to improve his income to
support the loan, which he did by working longer hours rather than improving his
business management, which meant even higher trading accounts.
After four more years little had changed, his debts were similar and he was working long
hours.
He went back to Stovies, worked any overtime he could get and paid off his debts over a
period of two years.
He says that if he ever goes out on his own again, he will do a contracting business
management course first.
TALE 4
Kenny, an electrical contractor got a good job with a large building company that
involved the construction of a large club. As part of the contract, liquidated damages of
$1000.00 per day were included.
(liquidated damages is a penalty for failure to comply with the construction schedule)
While Kenny and the other sub contract trades performed well, the job ran over
schedule, and had not seemed well coordinated throughout the work.
The builder deducted $5000.00 from Kennys final claim for delaying the work 5 days.
When Kenny complained, the builder threatened to cancel the cheque, and take even
more money from the claim.
Some months later, Kenny was talking to the plumber that had been on the job, to find
that he had been hit with five days liquidated damages, as had the painter, glazier and
air conditioning contractor.
Enquiries with the carpet layer (who was a director of the club) revealed that the builder
paid liquidated damages of $1000.00 per day for five days to the club.
The builder had profited from the use of liquidated damages!
Note that since the time of this tale legislation has occurred in NSW that stipulates the total liquidated
damages imposed on sub contractors cannot exceed that paid by the head contractor. However, recovering
monies withheld in dispute conditions can be a protracted and expensive process.

Copyright Ken Postill

Page 11 of 199
TALE 5
Kenny, an electrical contractor and his mate Reg the plumber won a job to do work on a
new factory.
At the end of the job, Kenny noticed that the final claim of $6000.00 had been short paid
by $230.00. He contacted the builder to be given the message they would look into it ....
When talking to Reg he found that Reg had also been short paid by a small amount, and
had received the same response from the builder. Reg contacted the concreter, and found
that the same thing had occurred.
After three months of phoning to try to get payment, Kenny cut his losses and gave up.
As did Reg and the concreter (and the other sub contractors) .......
TALE 6
Reg the plumber won a job to do work related to a luxurious swimming pool/spa for a
wealthy client, and referred Johnno his mate to the client for the associated electrical
work.
When the work was complete, the client requested that both contractors supply their
invoices at the same time, which they did, after the work was complete.
After some delay in payment, Johnno contacted the client to request payment, to be told
that the client was dissatisfied with the use of steel saddles on a short section of well
concealed pvc conduit, as the (galvanised) saddles may rust .The following day Johnno
got his apprentice to drop in an replace the saddles with plastic units. He then contacted
the client for payment, only to be told that the client felt the pvc saddles may not be
strong enough.
The following day Johnno got his apprentice to drop in an replace the saddles with
copper units. He then contacted the client for payment, only to be told that the client felt
the copper saddles would go green in the salt water environment of the pool.
Johnno contacted Reg to find that he had the same problems getting payment. Johnno
went to the property at a time that the client was absent, opened the switchboard, and
disconnected the supply from the circuit breaker, fitting a danger tag to the switchboard.
He then contacted the client and told him that the pumps would be reconnected after he
was paid, and that no other electrician could legally remove the danger tag.
He got paid promptly, but Reg didnt.
Both contractors had performed the work without a written contract.
Reg remained unpaid.
It was illegal for Johnno to enter the property and tamper with the switchboard without the clients consent.
In general, materials, once supplied to the site become the property of the client, regardless of payment, and
cannot be repossessed in the event of payment dispute.

TALE 7
Bodgy Building Pty Ltd, a reputable company that had successfully traded in the club
and hotel industry for many years, had a change of management when the founding
owner retired and sold the business. The many subcontractors, who had a long standing
relationship with the original owner were assured that it would be business as usual.
Over the next two years the new managers, who were also the directors and company
secretary, made multiple trading mistakes, leading Bodgy Building Pty Ltd into a
precarious financial position.

Copyright Ken Postill

Page 12 of 199
Payment to sub contractors extended out from the traditional 30 day terms to up to 120
days, but they were assured by the managers that it was a short term situation that would
soon be rectified. Because of the previous tradition of reliable payment the sub
contractors continued to start new jobs and finish existing projects.
While remaining as managers, the managers of Bodgy Building Pty Ltd resigned their
positions as company directors (having relatives appointed) and formed a new company
Slimeball Building Pty Ltd.
After some months had elapsed the (new) directors of Bodgy Building Pty Ltd put the
company into voluntary receivership, with the managers of Slimeball Building Pty Ltd
contacting all the hotel and club clients to inform them that Slimeball would take over
the contracts and complete the jobs.
Thus the significant debts to the sub contractors were left with the collapse of Bodgy
Building Pty Ltd, and work recommenced as Slimeball Building Pty Ltd, with new sub
contractors.
At the creditors meeting with the liquidators, many of the debtors argued that the Bodgy
Building Pty Ltd had been underclaiming on jobs, thereby leaving handsome profits for
Slimeball Building Pty Ltd when it took over the work. However this could not be proved.
A person that is a director of a company that is in liquidation cannot be a director of another company,
therefore new directors were needed for Bodgy Building Pty Ltd.

TALE 8
Two real estate agents, having formed Quickbuck Developments Pty Ltd, organised
finances for three million dollars and purchased residential properties with the aim of
building a large multi domestic development.
With two million dollars remaining they engaged architects and designers to produce
plans, and then put out requests to a number of builders to have the work done.
However, the lowest price they could obtain was significantly more than their remaining
capital.
So they formed a building company, Quickbuck Building Pty Ltd, with the intention of
building themselves. Quickbuck Developments Pty Ltd formed a contract with Quickbuck
Building Pty Ltd after receiving a quote to do the works for the remaining capital.
Quickbuck Building Pty Ltd (with different company directors to Quickbuck
Developments) hired a building manager/ foreman and engaged subcontractors to do the
work.
Work commenced with the sub contractors being paid promptly for progress claims,
establishing trading confidence with the contractors.
Over a period of time payments became longer, and longer, eventually exceeding 120
days. The sub contractors were assured by the building manager/foreman that payment
would be made immediately after hand over of the completed works, when finance would
be available.
At completion of the work, Quickbuck Building Pty Ltd handed over to Quickbuck
Developments Pty Ltd, for a final payment that was less that the debts of Quickbuck
Building Pty Ltd.
Quickbuck Building Pty Ltd then went into liquidation, with Quickbuck Developments
Pty Ltd having clear title to the development.
The sub contractors received less than 10 cents in the dollar from the liquidation.

Copyright Ken Postill

Page 13 of 199

TALE 9
Kenny, an electrical contractor got a good job with a large building company installing
temporary builders supplies on a large site. At the time of starting the job the building
project manager told Kenny that the job would span three months, and that they would
require an ongoing tally of costs, updated each week, with a single invoice for all the
work at the finish.
Kenny thought that was okay, and having had a look at the contract supplied by the
builder, signed it and commenced work.
Having supplied the tallies as required, and completed all the work Kenny submitted a
well formatted claim at the end of the works period for $18,990.00
After delays in payment of 105 days, Kenny finally received a cheque for $6990.00
When he contacted the project manager, he was directed to the contract, which stipulated
90 day trading terms, and included a clause that said the contractor shall supply all site
storage and amenities for his works.
The builder had deducted $12,000.00 for use of the toilets, rental of space for on site car
parking, use of the temporary power, provision of hoists, scaffolding, etc.
As Kenny had failed to notice the impact of this clause, and had failed to have such costs
detailed in the contract, or had failed to have it removed from the contract, he had no
recourse but to accept the values as detailed by the builder.
In all of the above tales, poor trading practices made the sub contractors vulnerable
to financial loss.
Professional trading practices help to minimise risk.
While there are many professional electrical contractors that make a good income
from trading, there are many electricians that produce less than wages by being
unprofessional in the conduct of their business.

Copyright Ken Postill

Page 14 of 199

Copyright Ken Postill

Page 15 of 199

PART 1

ESTIMATING
AND
QUOTATIONS FOR
ELECTRICAL
WORK

Copyright Ken Postill

Page 16 of 199

CONTENTS
(PART 1)
PURPOSE

Page 17

Section 1 Processes for developing a quotation for


installation or service work

Page 21

Section 2 Processes for developing an estimate for


installation work

Page 28

Section 3 Processes for determining direct costs of


labour

Page 58

Section 4 Processes for developing a margin to


cover overheads

Page 71

Section 5 Processes for developing a bid price to be


offered to the client

Page 83

Section 6 Preparing a quote to be offered to the


client

Page
105

Section 7 Addendum Ancilliary information for


student exercises.

Page
119

PART 2 - CONTRACTS, PROJECT MANAGEMENT AND


FINANCIAL CONTROL FOR ELECTRICAL WORK of this book
commences on Page 133

Copyright Ken Postill

Page 17 of 199

Copyright Ken Postill

Page 18 of 199

PURPOSE
The purpose of this part of the book is to provide information and mechanisms for the
preparation of quotations for electrical installation or service work.
An underpinning philosophy of successful contracting is that correctly prepared
quotations are the foundation of success.
This part of the book covers preparation of quotations, which involves the following
considerations

estimating the cost of materials to complete the work


estimating the labour hours to complete the work
adjusting estimated labour hours for productivity factors
calculation of labour costs, including on costs
calculation of business overhead burdens
calculation of minimum gross profit margins
calculation and forecasting of nett profit margins
the effect of labour/material ratios on quotations for specific projects
consideration of market forces
contract law
standard conditions of tender
preparation of a written quotation

The information is provided to allow development of the skills and knowledge required
to achieve competency in the Competency Standard Unit
UEENEEC003 Prepare quotations for service or installation work

Copyright Ken Postill

Page 19 of 199
MANAGING AN INSTALLATION PROJECT
The following flowchart shows the procedure for correct financial management of an
individual project. Correct estimating methods are an essential component in the ongoing
management of a project.
ESTIMATED LABOUR HOURS
ESTIMATED
MATERIAL
COSTS

ESTIMATED LABOUR COSTS

ESTIMATED
DIRECT COSTS

ADD DESIRED PROFIT


MARGIN

OVERHEADS AND
MARKET
INFLUENCES ARE
CONSIDERED

SALE VALUE

OFFER TO THE CLIENT

TRADING
CONDITIONS ARE
CONSIDERED
AND DETAILED

CONTRACT

WORK
PERFORMED

CLAIMS
SUBMITTED

MONIES
COLLECTED

PROGRESS
OF THE
WORK IS
COSTED

ADJUSTMENT
FOR
VARIATIONS

MATERIALS COSTS
ARE RECORDED

LABOUR HOURS
AND COSTS ARE
RECORDED

FEEDBACK
TO
ESTIMATOR
ON THE
ACCURACY
OF LABOUR
AND
MATERIALS
ESTIMATES

ACTUAL COSTS ARE


DETERMINED

RECONCILLIATION PROCESS,
COMPARING ACTUAL COSTS TO
ESTIMATED COSTS

Copyright Ken Postill

Page 20 of 199
PROCESS FOR DEVELOPING A QUOTATION FOR INSTALLATION WORK

Estimate the number of


labour hours in the job

See
page
29

Adjust the labour hours


to suit productivity rates

See
page
44

Convert labour hours to


cost, being wages plus
on costs

See
page
58

Labour and material costs are


recorded in a pattern that
parallels the expected sequence
of the work

Estimate the cost of


materials in the job

See
page
29

Develop a break even


cost

Margin to cover
overheads, based on the
labour hours in the job

See
page
71

Develop a sale price.


Sale price is direct cost
plus gross profit margin.
Gross profit margin is
overheads plus nett profit

Consider market forces,


and the desired gross
profit for this job. Where

See
page
40

Determine the direct costs


to perform the work.

Develop an offer to the


client, including all
conditions of the offer

required, add B factor

Include all conditions of


the offer, such as
standardised conditions,
payment schedule and
items specific to the job

Copyright Ken Postill

See
page
105

Page 21 of 199
An estimate is an educated guess of the time and materials required to achieve a
desired outcome. Estimating is a part of everyday life, where individuals estimate the
time required to perform tasks such as traveling to a destination, doing housework,
cooking a meal, performing any of a wide range of work related tasks, etc. etc.
The skills required to perform accurate estimates for electrical work are developed over
time, and rely on the application of experience gained in the industry. Processes that
supply feedback to the estimator on the accuracy of an estimate are essential in the
development of the estimators skills.
Unit rate manuals can be used to supplement the estimators experience, or as a substitute
for experience
The most important function of estimating and the preparation of quotations is to
ensure that the job provides for a profit. Many uninformed electrical contractors
operate at unrealistic low prices, often not covering hidden costs such as overheads and
on costs, leading to a high level of business failure among electrical contractors in
Australia.
An equally important area of successful trading is the preparation of the quote, or
offer, to the client, which forms the basis of the contract between the client and the
electrical contractor. Where the quote is poorly formulated, the contractor is in danger of
being unable to pursue the client for payment, should the client be unwilling, or unable,
to pay for the work.
The introduction of training in this area of the electrical industry aims to alleviate this
problem.

Copyright Ken Postill

Page 22 of 199

SECTION 1

PROCESSES FOR DEVELOPING A


QUOTATION FOR INSTALLATION OR
SERVICE WORK
The following pages show the processes involved in the development of a quotation for
either installation work or service work.
The process for the development of a quotation for installation work includes the
production of an estimate of direct costs, and the ensuing process of developing the
estimate into the quote to be offered to the client.
ESTIMATED COST + PROFIT MARGIN = PRICE OFFERED TO THE CLIENT
Some terms to understand are
Estimate a forecast of the expected labour and material components and the
associated costs to the contractor to perform a specific project.
Quote

the price offered to the client, for which the contractor is willing to carry out
the works. This must include all appropriate conditions of trading, as it
forms the basis of the contract upon which payment will depend.

Estimating is the process of making a forecast, or educated guestimate of the amount


of labour in a project and the cost of materials and labour, and is a part of the process
required in developing a price to be offered to the client.
A quotation for service work, or do and charge work must include provision for all
trading costs, such as overheads and nett profit, within the hourly charge out rate. It must
also include trading terms.
An important function in all successful contracting operations is to perform a
reconciliation of the estimated values of labour and material against the actual values,
determined at the conclusion of the work. This process provides essential feedback to the
estimator/manager on the accuracy of the estimate, and the productivity of various
individuals within the labour force.

Copyright Ken Postill

Page 23 of 199
PROCESS FOR DEVELOPING A QUOTATION FOR INSTALLATION WORK

Estimate the number of


labour hours in the job

See
page
29

Adjust the labour hours


to suit productivity rates

See
page
44

Convert labour hours to


cost, being wages plus
on costs

See
page
58

Labour and material costs are


recorded in a pattern that
parallels the expected sequence
of the work

Estimate the cost of


materials in the job

See
page
29

Develop a break even


cost

Margin to cover
overheads, based on the
labour hours in the job

See
page
71

Develop a sale price.


Sale price is direct cost
plus gross profit margin.
Gross profit margin is
overheads plus nett profit

Consider market forces,


and the desired gross
profit for this job. Where

See
page
40

Determine the direct costs


to perform the work.

Develop an offer to the


client, including all
conditions of the offer

required, add B factor

Include all conditions of


the offer, such as
standardised conditions,
payment schedule and
items specific to the job

Copyright Ken Postill

See
page
105

Page 24 of 199
FLOW CHART SHOWING THE PROCESS THAT LEADS TO
RECONCILLIATION BETWEEN ESTIMATED COSTS AND ACTUAL COSTS
FOR AN INSTALLATION PROJECT.
ESTIMATED
MATERIAL
COSTS

ESTIMATED LABOUR HOURS

ESTIMATED LABOUR COSTS

ESTIMATED
DIRECT COSTS

ADD DESIRED PROFIT


MARGIN

MARKET
INFLUENCES ARE
CONSIDERED

SALE VALUE

CONTRACT

PROGRESS
OF THE
WORK IS
COSTED

MATERIALS COSTS
ARE RECORDED

LABOUR HOURS
AND COSTS ARE
RECORDED

ACTUAL COSTS ARE


DETERMINED

RECONCILLIATION PROCESS,
COMPARING ACTUAL COSTS TO
ESTIMATED COSTS

Copyright Ken Postill

FEEDBACK
TO
ESTIMATOR
ON THE
ACCURACY
OF LABOUR
AND
MATERIALS
ESTIMATES

Page 25 of 199
PROCESS FOR DEVELOPING A QUOTATION FOR SERVICE WORK

Labour cost per hour for


wages plus on costs

Hourly charge out rate for


labour stated in the
contract to be signed by
the client

Hourly allowance to cover


overheads
Hourly allowance to cover
nett profit
Penalty rates for out of
hours work, if applicable

Materials charge out rate


stated in the contract to be
signed by the client

Formal contract to be
signed by the client prior
to work commencing

Materials sold at trade list


price plus mark up. A mark
up of 20% is typical

Standard conditions of
trading, including
payment requirements
explained to the client

The effect of overheads is discussed in Section 4


For service work the cost to support the service vehicle is attributed directly to the
output of the service person as a direct cost, on an hourly basis.
It is not an overhead, as the cost be attributed to, and charged for, for each job.
Overheads are those business costs that cannot be directly attributed to any
specific job. Examples include, but are not limited to, office rent, telephones,
liability insurance, equipment depreciation/replacement, etc.

Copyright Ken Postill

Page 26 of 199

NOTES

Copyright Ken Postill

Page 27 of 199

NOTES

Copyright Ken Postill

Page 28 of 199

NOTES

Copyright Ken Postill

Page 29 of 199

SECTION 2

PROCESSES FOR DEVELOPING AN


ESTIMATE FOR INSTALLATION
WORK
The purpose of an estimate is to determine, or forecast, the costs to the contractor to
perform the work.
There are several methods used to estimate, but all should produce a forecast of the
expected labour hours required to perform the work, plus the cost of labour and the cost
of materials.
Having determined the estimated costs, a separate process is followed to develop a sale
price to be offered to the client. This process involves adding a profit margin to the
estimated direct costs. (See Section 4)
The following pages contain information on methods of estimating.

Copyright Ken Postill

Page 30 of 199
INFORMATION
The primary purpose in estimating is to determine the cost to the contractor of
carrying out the work, which is an entirely different function to developing the price that
will be offered to the client.
ESTIMATED COST + PROFIT MARGIN = PRICE OFFERED TO THE CLIENT
Some terms to understand are
Estimate a forecast of the expected labour and material components to perform a
specific project.
Quote

the price offered to the client, for which the contractor is willing to carry out
the works.

Bid

the contractors full offer, including all conditions attached to the offer.

Tender

similar to a bid, but including the clients criteria, where the client requires
the contractors offer to be presented in a specified way

Estimating is the process of making a forecast, or educated guestimate of the amount


of labour in a project, and the cost of materials and labour, and is a part of the process
required in developing a price to be offered to the client.
Take off sheet a purpose designed form or spread sheet that is used to record the
various material and labour components of an estimate. The take off sheet may be a paper
based form, or part of a computer based spread sheet.
The following pages contain samples of take off sheets, with notes to explain the various
components of a take off sheet.
Remembering that the process of determining a quote price is a separate function to
estimating, some take off sheets are developed solely as an estimating tool, while others
include the facility to develop the estimated quantities to a quote price.
Where an experience based estimating method is used the take off sheet requires one
column only for estimating labour.
Where a unit rate method is used the take off sheet requires additional columns to allow
extension of the specific task labour units to provide a total labour hours for that part of
the project.

Copyright Ken Postill

Page 31 of 199
Sample of a take off sheet used with experience based estimating. The reverse side is a
similar table.

TAKE OFF SHEET


JOB NAME ...............................................................................................................DATE ..........................
JOB DESCRIPTION.......................................................................................................................................
............................................................................................................................................................................
SHEET ........ of .......... COSTED BY ............................................ CHECKED BY ....................................
Qty
Materials
Per
Material
Labour in
DETAILS
unit price
extension
hours

TOTALS Front sheet


Total labour hours = ............................... Total material costs = ........................................
Total labour costs = .......................hours @ $.......................... = ........................................
B Factor (if required) = ........................................
Total costs = .......................................
Copyright Ken Postill

Page 32 of 199

Sample of a take off sheet used with unit rate based estimating. The reverse side is a similar table.

TAKE OFF SHEET


JOB NAME ............................................................................................................................................................................................................................................
JOB DESCRIPTION..............................................................................................................................................................................................................................
..................................................................................................................................................................................................................................................................
SHEET ........ of .......... COSTED BY ............................................ CHECKED BY .......................................................................... DATE ...................................

DETAILS

Qty

Material
unit price

TOTALS Front sheet

Copyright Ken Postill

Per

Material
extension

Labour
unit

Qty

Labour
extension

Page 33 of 199

Labour hours = ........@ $ ......... Labour cost = .............. Materials cost = $.............. B factor .............Total direct costs
= ......................

Copyright Ken Postill

Page 34 of 199
Sample of a take off sheet used with experience based estimating with the provision to
develop the direct costs into a quote price. The reverse side is a similar table.

JOB QUOTATION TAKE OFF SHEET


JOB NAME ...............................................................................................................DATE ..........................
JOB DESCRIPTION.......................................................................................................................................
............................................................................................................................................................................
SHEET ........ of .......... COSTED BY ............................................ CHECKED BY ....................................

DETAILS

Qty

Materials
unit price

Per

Material
extension

Labour in
hours

TOTALS Front sheet


TOTAL HOURS ................. + ADJUSTMENTS = .................. @ $.....................p/hr = $.........................
PLUS MATERIAL COSTS = $ ....................... PLUS B FACTOR (if required) ..........................
JOB DIRECT COST = $....................... + MARGIN ...............% =

SALE PRICE $....................

BREAK EVEN = DIRECT COST = $....................... + OVERHEADS @ ............p/hr = .....................


NETT PROFIT = SALE BREAK EVEN = $....................... - $...................... = $ ........................

Copyright Ken Postill

Page 35 of 199

THE TAKE OFF SHEET IS ONE OF THE MOST IMPORTANT COMPONENTS


OF ANY CONTRACTING OPERATION
A correctly formatted and utilised take off sheet performs three important functions in the
management of any contracting operation.
(a) Estimating with a well formatted sheet will help the estimator in detailing the job
components and developing a reliable cost for the job. If the sheet has provision for
full itemising of the parts of the estimate, it assists the estimator to break down the
separate parts of the job into individual material and labour components.
In addition to this, the full detailing of the work allows the estimator (or some one
else) to check back through the estimate to see if anything has been missed or
doubled up.
(b) Managing the job once the estimate has been completed, and the job won, the take
off sheet can be used as a useful guide in running the job.
Using the take off sheet as a job production plan means that the details of the job do
not need to be retained in the contractors memory, thus freeing them to think about
other profitable matters.
As a part of managing the job, the contractor can use the detailed take off sheet as an
advance organiser to buy in equipment required for the job. If the contractor can
spend a few minutes each day to advance order the equipment for forthcoming jobs,
the hours lost obtaining supplies on a day to day basis, can be reduced to a minimum.
(c) Job cost reconciliation in this function the take off sheet forms the record of the
expected costs of the job, to be accompanied with the costing system, which is the
record of the actual costs of the job.
Unless the take off sheet has sufficient details to allow the comparison of the two
records, the analysis of the costs cannot be performed with any detailed accuracy.

Copyright Ken Postill

Page 36 of 199
METHODS OF TAKE OFF SHEET USE
In estimating, there are two general methods used :
(a) Estimating using practical experience, where the estimator breaks the job down
into its various parts, and estimates the labour (hours) by using personal experience to
predict the quantities of labour for each part. Estimating is done in an order that
parallels the way in which the job is expected to progress to allow for the
reconciliation process that occurs once the project has been completed.
Since, in most small and medium operations, the contractor is also the estimator, and
is often involved in the site work, this method is the most commonly used.
(b) Estimating using a unit rate method, where the estimator simply calculates the
quantities of items from the plans and other job information, and then allocates costs
from a labour unit rate list to these items. Many larger well established contractors
have developed a unit rate list, in which the labour components for many common
tasks been detailed.
This method relies on the development of an accurate list, which can only be
developed after the work rates of the labour force have been carefully analysed and
rechecked over a long period.
The NECA Manual of Labour Units reflects such detailed research, and is available
from NECA.
The primary benefit of unit rate manuals is that they allow relatively inexperienced
staff to use the collective wisdom of experienced estimators to estimate from a given
set of plans.
Other methods of estimating are
(c) Estimating using a schedule of rates. This method breaks the project down into a
number of tasks, and allocates a set cost to each task. This is a development of
pricing on a per point basis, and can be successfully applied to projects such as
multi domestic (home units etc.), commercial fit outs in high rise buildings, and
single domestic (cottage) wiring, where the projects involve a high number of
identical tasks.
Using this system, the estimator separates the repetitive tasks such as lighting points,
switch points, and power outlets from those items such as switchboards, mains, data,
and other specialised circuitry. The specialised items are estimated on a quantity
method (as in (b) above), and the remainder of the work is costed on a per point
basis, using costs that have been developed over a long period of averaging prices
arrived at through quantity estimates. This method allows for rapid estimating of

Copyright Ken Postill

Page 37 of 199
projects, but creates difficulties in the reconciliation of actual job costs to estimated
costs.
This method relies on the estimate containing all the points in a project, allowing an
average to occur across the project. Note that it is unsuitable for small projects and
one off estimates.
(d) Historical estimates. This method uses a broad based average of costs for specific
types of work. While it is not commonly used among electrical contractors, it is
widely used in the building industry to supply builders with an allowance for
electrical work. The costs are based on the average electrical price for a specific type
of work, such as new cottage construction, high rise commercial, etc. These costs are
usually expressed as a number of dollars per square metre of floor space, or per cubic
metre of building space.
Construction reports, such as Cordells, supply these costs on a regularly updated
basis, for the benefit of builders who are developing construction projects not yet
tendered for.
While this system is not suitable for electrical contractors preparing competitive
tenders, it is useful as a general guide as to the probable price range that may be
expected for a specific type of project.
It should be noted that the pricing lists do not represent a method of Pricing per
point. Some contractors are willing to estimate jobs using an average price per point
method. For example, a contractor may quote a price of $70.00 a point for power
points, irrespective of the job conditions. They use the philosophy that they will lose
on some points, but win on others, and so attain an acceptable average.
In practice, however, when estimating jobs, the tendency will be to win all those jobs
which have been quoted too low, and not win those that have been quoted too high.
Consequently the operation will be trading at a loss on most of its quoted work.
Further, this practice effectively prevents the contractor from carrying out a thorough
cost reconciliation, because it does not supply sufficient details of labour and material
costs.

Copyright Ken Postill

Page 38 of 199
COMPONENTS OF A TAKE OFF SHEET
To suit the optimum use of the take off sheet in the operations activities, there are a
minimum number of items of information that need to be included in the design of the
take off sheet. Each of these items performs at least one (often more) important
functions, and are as follows :
(a) A title, such as TAKE OFF SHEET, OR QUOTATION FORM etc., to clearly
identify the sheet and its function. This ensures that the sheet will not be confused
with other forms, and is readily identifiable to all staff concerned in the operation.
(b) A general job information section, which will include a number of information items
that relate directly to the job. This information would include items such as :
(1)

JOB NAME The job needs to be clearly identified in order to avoid confusing
it with other jobs. This is especially so in the case where more than one job is
carried out for the same client, often in the same premises.
Where the client has allocated a specific name to the job, the adoption of this
job name by the contractor will reduce confusion during the production phase,
and especially in the invoicing and payment phase.

(2)

JOB DESCRIPTION Here the estimator notes a brief, but accurately detailed,
description of the job to be estimated. This performs several functions, the most
important being that it forces the estimator to form an accurate idea of the job,
before the estimate is begun. Other functions are to (i) further identify the job,
(ii) simplify the entry of the job, once won, into the job book, by supplying a
ready made description, and (iii) use the estimators job description sheet as a
site staff instruction, so that the site staff have an understanding of the
estimators concept of the job.

(3)

QUOTE OR JOB NUMBER This allows the contractor to keep a quote record
by numbering the quotes in a sequences, not unlike a job book. This allows the
client a reference number to identify the quote, and simplifies the method by
which the quote is referred to, and included in, any contract documents
associated with the job. Should the quote be successful, the job number can
also be entered onto the sheet, thereby permanently linking the estimate to the
job.

(4)

DATE OF ESTIMATE It is a common occurrence for a client to postpone a


job until a later date, and then telephone the contractor, asking for an on the spot
adjustment to the price before issuing a work order. This means the contractor
needs to be in a position to quickly adjust the overall price, depending on the
percentage CPI changes that have occurred since the date of the estimate. The
contractor can then offer the immediately revised price as a provisional price,

Copyright Ken Postill

Page 39 of 199
pending a full check of the estimate. This allows the negotiating process to
begin, and often results in the winning of the job.
Another useful facet of dating the estimate is where previous estimates are used
as a technical reference when designing another job prior to estimating it. The
estimator/designer can gain an approximate idea of the costs, so that a decision
on the best way of doing the job can be determined.
(5)

SHEET NUMBER This is usually detailed as sheet of . As most


estimates will involve the use of more than one sheet to detail the costs, it
becomes important to number the sheets for totaling the costs of the individual
sheets in a summary page.

(6)

THE ESTIMATORS NAME Provision such as Costed by allows for the


estimators name or initials to be entered on the sheet. This serves two important
functions.
(i)
(ii)

(7)

Having the estimator permanently identify himself with the product of his
work tends to ensure a degree of care that may not always be present if the
estimator remains unaccountable
Once a job is won, and production staff are issued with the job
instructions, any matters that are unclear can be referred to the easily
identified estimator.

NAMING OF THE PERSON THAT CHECKS THE ESTIMATE This is


usually provided for with an entry such as checked by . Since even the best
estimator can overlook items, or misread specification clauses, it is an important
practice in any contracting operation to have a second party check the
estimators work.
This second party should, where possible, be experienced in estimating or
production techniques to ensure the best checking of the estimate. In a
partnership based operation, all partners share a joint responsibility for any
errors or miscalculations in the estimate, thus safeguarding any one partner
against recriminations.
Where the operation is very small, and the contractor is also the estimator, and
the production staff, then it is still a wise practice to have someone else, such as
a wife or other involved person, check through the estimate. An unskilled
person can often detect errors or ask questions that prompt the estimator to re
evaluate parts of the estimate.

(8)

COLUMNS FOR TAKING OFF THE JOB QUANTITIES The take off sheet
needs to be arranged in a series of columns in which the various items of the
estimate are arranged. While there is perhaps no maximum number of columns,

Copyright Ken Postill

Page 40 of 199
there is a minimum number to allow the take off sheet to be developed to its full
potential.
For the sake of the exercise, and in line with the philosophy of minimising the
time used on paperwork, only a minimum number of columns will be developed
in the information to follow.
(a)

A DETAILS column in which a brief description of the item of work and


its associated materials is entered. Note that this description and materials
details may be used for other purposes, such as ordering materials for the
job or site instructions for production staff, and so should be detailed
enough to provide clear information to people other than the estimator.

(b)

A QUANTITY column in which the quantity of materials measured from


the job plans is entered. This column can be used later as a source of
information for materials ordering and job instruction for site staff, as an
adjunct to the details column. The site staff can be supplied with a
photocopy of the take off sheet showing this and the details column, with
all other columns (where costs appear) blanked out. This will inform the
site staff of quantities and types of materials allowed for on individual
parts of the job, without disclosing the materials costs or labour hours
allowed.

(c)

UNITS columns this will involve two columns :


(i) A column to detail the units in which the individual items are costed,
eg. Cable per metre, switches per each, clips per 100, etc. This
column is generally titled PER at the top of the column.
(ii) A second column to detail THE UNIT COST of the item of material.
eg. $1.80 per metre for cable, $3.10 for a switch, $5.60 per packet of
100 clips, etc. These column are used to establish the base price for
the material item being costed.

(d)

COST EXTENSION column in which the information developed in the


three previous columns is extended to form a cost (in dollars) for the
particular item of the estimate. This column is totaled to provide a final
estimated cost for materials to be used in the job.

(e)

A LABOUR HOURS column in this column the labour, estimated in


hours, to carry out the item of work is entered. The labour is always
estimated in hours, rather than dollars, for several reasons :
(i)

The totalled labour hours can be used to carry out project viability
considerations, with respect to both the sales budget and the capacity
of the workforce to perform the work.

Copyright Ken Postill

Page 41 of 199

(ii)

Simplicity in comparing the take off sheet and the cost sheet hours
when analysing discrepancies during a job cost reconciliation.

Some larger estimating offices will estimate the labour in specialised


categories, such as apprentice, tradesman, labourer, foreman, etc. This
method allows for greater accuracy in estimating labour costs, and
requires additional columns in which the varying costs for labour rates are
developed to provide a dollar cost for labour.
However, very few small to medium sized operations are in a position to
allocate labour arrangements as far in advance as the tender stage.
This means that these operations need to develop a general hourly rate for
labour, and this is based on the most common costing rate for labour used
in the operation. Most trade associated operations will use the labour cost
of a standard tradesman as the general hourly labour cost.
While it is true that this cost will not be accurate at all times, the following
considerations should be examined :
(i)

The lower rate of cost for apprentice labour will be offset by the
higher on cost level, and the likelihood of a lower productivity.

(ii)

The lower rate of cost for labourers will be offset by the lower skill
level causing a lack of useful employment at some times during the
job.

(iii) Leading hands and foremen, etc. will have a higher degree of site
productivity offsetting the higher cost of labour. However, on jobs
where it is clear that a higher cost of labour will be required due to
the fact that a foreman or leading hand will be required throughout
the job duration, an additional allowance for this can be made during
or at the finish of the estimate, by adding an adjustment to cover the
number of hours that this person will be on the job.
(9)

A TOTALLING AREA - where the material costs and labour hours can be
totaled, then developed into an estimated cost for the job. If the take off sheet
is to be used to develop the estimate into a quote or bid, then a further
provision needs to be made for adding a profit percentage to the costs to form
a quote. This area should also allow for the inclusion of any special costs,
such as mileage, abnormal delivery costs, etc

(10)

B FACTOR this is an allowance as a safety margin for suspected but


undefined problems that may occur.

Copyright Ken Postill

Page 42 of 199
B Factor is not always used, and is based on a matter of experience and any
hunches that the estimator or manager may feel apply to the project being
estimated.
It should be noted that for large involved estimates, there will be a need for the estimator
to develop the cost estimate first, and then for the manager or senior estimator to use this
job cost to add a suitable profit margin in order to form a bid price for the job. At the
time of tender and the subsequent negotiations, it may be undesirable to have the added
gross profit margin commonly known in the contractors office. Consequently, in larger
operations the take off sheet may not include an area for converting the estimate into a
bid price.
However, in smaller operations, where the estimates are not spread over several
estimators, and are contained on a limited number of take off sheets, it is very practical to
use the take off sheet to form a bid price. Therefore, the take off sheet used under these
conditions, also becomes a quotation sheet, and requires the section for converting the
estimate to a bid price.
Examples of estimate take off sheets and quotations sheets are supplied on the pages in
this book.
Remember when using a take off sheet, you should enter the materials and labour
quantities in such a fashion that the take off sheet can be used as :
(i)

a job planner, to reduce the time required to refresh your memory or instruct site
staff on the work required for the project

(ii)

a materials lit, to reduce the time required to purchase and organise the stock
needed to carry out the work

(iii)

a job cost reconciliation document, where the estimated labour and materials can
be compared with the actual costs incurred and recorded on the job cost card.
This is an essential process that provides feed back on the accuracy of the
estimate, and the productivity of the site activities.

DOING THE PAPERWORK CORRECTLY = LESS MISTAKES


= BUSINESS PROFIT
= LESS STRESS
= BETTER BUSINESS
= MORE TIME FOR LEISURE
DOING DUPLICATED PAPERWORK

= LESS TIME FOR BUSINESS


= MORE STRESS
= LESS PROFIT
= LOST LEISURE TIME

Copyright Ken Postill

Page 43 of 199
POOR PAPERWORK

= MORE MISTAKES
= NO PROFIT OR A LOSS !!!
= LOTS OF STRESS
= POOR BUSINESS
= EVEN LESS LEISURE TIME

ASK YOURSELF If I am not willing and committed to running my business correctly


and as efficiently as possible, should I be in business at all?

HOW EFFECTIVE IS YOUR ESTIMATING METHOD?


Can the take off sheet be used as :
1.

An accurate estimate of the cost of all job materials, broken down into each stage of
the job?

2.

A total of the expected labour hours, broken down into each stage of the job?

3.

A total of the cost of labour for the job?

4.

A method of planning labour and materials requirements for the job, as each stage
of the job approaches? Is the estimate arranged in a sequence that parallels the
expected progress of the works? Will the take off sheet allow you the luxury of not
needing to remember or re-engineer the job on a continuing basis?

5.

A materials list, to facilitate the purchasing of items for the works, as they are
required for each stage?

6.

A job instruction sheet, for site personnel. (With materials details shown, but costs
and labour hours/costs blanked out from the photocopy).

7.

An easily compared reference to the job cost record, for the purposes of the job cost
reconciliation?

8.

A technical reference, for similar jobs priced at a later date?

9.

A reference detailing the clients name for the job, and the client contact person (by
name) and phone number, etc.?

10.

A method to allow you to determine a minimum profit margin, based on the number
of labour hours in the job?

Copyright Ken Postill

Page 44 of 199
In any contracting operation, time is the most valuable asset of the management and
production processes.
If the labour capacity of the operation is not used at maximum efficiency, trading capacity
is restricted, leading to loss of profit and potential business failure.
If the management processes are not streamlined to minimise the time, resources are not
available to take on new business opportunities. Poor management of individual projects
leads to confusion and mistakes during the production phase of individual projects.
Use a diary to maximise time management.
Do not rely on memory write things down in a diary or project file
Use the estimating process as the foundation for efficient financial management of each
project
Use a gang rate to adjust labour hours where labour involves larger groups
Use an adjustment rate to adjust labour hours where abnormal installation conditions
exist
Use a minimum hourly return rate to determine the minimum sale value for each project
Consider the material to labour ratio when assessing the profit margin for each project
Convert estimated costs to a sale value expressed as a margin (not mark up) to align with
the reconciliation process
Obtain feedback on estimating and labour by reconciling final costs to estimated costs for
each project

Copyright Ken Postill

Page 45 of 199
ADJUSTMENT OF ESTIMATED LABOUR HOURS FOR PRODUCTIVITY
CONDITIONS
There is a wide range of influences on labour productivity, such as :

Number of workers on site


Multi storey work
Heat and humidity
General work ethic
Very large site areas
Wet weather
Very low temperatures
Difficult access

When estimating, an estimator determines labour hours at what is an average or bench


mark level of productivity. Where productivity may be influenced by site conditions, the
total of estimated labour hours must be adjusted to suit the expected outcome.
Adjusted hours = estimated hours for standard productivity
adjustment factor(s)
Example 1
Where site conditions will cause a reduction in productivity to 90% of normal, and the
project has an estimated labour content of 500 hours, the total labour hours must be
adjusted to reflect the expected actual outcome.
Expected hours = 100 x 500 hours = 556 hours
90
or = 500 = 556 hours
0.9

Copyright Ken Postill

Page 46 of 199
Example 2
Where more than one productivity influence is anticipated, such as work occurring with
large crews on multi storey sites, in hot weather.
If the productivity value adjustments are :

Crew size 0.9


Multi storey 0.85
High temperature 0.8

The adjustment factor is 0.9 x 0.85 x 0.8 = 0.612


Therefore, if the project had 2000 hours of estimated labour, the expected, or adjusted
estimate, is :
2000 hours
= 3268 hours
Adjustment of 0.612
The above adjustment factors are hypothetical, and should not be used in actual
conditions.
To obtain correctly determined adjustment factors for most conditions, reference may be
made to the NECA Labour Unit Manual.

Copyright Ken Postill

Page 47 of 199
Gang Rate
An alternative method for smaller contracting operations is to use a gang rate
adjustment factor. This involves determining an average productivity for the employees,
based against a bench mark employee.
Example a contracting operation has a workforce of six employees, who are graded
against the bench mark employee.
Employee

Description

Bob
John
Bill
Jack
Ken
Bruce

Skilled tradesperson used as bench mark


First year apprentice 10 month experience
Fourth year apprentice
Leading hand highly motivated
Poor work ethic, tradesperson
Trades assistant, good work ethic

Grading
100
60
90
120
60
80_
510

Average = 510 = 85
6
the labour adjustment factor on gang rate for this group of workers is 0.85.
Example where the labour for a project is estimated at 1000 hours, and a contracting
operation has a gang rate of 0.8, the expected hours to complete the project will be :
Labour hours
Adjustment
= 1000 = 1250 hours
0.8
Always remember that the purpose of estimating is to forecast the cost of
performing the work. This must be the cost to the existing structure of the contracting
operation. Estimating at rates relevant to other operations leads to inaccuracy and
incorrect pricing.
A large company does not have the same labour productivity as a small company,
particularly where the owner/operators are not involved in the day to day installation
work.
Therefore, if a large company was to attempt to estimate at the productivity rates of a
smaller company, each estimate would result in under estimating the labour costs.

Copyright Ken Postill

Page 48 of 199
Larger companies remain competitive by operating with a relatively low hourly overhead
burden, achieved by spreading the overheads across a much larger number of productive
hours.
The estimate must provide for the process of comparing estimated to actual labour
and material costs
The estimate must be detailed in the time sequence that the job is expected to follow, so
that as labour and material costs are incurred during the works, they can be compared to
the estimated labour and material costs as an ongoing reconcilliation process.
This allows for monitoring the profitability of long term jobs, and provides essential
feedback on the accuracy of the estimate.
Estimated
labour hours
used for the
work

Actual labour
hours used for
the work

Estimated
labour cost to
do the work

Actual labour
cost to do the
work

Estimated cost
of materials to
do the work

Actual cost of
materials to
do the work

RECONCILLIATION PROCESS
Feedback is provided on the
accuracy of the estimated values,
plus indications of the workplace
productivity of production staff and
methods

Copyright Ken Postill

Page 49 of 199
EXAMPLE OF THE USE OF TAKE OFF SHEETS TO FORM AN ESTIMATE
The following pages contain examples of take off sheets used to complete an estimate for
a small commercial fit out job with the following details.
The job involves a small office area that has the following electrical work

twenty 2x36 watt recessed troffer type fluorescent lights, wired with 1.5mm2
TPS cable, controlled by a two gang switch
one emergency pack, fitted to one of the troffers, for egress lighting

15 metres of three channel skirting trunking


fifteen double 10 amp socket outlets, over three circuits, wired with 2.5mm2 TPS
cable
fifteen data outlets, using Cat5e cable with RJ45 socket points

one package type sub board


one data hub

Labour costs are $30.00 per hour, with 38% on costs


The first example take off sheet is an estimate, using an experience based method, as
performed by an estimator that is not part of the managerial process that leads to a quote
price.
The second example is typical for that used by a small contracting operation that has a
requirement to recoup $15.00 per hour to cover overhead costs. This example is a
quotation sheet where the estimated quantities are used to develop a price for the project,
based on a gross profit margin of 20%. The estimating method is experience based.
The third example is an estimate, using a unit rate method, as performed by an estimator
that is not part of the managerial process that leads to a quote price.
Note that the labour hours in each example provide a total of 39 hours. As the purpose of
an estimate is to determine the cost to do the work, and the labour used on the job is
based on eight hour days, or two 4 hour half days, 39 hours is an impractical value to
base costs upon. Therefore it is converted to 40 hours.
Note that the labour units used in the example of unit rate method are not to be used for
actual estimating purposes. They are not a genuine reflection of values shown in unit rate
manuals.

Copyright Ken Postill

Page 50 of 199

TAKE OFF SHEET


JOB NAME .

.Dodgipay Accontancy Services Office fitout.......................DATE ..20/2/2009........

JOB DESCRIPTION....Wire in 20 2x36watt troffers on two switchgroups, 15 double socket outlets,


15 data points. Package type switchboard and data hub...All outlets on three channel skirting
trunking
SHEET .....1... of ....2... COSTED BY ...I N Fallible......... CHECKED BY ...D Unno.........................
Qty
Materials
Per
Material
Labour in
DETAILS
unit price
extension
hours
Rough in lights 2 switch groups 1 emerg.
1.5mm2 twin & earth
130m 110
00
100
1 4 3
1 6
3 pin sockets with base ACME 413
21
8
20
@
1 7 3
Cable ties
200
7
00
100
1 4
switch mounting bracket ACME S14
1
2
50
@
3
Fit off skirting trunking
ACME S 3x150 3 channel skirting
15 metres in 2.4m lengths
knock in masonry fixings
internal corners ACME ENC
joiners ACME ENJ
end caps ACME ENC
socket outlet kits ACME SO2
data outlet kits ACME DA 1

7
100
4
5
2
15
15

56
32
12
6
6
12
12

00
00
00
00
00
00
00

@
100
@
@
@
@
@

Rough in socket outlets 3 circuits


2.5mm2 twin & earth

70m

180

00

Rough in data outlets


Cat 5e 4 pr cable

220m

60

Fit off lights


ACME 2x36 PRDTR
ACME EMR emerg kit
Plasto light switch LS2

20
1
1

Fit off socket outlets


Plasto 210 outlets
Fit off data outlets
Plasto DRJ45 8

1
1

9
3
4
3
1
8
8

2
2
8
0
2
0
0

100

00

100

72
140
7

00
50
60

@
@
@

4
1

4
4

0
1
8

15

12

30

15

11

40

7
6

TOTALS Front sheet

Total labour hours = ..63.. Total material costs = .$ 3855.......................................


Total labour costs = .....63.............hours @ $30.00 + 38%.. = .......$2608......................
Add B factor (if required) ......................

Total costs = ..$6463......................

Copyright Ken Postill

Page 51 of 199

DETAILS

Qty

Materials
unit price

Per

Material
extension

Labour in
hours

Fit off switch board


Plasto PAK 15P
Plasto Comb RCDCB 20
Plasto Comb RCDCB 15

1
3
1

42
38
38

80
60
60

@
@
@

4
1
3

3
6
9

Fit off data hub


Plasto D25 LP

246

80

TOTALS rear sheet

Copyright Ken Postill

Page 52 of 199

TAKE OFF SHEET


JOB NAME ...... Dodgipay Accontancy Services Office fitout.................................................................................................................................................
JOB DESCRIPTION.... Wire in 20 2x36watt troffers on two switchgroups, 15 double socket outlets, 15 data points. Package type switchboard and
data hub...All outlets on three channel skirting trunking.............................................................................................................................................................
SHEET ...1... of ...2..... COSTED BY ..... I N Fallible......... CHECKED BY ....... D Unno....................................... DATE .... 20/2/2009...............................

Qty

Material unit
price

Per

Rough in lights 2 switch groups 1 emerg.


1.5mm2 twin & earth
3 pin sockets with base ACME 413
Cable ties
switch mounting bracket ACME S14

130m
21
200
1

Fit off skirting trunking


ACME S 3x150 3 channel skirting
15 metres in 2.4m lengths
knock in masonry fixings
internal corners ACME ENC
joiners ACME ENJ
end caps ACME ENC
socket outlet kits ACME SO2
data outlet kits ACME DA 1

7
100
4
5
2
15
15

DETAILS

Material
extension

10
8
7
2

00
20
00
50

100
@
100
@

1
1

56
32
12
6
6
12
12

00
00
00
00
00
00
00

@
100
@
@
@
@
@

TOTALS front sheet

1
1

4
7
1

9
3
4
3
1
8
8

3
3
4
3

2
2
8
0
2
0
0

1 2 0 7

Labour
unit
8

Qty

Labour
extension

.7
.1
1
.2

1.3
21
200
3

.3
.02
.2
.2
.2
.2
.2

15
100
4
4
2
15
15

1
2
2

.6

4
2

.5
.8
.8
.4

3
3

3 0 .5

Labour hours = ..63.....@ $ .41.4.. Labour cost = .$2608......... Materials cost = $.3855.......Total direct costs = $6463......................
Add B Factor (if required) ..................................

Copyright Ken Postill

.3
.1

Page 53 of 199

Qty

Material unit
price

Rough in socket outlets 3 circuits


2.5mm2 twin & earth

70m

Rough in data outlets


Cat 5e 4 pr cable

220m

Fit off lights


ACME 2x36 PRDTR
ACME EMR emerg kit
Plasto light switch LS2

20
1
1

Fit off socket outlets


Plasto 210 outlets

DETAILS

Per

Material
extension

Labour
unit

Qty

Labour
extension

80

00

100

.6

70

60

00

100

.7

220

72
40
7

00
50
60

@
@
@

4
1

4
4

0
1
8

.3
1

20
1
1

6
1

15

12

30

.2

Fit off data outlets


Plasto DRJ45 8

15

11

40

.2

Fit off switch board


Plasto PAK 15P
Plasto Comb RCDCB 20
Plasto Comb RCDCB 15

1
3
1

42
38
38

80
60
60

@
@
@

4
1
3

3
6
9

Fit off data hub


Plasto D25 LP

46

80

TOTALS rear sheet

2 6 4 8

Copyright Ken Postill

.2

.5
.1
.1

.2

2
3
1

.5
.3
.1

3 2 .1

Page 54 of 199

JOB QUOTATION TAKE OFF SHEET


JOB NAME .

.Dodgipay Accontancy Services Office fitout.......................DATE ..20/2/2009........

JOB DESCRIPTION....Wire in 20 2x36watt troffers on two switchgroups, 15 double socket outlets,


15 data points. Package type switchboard and data hub...All outlets on three channel skirting
trunking
SHEET .....1... of ....2... COSTED BY ...I N Fallible......... CHECKED BY ...D Unno.........................
Qty

DETAILS

Materials
unit price

Per

Material
extension

Labour in
hours

Rough in lights 2 switch groups 1 emerg.


1.5mm2 twin & earth
3 pin sockets with base ACME 413
Cable ties
switch mounting bracket ACME S14

130m
21
200
1

110
8
7
2

00
20
00
50

100
@
100
@

1
1

4
7
1

3
3
4
3

Fit off skirting trunking


ACME S 3x150 3 channel skirting
15 metres in 2.4m lengths
knock in masonry fixings
internal corners ACME ENC
joiners ACME ENJ
end caps ACME ENC
socket outlet kits ACME SO2
data outlet kits ACME DA 1

7
100
4
5
2
15
15

56
32
12
6
6
12
12

00
00
00
00
00
00
00

@
100
@
@
@
@
@

2
2
8
0
2
0
0

1
1

9
3
4
3
1
8
8

Rough in socket outlets 3 circuits


2.5mm2 twin & earth

70m

180

00

100

Rough in data outlets


Cat 5e 4 pr cable

220m

60

00

100

7
6

TOTALS Front sheet

TOTAL HOURS ....63........ + ADJUSTMENTS = ...64....... @ $.41.4.....p/hr = $..2650...................


PLUS MATERIAL COSTS = $ ..3855.............. PLUS B FACTOR (if required) ..........................
JOB DIRECT COST = $...6505....... + MARGIN ..20......% =

SALE PRICE $...8132.............

BREAK EVEN = DIRECT COST = $.6505....+ OVERHEADS 64hr@ .$15.00.....p/hr = $7465...


NETT PROFIT = SALE BREAK EVEN = $..8132..... - $.7465..... = $ .667......

Copyright Ken Postill

Page 55 of 199

DETAILS

Qty

Materials
unit price

Per

Fit off lights


ACME 2x36 PRDTR
ACME EMR emerg kit
Plasto light switch LS2

20
1
1

72
140
7

00
50
60

@
@
@

Fit off socket outlets


Plasto 210 outlets

15

12

30

Fit off data outlets


Plasto DRJ45 8

15

11

Fit off switch board


Plasto PAK 15P
Plasto Comb RCDCB 20
Plasto Comb RCDCB 15

1
3
1

Fit off data hub


Plasto D25 LP

Material
extension
4
1

4
4

0
1
8

40

42
38
38

80
60
60

@
@
@

4
1
3

3
6
9

246

80

TOTALS Rear sheet

Labour in
hours

Copyright Ken Postill

Page 56 of 199
Remember that the most important resource for any contracting operation is labour, and
the use of that labour is to produce optimum sales outcomes.
Time spent managing projects is an essential component for any successful contracting
operation, but is an overhead cost that diminishes profit.
therefore, time spent managing projects must be kept to a minimum, but be used to
provide all necessary management functions.
A correctly formatted take off sheet can be used to reduce the amount of time used to
manage a project.
Use the take off sheets provided on the preceding pages to see if the time invested in
producing the estimate can also be used to

plan the labour required for each part of the work, as it arises. Will this avoid
the need to study the plans for the job in advance of each part as it occurs in order
to determine the labour requirements?
purchase the materials required for each part of the work, as it arises. Will this
avoid the need to study the plans for the job in advance of each part as it occurs in
order to ensure that the required materials are available on time?
monitor the labour hours consumed by each stage of the job in order to check the
labour productivity against the estimated values
monitor the usage of materials for each stage of the job, checking for loss or
misappropriation of materials
use mismatches in the recorded costs to estimated values to check if unauthorised
variations to contracted work have occurred
use mismatches in the recorded costs to estimated values to make enquiries with
production staff as to how the unexpected outcome occurred
determine minimum values for progress claims, submitted as the work
progresses

Will the use of a correctly formatted take off sheet result in a reduction of time consumed
to manage a project?

Copyright Ken Postill

Page 57 of 199

NOTES

Copyright Ken Postill

Page 58 of 199

NOTES

Copyright Ken Postill

Page 59 of 199

NOTES

Copyright Ken Postill

Page 60 of 199

SECTION 3

PROCESSES FOR DETERMINING


DIRECT COSTS OF LABOUR
THE DIRECT COST OF LABOUR
The direct cost of labour is the cost of employing a person on an hourly basis. This cost
must include all on costs such as paid leave, public holidays, workers compensation
insurance, superannuation, etc.
The following pages provide information on the method for determining the on cost
provision for labour.
As on costs are determined by employment conditions, it is best to develop the on costs
margin as a percentage of wages paid so that it remains stable unless there is a change to
working conditions. Where a salary increase occurs, without a change in working
conditions, the fixed percentage margin is easily applied to the new wage rate to
determine the new direct cost of labour.
As wage increases are a regular occurrence, but working conditions rarely change, most
contracting operations use the percentage method as a means of avoiding constant
recalculation of on costs for labour.

THE DIRECT COST OF MATERIAL


The direct cost of materials for an estimate is that cost born by the contractor to supply
the materials to the project. It is not the price or sale value provided to the customer.
As the purpose of estimating is to determine the cost to the contractor to perform the
work, the direct cost of materials is that cost that includes regular discounts, but also
includes expected wastage, such as cable off cuts, short ends from cable drums, etc.

Copyright Ken Postill

Page 61 of 199

DIRECT COSTS
In any contracting operation utilising labour to perform its normal trading activities, there
is an inescapable need to determine the cost to the operation of the labour, on an hourly
basis. When an estimator calculates the quantities of materials in a particular job, it is a
simple matter to express the cost of materials in dollar terms, based on the cost of
purchasing the materials.
However, labour is estimated in units of time, usually hours, and not in dollar terms.
Therefore a cost per hour for labour is required. This cost must encompass
cost of wages
on costs
Wages costs are those costs that are paid as a component of salary, and can usually be
identified with those monies detailed on a pay slip. This must include costs such as
hourly wage, travel allowances, tool allowances, license allowances and other wage
components that are part of an employment agreement.
On costs are those costs that are directly related to wages, but not specifically detailed as
part of salary payments. On costs include provision for sick leave, annual leave, annual
leave loadings, workers compensation insurance, superannuation, long service leave,
family and community leave and any number of other employment conditions.
On costs are calculated as a percentage of wages, rather than as a dollar value. Since on
costs result from employment conditions which do not change regularly (unlike wage
rates), determining a percentage value allows for simple adjustment to labour cost.
As a guide, the on cost value for electrical work ranges between 35% to 40% for most
Australian employment conditions.
The hourly cost for labour is determined by dividing the wages payment by the number
of working hours per week, and adding the on cost percentage to that value.
Note that the on cost margin is covered by the normal working hours. It is not applied to
overtime payments. Therefore, where overtime is worked at 1.5 times normal rate it may
not be unduly punitive to the costs to perform the work.

Copyright Ken Postill

Page 62 of 199

DETERMINING AN HOURLY COST OF LABOUR


The first step in arriving at a direct cost figure for labour is to establish the actual dollar
figure paid as wages per week to a particular employee.
Calculating wage costs
The following example uses hypothetical values of employment conditions for
determining the wage cost for a specific individual.
The calculations are based on a 38 hour working week
(a)
(b)
(c)
(d)
(e)
(f)

Base electricians wage rate $32.00 per hour $1216.00 per week
Licence allowance .
$ 30.00 per week
Tool allowance ..
$ 25.00 per week
Special (skill) allowance $2.31 per hour
$ 87.78 per week
Construction allowance .
$ 64.00 per week
Travelling time allowance ..80 minutes pay per day, on a 38 hour week
= 5 x 80 hours per week @ $32.00
60

$ 213.33 per week

Therefore, the normal weekly wage for this employee will be the sum of these items :
= $1636.11 per week
Dividing the weekly wage by the number of working hours per week, the wage
component is
$1636.11 = $43.06 per hour
38 hrs
However, the actual cost is a lot more than $43.06 per hour, because there remains the
on cost component to be added to this figure.
The on cost margin, expressed as a percentage of the employees wage rate, will apply to
all employees in the one operation that are employed under the same award.

Copyright Ken Postill

Page 63 of 199
Calculating on costs
On costs should be calculated as a percentage that can be added to the wage rate for any
employee engaged under the local employment agreement.
Each of the on cost components is calculated as a percentage of the wage, and then added
to supply a fixed percentage that will allow for all the on costs.
Note that although the employee gets paid 52 weeks a year, income for the yearly salary
is produced over less than that period. Those times for holidays, sick leave, etc. are not
income earning periods.
As an example, the number of working weeks for most electrical workers is
Annual holidays ..........
Paid public holidays 9 days
Paid sick/family leave say, 10 days
Total non income earning weeks .
Therefore incoming earning weeks = 52 7.8

= 4.0 weeks
= 1.8 weeks
= 2.0 weeks
= 7.8 weeks
= 44.2 weeks

Calculation of on costs must be based on the number of income producing weeks, rather
than 52 weeks per year.
The following calculations are provided as an example of determining the on cost
percentage required for a hypothetical employee.
1.

Workers Compensation Insurance


This is usually based on a percentage of the wages paid to an employee. It varies
in levy, depending on the competitive rates at which the insurance companies are
prepared to operate.
Assuming that suitable cover is obtained for 8% of wages paid.
Therefore the on cost component for workers compensation insurance will be 8%,
to be gained over the 44.2 productive weeks.
Workers compensation on cost = 8% x 52 weeks to be paid
44.2 productive weeks
= 9.41% of wages paid

Copyright Ken Postill

Page 64 of 199

2. Long Service Leave


This hypothetical example allows for eight weeks long service week after ten
years of service.
For each year worked, allow 0.8 weeks pay, spread over the number of productive
working weeks in the year.
Converting this to a percentage, = 0.8 x 100 = 1.8%
44.2 wks
Long Service on cost = 1.8%
(Footnote: In NSW the long service costs for employees engaged in the construction industry are
paid by a levy on developers, via the Building Industry Long Service Corporation, and not by the
individual contracting industry employers. So, in NSW it is not an on cost component).

3.

Annual Leave
This comprises four out of every fifty two weeks.
Converting this to a percentage form for use as an on cost component
=
4
x 52 x 100 = 9%
52 wks
44.2
Annual Leave on cost = 9%

4.

Annual Leave Loading


For this hypothetical employment agreement, employees are granted a 17.5%
loading on all annual leave
Converting this to a percentage form for on cost purposes, we can use the 9%
already allowed for annual leave, and simply calculate an additional margin for
the leave loading.
Additional on cost for leave loading = 17.5% of the 9% on cost
= 17.5% x 9% = 1.58%
Annual Leave Loading on cost = 1.58%

Copyright Ken Postill

Page 65 of 199

5.

Public Holidays
For this hypothetical employment agreement there are nine paid public holidays,
and a paid union picnic day, each year. This is yet another cost that must be
carried by the 44.2 working weeks.
Converting this to an on cost percentage, and using the five day working week, 10
paid holidays = 2.0 weeks, which represents an on cost percentage of
2
x 52
x 100 = 4.52%
52
44.2
Public Holiday on cost = 4.52%

6.

Sick Leave
For this hypothetical employment agreement employees have eight days paid sick
leave and two family/community days each year. Using the same methods as for
public holidays (as above), an on cost component can be derived.
10 days = 2.0 weeks =

2.0
x 52 x 100 = 4.52%
52 wks
44.2

7 Superannuation
This cost is currently set at 9% of wages paid. therefore the on cost component is
9% x 52
44.2

= 10.6%

TOTAL OF ON COST MARGINS


Adding the various on cost percentage margins will give a total on cost margin
Workers Comp
Long Service
Annual Leave
Leave Loading
Public Holidays
Sick Leave
Superannuation
TOTAL

=
=
=
=
=
=
=

9.41%
1.8%
9.0%
1.58%
4.52%
4.52%
10.6%
41.43%

Copyright Ken Postill

Page 66 of 199
For this hypothetical employment agreement the true cost of employing a tradesperson
will be the wages component of $43.06 per hour, plus an on cost margin of 41.43%.
= $43.06 plus 41.43% = $60.90 per hour
Or the cost of employing a foreman, who is entitled to an additional $100.00 per week,
will be :
($43.06 + $100 ) + 41.43% = $64.62 per hour
38 hours
The simplicity of using a fixed on cost margin (expressed as a percentage of wages paid)
to determine the direct cost of labour, allows for quick calculations of various labour rates
and costs.
Changes to wage rates caused through bargaining adjustments will not require a
recalculation of the on cost component unless there is a variation in the working
conditions, meaning that frequent on cost recalculations are unnecessary.
Note
NECA provides guidance to the on costs applicable to a range of employment conditions
as a service to its membership.

Copyright Ken Postill

Page 67 of 199

EXERCISES
Below are some exercises in calculating the direct cost of labour for operations trading
under differing employment conditions :
EXERCISE ONE
Calculate the direct hourly cost of employing an electrical serviceman, using the
following award conditions :
38 hour working week
4 weeks annual leave, with 17.5% leave loading
21 days full pay sick leave
10 weeks long service after ten years service
9% non contributory superannuation
9 paid public holidays per annum
1 paid industry union picnic day
Workers compensation insurance at a rate of 8% of wages paid
Wage rates :
Base award rate
Tool allowance
Special (skill) allowance
Electronics certificate allowance
Servicemans allowance

$ 35.20 per hour


$30.00 per week
$48.00 per week
$30.00 per week
$46.00 per week

Copyright Ken Postill

Page 68 of 199
EXERCISE TWO
Calculate the direct cost of employing an apprentice under the following award
conditions :
38 hour working week
4 weeks annual leave
17.5% annual leave loading
8 days full pay sick leave
9% non contributory superannuation
9 paid public holidays per annum
36 paid days per year at college
Workers compensation at the rate of 10% of wages paid
Wage rates :
Base award rate
Tool allowance
Construction allowance
Travelling allowance

$15.00 per hour


$30.00 per week
$51.00 per week
80 minutes per day

EXERCISE THREE
Calculate the direct cost of employing a leading hand under the following employment
conditions :
36 hour working week
4 weeks annual leave
17.5% annual leave loading
21 days full pay sick leave per annum
9 paid public holidays per annum
1 paid union picnic day per year
8 weeks long service after ten years service
Workers compensation insurance at the rate of 9% of wages paid
9% non contributory superannuation
Wage rates :
Base award rate
Leading hand allowance
Tool allowance
Special allowance
Construction allowance

$30.20 per hour


$56.00 per week
$30.00 per week
$66.00 per week
$55.00 per week

Copyright Ken Postill

Page 69 of 199
EXERCISE FOUR
Using the data supplied in exercise three (above), determine the new direct labour cost
for the leading hand following a national award wage adjustment that grants a flat 5%
increase to the hourly base award wage rate. Note that this would not apply to the
various allowances, which, in this case, are adjusted in a separate award adjustment.

P.S.

If the answer you got in calculating a direct cost for apprentice labour alarmed
you, remember that the Federal Government generally supplies a training subsidy
to employers that engage apprentices as part of their workforce. In addition to
this, apprentices can be profitably utilised to carry out work that would otherwise
be done by a tradesman on higher wages.

Copyright Ken Postill

Page 70 of 199
ANSWERS TO EXERCISES
Exercise 1
Productive weeks = 41.8
workers comp insurance = 8% x 52 = 9.95%
41.8
superannuation = 9% x 52
= 11.2%
41.8
annual leave = 4 weeks x 52
= 9.6%
52
41.8
leave loading = 17.5% of 9.65%
= 1.68%
Public holidays + union picnic = 2 weeks x 52
52
41.8
sick leave = 4.2 weeks x 52 = 10%
52
41.8
Total on cost percentage = 47.23%

= 4.8%

Hourly wages rate = ($35.20 x 38 hrs) + 30 + 48 + 30 + 46


38 hours

= $39.25 per hour

Direct cost for labour = $39.25 + 47.23% = $57.79 per hour

Exercise 2
Wage rate = $17.66 per hour On cost percentage = 64.2%
therefore direct cost for labour = $30.00 per hour

Exercise 3
Wage rate = $35.95 per hour On cost percentage = 52.87%
therefore direct cost for labour = $54.96 per hour

Exercise 4
Wage rate = $37.46 per hour On cost percentage = 52.87%
therefore direct cost for labour = $57.27 per hour

Copyright Ken Postill

Page 71 of 199

NOTES

Copyright Ken Postill

Page 72 of 199

NOTES

Copyright Ken Postill

Page 73 of 199

SECTION 4

PROCESSES FOR DEVELOPING A


MARGIN TO COVER OVERHEADS
The following pages provide information on the processes involved in developing a price
to be offered to the client.
This price must include provision for all direct costs (labour and materials), an amount to
cover overheads for the duration of the job, and an amount for nett profit.
The method for overheads allowance is development of an amount allocated for each
working hour of a job, ensuring that each job carries its share of the overhead burden.
The overhead margin, once developed, can be simply applied to each estimated job based
on the hours in that job.
Service work rates are developed in a similar manner to estimated work.

Copyright Ken Postill

Page 74 of 199

FORMULATING A BID PRICE


BID PRICE - The sale value of the offer to the client.
This sum must include (a) the total direct costs for materials and labour
(b) the gross profit margin, comprised of hourly overhead costs and nett profit

DIRECT COSTS
Material - the expected cost to supply the materials for the project
Labour - the cost of labour - being hourly costs based on wages plus on costs
On costs include those costs, other than wages, that can be directly attributed to the
hourly cost of labour. This includes, but is not limited to, sick leave, paid public holidays,
annual leave, annual leave loading, workers compensation insurance, redundancy funds,
long service, and any other paid non productive events that are directly attributable to
employed labour hours.
On costs are calculated as a percentage of the hourly labour rate. By determining a
percentage value, the on costs do not need to be recalculated in the event of a change to
the hourly wage rate.
Where a change to employment/working conditions occurs, the on cost percentage must
be re calculated.

HOURLY OVERHEAD COSTS


The hourly overhead cost for an operation is the annual overhead costs divided by the
annual productive working hours.
By calculating an hourly loading for the coverage of the overheads, the overhead cost
burden can be allocated to each project, based on the estimated labour hours in the
project.

GROSS PROFIT MARGIN


The gross profit margin is expressed as a percentage of the sale value (not as a mark up
on the costs). This allows easy comparison to the final result of the job, where actual
costs determine the resultant gross profit margin, when compared to the sale value. Actual
gross profit margins are compared to estimated gross profit margins and costs during the
job cost reconciliation process that should occur for each project.
Sale value - direct costs
Sale value

= gross profit percentage

NETT PROFIT
The nett profit is the final profit, after all direct costs and hourly overhead costs for the
project have been deducted from the sale value.

Copyright Ken Postill

Page 75 of 199
Determining a minimum sale value for a quotation
The value of a quotation must include all direct costs, and a gross profit margin.

labour hours

direct costs to
perform the work

labour cost
materials cost

gross profit
expressed as a
margin, added to
provide
allowances for
overheads and nett
profit

margin to cover
overheads, based on
the labour hours in
the job

margin for nett profit

consideration of
what margins the
market will allow

sale price or
amount

quote offered to
the client

trading conditions
and offer of
alternatives, etc

CONTRACT

Copyright Ken Postill

Page 76 of 199

OVERHEADS
The overheads are those operating costs of a business that cannot be directly attributed to
a specific job, but must be covered by all jobs, over the current financial year.
In order to ensure that the overheads are covered, a portion of the overheads must be
covered by each job. The simplest way to achieve this is to determine a set amount, in
dollars per productive working hour that is required to cover the total overheads.
Overheads include items such as:

phone/fax costs
wages for supervisory staff
wages for administrative staff
rent of premises
accountancy costs
advertising
insurance (public liability, fire, theft, etc.)

Note that workers compensation insurance is not an overhead. It is a component of the


on cost part of labour costs.
Research has demonstrated that poor management of overheads is a common
contributor to failure of small business in Australia.
In order to determine the amount of cost to allow for overheads, on an hourly basis,
determine :
(a) the total annual overhead costs
(b) The total number of productive hours
Hourly overhead burden =

Total Overhead Costs_


Annual Productive Hours

Example for a small contracting operation that has total overheads of $23,000, and
1150 productive hours per year, the overhead burden is :
$23,000 = $20 per productive hour
1150

Copyright Ken Postill

Page 77 of 199
EXERCISES
Exercise 1
Determine the hourly overhead cost for an electrical contracting business that has the
following characteristics One full time manager, with an annual salary of $ 80,000 plus 35% on cost = $

One part time clerical person, with an annual salary of $26,000 plus 35% on cost
= $
Two vehicles, each with annual operating and lease costs of $15,000.
Annual telephone costs of $ 4800
Annual insurance costs (public liability, fire, theft etc) of $4000
Annual rental costs of $20,000
All other costs $ 10000
Total overheads =

Labour resource - seven full time workers, each working 44.6 productive weeks per
annum, and 36 hours per week.
Total productive hours =
Hourly overhead cost = annual overhead costs
annual productive hours
=

= $

per hour

Copyright Ken Postill

Page 78 of 199
Exercise 2
Determine the hourly overhead cost for an electrical contracting business that has the
following characteristics One owner/operator, with 30% of an annual salary of $ 75000 plus 35% on cost being
connected with non productive work = $
One vehicle, with annual operating and lease costs of $15000
Annual telephone costs of $ 3000
Annual insurance costs (public liability, fire, theft etc) of $2000.
All other costs $ 5000
Labour resource - working 44.6 productive weeks per annum, and 26 hours per week.

Hourly overhead cost =

= $

per hour

Exercise 3
Determine the hourly overhead cost for the same contracting business as in Exercise 2,
but where the labour hours have been increased by the addition of a full time worker
One owner/operator, with 30% of an annual salary of $ . plus 35% on
cost being connected with non productive work = $
One vehicle, with annual operating and lease costs of $.
Annual telephone costs of $
Annual insurance costs (public liability, fire, theft etc) of $..
All other costs $
Labour resource - working 44.6 productive weeks per annum, and 26 hours per week for
the owner, and 36 hours per week for an employee.

Hourly overhead cost =

= $

Copyright Ken Postill

per hour

Page 79 of 199

MINIMUM HOURLY RETURN FOR A CONTRACTING BUSINESS


Every contracting business needs to establish a minimum hourly return to cover wages
and overhead costs.
Profit from material sales can be used successfully to off set overheads costs, allowing
the business to be competitive on the open market. Most successful contacting businesses
use profit from materials sales for this purpose.
However, minor domestic work, or most service work, does not provide the required
materials sales to allow this practice. Consequently income from labour must be priced to
support both wages and overhead costs.
MINIMUM HOURLY RATE FOR A SOLE TRADER
The following sample calculation shows the process required to determine a minimum
hourly rate for a sole trader operating in the local area, performing a combination of
service work and small installation jobs. The rate is developed to allow for low sales of
materials.
For this example, it is assumed that the contractor operates the business from home, and
has no unnecessary overhead commitments. It is assumed that the contractor is able to
achieve a productivity that allows 30 hours per week as chargeable work, with the
remaining 8 hours lost on non chargeable tasks such as traveling, preparing quotes,
bookwork, etc. This 8 hour non productive time becomes an overhead.
On costs are assumed to be 38%, which reflects a common value for many contracting
operations.
The contractor has chosen to aim for a wage of $35.00 per hour.
Labour cost per hour = $35.00 + 38% = $48.30 per hour
Overheads are as follows
Van = $15,000.00 per annum (includes all running, insurances and depreciation)
Telephones (mobile and land line) = $3,000.00 per annum
Insurances (public liability, fire, theft) = $2,000.00 per annum
Accountancy fees = $1,500.00 per annum
Advertising, petty cash, entertaining, etc = $100.00 per week or $5000.00 per annum
Tool replacement = $1,500.00 per annum
Non productive hours = 8 hours x 44.2 weeks = 353.6 @ $48.30 = $17,078.00
Total overheads = $28,000.00 + $17,078.00 = $45,078.00
Hourly overheads = total overheads =
productive hours

$45078
= $34.00 per hour
44.2 x 30hrs

Therefore the minimum hourly rate, to achieve a wage (without profit) is


$48.30 + $34.00 = $82.30 per hour
If this is not available in the market, the contractor should not continue to trade, or
should change the area of trading.

Copyright Ken Postill

Page 80 of 199
Exercise 4
For the sole contractor detailed on the previous page, determine the minimum charge out
rate that is required if the contractor employs an apprentice. The apprentice contributes
37.4 working weeks (allowing for attendance at TAFE), with 36 hours per week. For
simplicity, the charge out rate is based on the contractors wage rate of $35.00 per hour,
with 38% on costs. Would this adjusted minimum charge out rate make the contractor
more viable in the market, assuming that he can produce enough work to keep the
apprentice fully occupied?
Exercise 5
What effect on minimum charge rate would occur if the contractor provides a van for the
apprentice to use on a full time basis? (Allow $15000 for annual costs for the van)

Copyright Ken Postill

Page 81 of 199

NOTES

Copyright Ken Postill

Page 82 of 199

NOTES

Copyright Ken Postill

Page 83 of 199

NOTES

Copyright Ken Postill

Page 84 of 199

ANSWER TO EXERCISES
Exercise 1
OVERHEADS
Total Overheads = Manager $80,000 plus 35% =
$108,000
Clerical person $26000 plus
35% = $35,100
Two vehicles = $30,000
Telephones = $4,800
Insurance = $4,000
Rent = $20,000
All other costs = $10,000
TOTAL OVERHEADS = $211,500

ANNUAL PRODUCTIVE HOURS


Seven workers @ 44.6 weeks, 36 hours per week
= 7 x 44.6 x 36 hours = 11239 productive hours

TOTAL PRODUCTIVE HOURS = 11239

Hourly overhead costs = $211,500


= $18.82 per hour
11239 hours
Exercise 2 $47.75 per hour
Exercise 3 $20.03 per hour
Exercise 4 $65.16 per hour
Exercise 5 $70.78 per hour

Copyright Ken Postill

Page 85 of 199

SECTION 5

PROCESSES FOR DEVELOPING A


BID PRICE TO BE OFFERED TO THE
CLIENT
Developing the final price to be offered to the client includes allowing for all direct costs,
overheads and profit margins.
Sale value = direct costs plus gross profit margin
Gross profit = overheads plus nett profit
Nett profit is the profit remaining after all costs are covered.
SALE = DIRECT COSTS + OVERHEADS + NETT PROFIT
GROSS PROFIT MARGIN
The gross profit margin is expressed as a percentage of the sale value (not as a mark up
on the costs). This allows easy comparison to the final result of the job, where actual
costs determine the resultant gross profit margin, when compared to the sale value. Actual
gross profit margins are compared to estimated gross profit margins and costs during the
job cost reconciliation process that should occur for each project.
Sale value - direct costs
Sale value

= gross profit percentage

NETT PROFIT
The nett profit is the final profit, after all direct costs and hourly overhead costs for the
project have been deducted from the sale value.

Copyright Ken Postill

Page 86 of 199
GROSS PROFIT EXPRESSED AS A MARGIN FOR THE PURPOSES OF
RECONCILLIATION OF ESTIMATED VALUES TO ACTUAL OUTCOME
VALUES
Definitions :
Margin an amount expressed as a percentage of the sale value
Mark up an amount expressed as a percentage of the cost
Margin

= profit (in dollars)


sale value

Mark up = profit (in dollars)


value of costs

To add a margin to a cost the method is


Sale value =

direct costs
100 margin%

Gross profit a profit margin that must include funds to cover overheads, plus nett profit
Nett profit the profit realised after all costs, being direct costs and overheads, have
been covered
For the purposes of project management it is best to determine the anticipated profit as a
margin to allow easy reconciliation of estimated profit to actual profit at the end of the
project.
Reconciliation is the comparison of estimated profit to the actual profit produced at the
end of the project. This project is vital in order to provide feedback to the estimator on
the accuracy of estimates. It also allows easy reference to the sales budget requirements
for the time frames covered during the progress of the job.
.
Further study in both business and project management is recommended if you wish to
pursue a career in contracting management or self employment.
The process to allow reconciliation of an estimated margin to an actual outcome margin
is shown in the following flow chart.

Copyright Ken Postill

Page 87 of 199
FLOW CHART SHOWING THE PROCESS THAT LEADS TO RECONCILLIATION
BETWEEN ESTIMATED COSTS AND ACTUAL COSTS FOR A PROJECT.

ESTIMATED
MATERIAL
COSTS

ESTIMATED LABOUR HOURS

ESTIMATED LABOUR COSTS

ESTIMATED
DIRECT COSTS

ADD DESIRED PROFIT


MARGIN

MARKET
INFLUENCES ARE
CONSIDERED

SALE VALUE

CONTRACT

PROGRESS
OF THE
WORK IS
COSTED

MATERIALS COSTS
ARE RECORDED

LABOUR HOURS
AND COSTS ARE
RECORDED

ACTUAL COSTS ARE


DETERMINED

RECONCILLIATION PROCESS,
COMPARING ACTUAL COSTS TO
ESTIMATED COSTS

Copyright Ken Postill

FEEDBACK
TO
ESTIMATOR
ON THE
ACCURACY
OF LABOUR
AND
MATERIALS
ESTIMATES

Page 88 of 199

Margin versus mark up


Mark up, where a percentage profit is expressed against the costs is unsuitable for the
reconciliation process.
Margin an amount expressed as a percentage of the sale value
Mark up an amount expressed as a percentage of the cost
Example 1
If a job is won with costs of $1000 and a mark up of 20%, the sale value is :
$1000 + 20% = $1200
The gross profit is therefore $200.
If the costs came in exactly as estimated, the gross profit will be $200, for the sale value
of $1200.
Comparing the gross profit to the sale :
_200 x 100 = 16.6% margin, making it difficult to reconcile the outcome to the
1200
estimated 20% mark up
Where the profit is added as a margin, for the same 20% gross profit, the direct costs will
be 80% of the sale. (Sale = Direct Cost + Gross Profit)
Therefore, 1% of the sale will be = direct cost
80

sale = Direct Cost x 100


80
= 1000 x 100 = $1250
80
The gross profit is 1250 100 = 250
The gross profit % = 250 x 100 = 20% of sale which is easily reconciled
1250
to the estimated gross profit margin.

Copyright Ken Postill

Page 89 of 199
Example 2
A project is estimated with direct costs of $20,000.
If a mark up of 15% is used, the sale value will be $23,000 ($20,000 + 15% = $23,000).
If the cost come in as estimated the gross profit will be $23,000 - $20,000 = $3000.
Comparing the actual gross profit to the estimated 15%
Actual gross profit % = 3000 x 100 = 13% which is difficult to compare to the
23000
estimated 15% mark up
Calculating gross profit as a percentage margin :
GP% = 15% costs = 85%
Sale = Direct Cost x 100
85
= $23530
if costs come in at $20,000, profit = $3530
Gross profit % = 3530 = 15% = estimated margin
23530
Therefore, when determining gross profit, with direct costs as the basis, calculating the
gross profit as a margin (rather than a mark up) is preferable for the purposes of
reconciliation.
Examples of adding a margin to direct costs
labour estimated values
direct cost direct cost of
of labour
materials
100 hours @ $30.00 plus
$4140
$3400
38% on costs
36 hours @ $32.00 plus
$1625
$8560
41% on costs
180 hours @ $32.00 plus
$7948
$450
38% on costs
32 hours @ $34.00 plus
$1523
$15,500
40% on costs

desired gross
profit margin
20%

sale value

15%

$11982

35%

$12920

10%

$18915

$9425

At a later point in this book, you will find that material intensive jobs can be
profitable at lower margins than labour intensive jobs (see page
)

Copyright Ken Postill

Page 90 of 199
The Reconciliation Process
Where the gross profit outcome of a project is not the same as the estimated value, the
estimator should compare the estimated materials and labour values to the actual values,
using the take off sheet and costs records.

ESTIMATED
LABOUR
HOURS
AND
COSTS
RECORDED
ON THE
TAKE OFF
SHEET IN
A SEQUENCE
TO MATCH
THE
EXPECTED
PROGRESS
OF THE
WORKS

ACTUAL
LABOUR
HOURS
AND
LABOUR
COSTS
RECORDED
AS THE
WORK
PROGRESS

ACTUAL
MATERIAL
COSTS
RECORDED
AS THE
WORK
PROGRESS

ESTIMATED
COSTS
FOR
MATERIALS
RECORDED
ON THE
TAKE OFF
SHEET IN
A SEQUENCE
TO MATCH
THE
EXPECTED
PROGRESS
OF THE
WORKS

The reconciliation process allows the estimator to identify the areas of inaccuracy in the
estimating process.
Questions
1.

Where the final materials costs exceed the estimated values, what are the likely
causes?

2.

Where the labour hours and costs exceed the estimated values, what are the likely
causes?

3.

Where the labour hours come in close to the estimated value, but the labour cost is
less than the estimated value, what are the likely causes?

Copyright Ken Postill

Page 91 of 199
Consider the following reconciliations of estimated costs against actual outcomes.
Exercise 1
ESTIMATED COSTS
Material Costs
Labour Costs
All materials =
72 hours @ $30.00 plus
$1800.00
38% on costs
= $2981

ACTUAL OUTCOME
Material Costs
Labour Costs
$2150.00
32 hours @ 14.00 plus
58% (apprentice)
40 hours @ $30.00 plus
38% (tradesperson)
Total costs = $4781
Total costs =
Sale value with a margin of 25% added to estimated direct costs = $6375.00
Estimated gross profit =
Actual gross profit =
In order to determine why the variation occurred between the estimated and actual costs for this project,
what questions would you direct to the person that did the work?
Exercise 2
ESTIMATED COSTS
ACTUAL OUTCOME
Material Costs
Labour Costs
Material Costs
Labour Costs
All materials =
72 hours @ $30.00 plus
$3150
80 hours @ $30.00 plus
$3200.00
38% on costs
38%
= $2981
Total costs = $
Total costs =
Sale value with a margin of 20% added to estimated direct costs = $
Estimated gross profit =
Actual gross profit =
In order to determine why the variation occurred between the estimated and actual costs for this project,
what questions would you direct to the person that did the work?
Exercise 3
Where an estimator has a history of accuracy against actual outcomes across a wide range of jobs, with
different workers, it is reasonable to suspect unacceptable site outcomes as the reason for imbalances in the
reconciliation process.
If a specific worker consistently exceeds the estimated hours on work that is done, what is the first
line of assumption?
If the above worker is praised by the clients for neatness and punctuality, and requested for further
work, what assumptions can be made?
Where a worker is honest, punctual and reliable, preferred by the clients, but too slow to meet the
estimated hour target to allow competition in the market, what would you do?
If a specific worker consistently exceeds the estimated materials on work that is done, what is the
first line of assumption?
If a worker performed extra work for a client, as variation to the contract work, but forgot to pass
this information on to the contractor, what effect would this have on the reconciliation process?
Exercise 3
Where the labour component on estimates is consistently lower than the actual outcomes, across a range of
jobs, what is the first line of assumption?
Exercise 4
Where the material component on estimates varies regularly when reconciled to the actual outcomes, across
a range of jobs, what is the first line of assumption?

Copyright Ken Postill

Page 92 of 199
Answers
Exercise 1
ESTIMATED COSTS
Material Costs
Labour Costs
All materials =
72 hours @ $30.00 plus
$1800.00
38% on costs
= $2981

ACTUAL OUTCOME
Material Costs
Labour Costs
$2150.00
32 hours @ 14.00 plus
58% (apprentice)
40 hours @ $30.00 plus
38% (tradesperson)
Total costs = $4781
Total costs = $ 2363.84
Sale value with a margin of 25% added to estimated direct costs = $6375.00
Estimated gross profit = $1594 (25%)
Actual gross profit = 1861.16 (29%)
In order to determine why the variation occurred between the estimated and actual costs for this project,
what questions would you direct to the person that did the work?
Exercise 2
ESTIMATED COSTS
ACTUAL OUTCOME
Material Costs
Labour Costs
Material Costs
Labour Costs
All materials =
72 hours @ $30.00 plus
$3150
80 hours @ $30.00 plus
$3200.00
38% on costs
38%
= $2981
Total costs = $ 6198
Total costs = $6462
Sale value with a margin of 20% added to estimated direct costs = $ 7748
Estimated gross profit = $1550 (20%)
Actual gross profit = $1286 (16.6%)
In order to determine why the variation occurred between the estimated and actual costs for this project,
what questions would you direct to the person that did the work?
Exercise 3
Where an estimator has a history of accuracy against actual outcomes across a wide range of jobs, with
different workers, it is reasonable to suspect unacceptable site outcomes as the reason for imbalances in the
reconciliation process.
If a specific worker consistently exceeds the estimated hours on work that is done, what is the first
line of assumption? (Poor attendance, slow worker, mistakes, ... or poor estimating)
If the above worker is praised by the clients for neatness and punctuality, and requested for further
work, what assumptions can be made? (works too slow, makes mistakes, .... or poor estimating)
Where a worker is honest, punctual and reliable, preferred by the clients, but too slow to meet the
estimated hour target to allow competition in the market, what would you do? (allocate the worker
to do and charge work, service work, etc)
If a specific worker consistently exceeds the estimated materials on work that is done, what is the
first line of assumption? (misappropriating equipment, or careless with stock)
If a worker performed extra work for a client, as variation to the contract work, but forgot to pass
this information on to the contractor, what effect would this have on the reconciliation process?
(excess costs would show up in the reconcilliation process indicating a bad outcome or unpaid
work)
Exercise 3
Where the labour component on estimates is consistently lower than the actual outcomes, across a range of
jobs, what is the first line of assumption? (the estimator does not have a good understanding of the group
work productivity, or the group work productivity must be improved, or both)
Exercise 4

Copyright Ken Postill

Page 93 of 199
Where the material component on estimates varies regularly when reconciled to the actual outcomes, across
a range of jobs, what is the first line of assumption? (poor estimating)

Copyright Ken Postill

Page 94 of 199

Copyright Ken Postill

Page 95 of 199
EXERCISES - CONVERTING AN ESTIMATE TO A BID PRICE
The following exercises are designed to demonstrate the importance of developing a
quote price for each project, on an individual basis. Each of the following scenarios uses
the same overhead burden, and the same gross profit margin, but produces a range of nett
profit results. For the same contracting operation, operating at the same gross profit
margin, the nett profit varies with each job, depending on the value of materials and
labour.
Exercise 1
Determine the minimum price (break even) for a commercial fit out project that has been
estimated with the following characteristics Material costs = $5,400.00
Labour cost = 150 hours with an hourly cost of $23.30 + 37% on cost
Hourly overhead cost = $9.90 per hour

Where the general market rate for this work is a gross profit percentage of 20%, what nett
profit would occur if the project is won at market rates?

For this exercise, the ratio of material to labour cost is

Copyright Ken Postill

Page 96 of 199
Exercise 2
Determine the minimum price (break even) for a commercial fit out project that has been
estimated with the following characteristics Material costs = $2100.00
Labour cost = 250 hours with an hourly cost of $23.30 + 37% on cost
Hourly overhead cost = $9.90 per hour

Where the general market rate for this work is a gross profit percentage of 20%, what nett
profit would occur if the project is won at market rates?

For this exercise, the ratio of material to labour cost is

Copyright Ken Postill

Page 97 of 199
Exercise 3
Determine the minimum price (break even) for a hazardous location (flameproof)
project that has been estimated with the following characteristics Material costs = $6600.00
Labour cost = 24 hours with an hourly cost of $23.30 + 37% on cost
Hourly overhead cost = $9.90 per hour

Where the general market rate for this work is a gross profit percentage of 20%, what nett
profit would occur if the project is won at market rates?

For this exercise, the ratio of material to labour cost is

Copyright Ken Postill

Page 98 of 199
Exercise 4
Determine the minimum price (break even) for a routine maintenance project that has
been estimated with the following characteristics Material costs = $250.00
Labour cost = 250 hours with an hourly cost of $23.30 + 37% on cost
Hourly overhead cost = $9.90 per hour

Where the general market rate for this work is a gross profit percentage of 20%, what nett
profit would occur if the project is won at market rates?

For this exercise, the ratio of material to labour cost is

Copyright Ken Postill

Page 99 of 199
Enter the outcomes for exercises 1,2,3 and 4 in the table below, to provide an overview of
the effect of material/labour ratios on nett profit, where projects are priced at a constant
margin.

Exercise
No.

Hourly
overhead
burden

Assumed
market
rate

1
2
3
4

$9.90
$9.90
$9.90
$9.90

20%
20%
20%
20%

Material
to labour
ratio

Nett profit

Labour hours
required
Use of fixed
resource

The results of this table show the impact on profit of the ratio of material to labour, where
a contracting operation submits bids using the same gross profit margin,
(20% in this example) for all projects.
CONCLUSION each project must be evaluated on its ability to cover the hourly
overhead, and an acceptable margin determined to provide a nett profit.
Where the market rate enforces an unrealistically low margin, it is important to maintain
an acceptable margin, and avoid losing money.
ie. Pass the job to someone else!

Sitting on the beach is much better than operating a business at a loss!!!

Copyright Ken Postill

Page 100 of 199


Exercise 5
Determine the minimum gross profit margin that must be applied to labour only work for
a contracting operation with the following operating characteristics.
Cost of labour = $33.00 per hour plus 40% on costs
Hourly burden for overheads = $27.00 per hour
Exercise 6
Determine the minimum gross profit margin that must be applied to a job with the
following estimated values, where a contracting operation has an hourly overhead burden
of $17.00
Estimated labour = 40 hours @ $32.00 per hour, plus 38% on costs
Materials
= $4,500.00
Exercise 7
Determine the minimum gross profit margin that must be applied to a job with the
following estimated values, where a contracting operation has an hourly overhead burden
of $17.00
Estimated labour = 120 hours @ $32.00 per hour, plus 38% on costs
Materials
= $5,500.00
Exercise 8
Determine the minimum gross profit margin that must be applied to a job with the
following estimated values, where a contracting operation has an hourly overhead burden
of $27.00
Estimated labour = 100 hours @ $32.00 per hour, plus 38% on costs
Materials
= $3,500.00

Copyright Ken Postill

Page 101 of 199


ANSWERS TO EXERCISES - CONVERTING AN ESTIMATE TO A BID
PRICE
Exercise 1
Determine the minimum price (break even) for a commercial fit out project that has been estimated with the
following characteristics Material costs = $5,400.00
Labour cost = 150 hours with an hourly cost of $23.30 + 37% on cost
Hourly overhead cost = $9.90 per hour
Labour cost = 150 x 23.30 x 1.37 =
Material cost =
=
Overhead cost = 150 x 9.90
=
Total
=

$ 4789
$ 5400
$ 1485
$ 11674.00

Where the general market rate for this work is a gross profit percentage of 20%, what nett profit would
occur if the project is won at market rates?
Direct cost
80

x 100

= 4789 + 5400 x 100 = $ 12736


80

Nett profit = 12736 - 11674 = $ 1062.00


For this exercise, the ratio of material to labour cost is
5400 : 4789 = 1.13 : 1
Exercise 2
Determine the minimum price (break even) for a commercial fit out project that has been estimated with the
following characteristics Material costs = $2100.00
Labour cost = 250 hours with an hourly cost of $23.30 + 37% on cost
Hourly overhead cost = $9.90 per hour
Labour cost = 250 x 23.3 x 1.37 =
Material cost
=
Overhead cost = 250 x 9.90
=
Total
=

$ 7981
$ 2100
$ 2475
$ 12556

Where the general market rate for this work is a gross profit percentage of 20%, what nett profit would
occur if the project is won at market rates?
Direct cost x 100 = 7981 + 2100
80

= $12602

Nett profit = 12602 - 12556 = $ 46.00


For this exercise, the ratio of material to labour cost is
2100 : 7981 = 1 : 3.8

Copyright Ken Postill

Page 102 of 199


Exercise 3
Determine the minimum price (break even) for a hazardous location (flameproof)project that has been
estimated with the following characteristics Material costs = $6600.00
Labour cost = 24 hours with an hourly cost of $23.30 + 37% on cost
Hourly overhead cost = $9.90 per hour
Labour cost = 24 x 23.30 x 1.37 = $767.00
Material cost
= $ 6600.00
Overhead cost = 24 x 9.90
= $ 238.00
Total
= $ $7605.00
Where the general market rate for this work is a gross profit percentage of 20%, what nett profit would
occur if the project is won at market rates?
Direct cost
80

x 100 = 767 + 6600

= $9208.00

Nett profit = 9208 - 7605 = $1603


For this exercise, the ratio of material to labour cost is
6600 : 767 = 8.6 : 1
Exercise 4
Determine the minimum price (break even) for a routine maintainence project that has been estimated with
the following characteristics Material costs = $250.00
Labour cost = 250 hours with an hourly cost of $23.30 + 37% on cost
Hourly overhead cost = $9.90 per hour
Labour cost = 250 x 23.30 x 1.37 = $7981
Material cost =
$250
Overhead cost = 250 x 9.90
= $2475
Total
= $10706
Where the general market rate for this work is a gross profit percentage of 20%, what nett profit would
occur if the project is won at market rates?
Direct cost
80

x 100 =

$10289

Nett profit at 20% margin = 10289 - 10706 = nett loss of $417.00


For this exercise, the ratio of material to labour cost is
250 : 7981 = 1 : 32
Exercise
No.
1
2
3
4

Hourly
overhead
burden
$9.90
$9.90
$9.90
$9.90

Assumed
market rate

Material to
labour ratio

Nett profit

Labour hours
required

20%
20%
20%
20%

1.13:1
1:3.8
8.6:1
1:32

$1062
$46
$1603
- $417 LOSS

150
250
24
250

Copyright Ken Postill

Page 103 of 199


Exercise 5
Hourly cost of labour = $33.00 plus 40% on costs = $46.20
Sale value must include overhead loading = $27.00 per hour.
therefore minimum hourly sale value = $46.20 + $27.00 = $73.20
Minimum margin = $27.00
= 37%
$73.20
Therefore, any margin above 37% will produce a nett profit. However, as this project ties up labour and
does not provide a profit from materials, the margin would need to be substantially above the minimum in
order to make it attractive.
Exercise 6
Direct costs Labour = 40 hours @ $32.00 plus 38% = $1767.00
Materials = $4500.00
total estimated direct costs = $6267.00
overhead allowance = 40 hours @ $17.00 = $680.00
Minimum sale value = $6947.00
Minimum gross profit margin =
$680
= 9.8%
$6947
Therefore, any margin above 9.8% will produce a nett profit

Exercise 7
Direct costs Labour = 120 hours @ $32.00 plus 38% = $5299.00
Materials = $5500.00
total estimated direct costs = $10,799.00
overhead allowance = 120 hours @ $17.00 = $2040.00
Minimum sale value = $12,839.00
Minimum gross profit margin =
$2040
= 15.89%
$12,839
Therefore, any margin above 15.89% will produce a nett profit

Exercise 8
Direct costs Labour = 100 hours @ $32.00 plus 38% = $4416.00
Materials = $3500.00
total estimated direct costs = $7,916.00
overhead allowance = 100 hours @ $27.00 = $2700.00
Minimum sale value = $10,616.00
Minimum gross profit margin =
$2700
= 25.5%
$10,616
Therefore, any margin above 26% will produce a nett profit

Copyright Ken Postill

Page 104 of 199

NOTES

Copyright Ken Postill

Page 105 of 199

NOTES

Copyright Ken Postill

Page 106 of 199

NOTES

Copyright Ken Postill

Page 107 of 199

NOTES

Copyright Ken Postill

Page 108 of 199

SECTION 6

PREPARING A QUOTE TO BE
OFFERED TO THE CLIENT
The quotation to be offered to the client includes the bid price and all the trading
conditions that apply to the contractors offer.
The following pages provide guidance in the formulation of a quotation to be offered to a
client.
The items detailed in these pages do not, and cannot cover the infinite number of
variables that occur in day to day contracting. Therefore, it is essential that you develop
your own, or use professionally developed quotation forms, such as those available
through NECA.
For major jobs purpose designed contacts, such as AS 2545 Subcontract Conditions
should be used.
Part 2 of this book addresses the use of contacts during the formation of the agreement
and the ensuing progress of the work.
By definition, a contact is based on the acceptance of an offer, which means that a poorly
constructed offer leads to a weak contract, leaving the contractor vulnerable to non
payment.

OFFER + ACCEPTANCE = CONTRACT


While the majority of clients are reputable, and seek a good job for a just payment, there
remains a significant number of clients that will avoid payment of claims if the option is
available.
In many cases, large clients such as major building companies take the view that non
payment, or prolongation of payment, is simply good business practice. The company can
make good use of the trading capital that holding sub contractors funds can provide.
As the contracting industry operates on small profit margins, the impact of non payment
by any customer has a significant effect, leading to a considerable amount of further
trading to recover to the financial position that existed before the job was commenced.

Copyright Ken Postill

Page 109 of 199


The quote or offer to the client
The following pages contain an example of quotations that may be provided to a client.
The quote should include at least the following items :

the price in words and numbers


the clients name, company, title etc.
the date of the offer
a description of the works
details of drawings, plans etc., including plan and revision numbers from which
the quotation has been derived
items specific to the work, especially variations to the plans and specification
reference to the standard conditions of tender, ensuring that they become an
integral part of the contract
name of the contracting operation, with address, phone, fax etc.
provision for a signature by the contractor

For smaller projects, where the quotation may be used as the contract, provision must
also be made for :

the clients name and title


the client company name (if applicable)
the date of signing
signatures of all parties to the contract

Note that NECA has a pro forma quotation document, in triplicate pad format, available
to members at an economic rate. These are suitable for small to medium jobs, as well as
service work. Standard conditions of trading are detailed on the rear of each form.

Copyright Ken Postill

Page 110 of 199


USING A STANDARD FORM OF QUOTATION
A standard quotation form can be developed, for use with most quotations, thereby
reducing the work and time required to formulate the offer to the client.
Since the quotation (or offer) to the client is likely to become the basis of any contract
formed between the contractor and the client, the document must include all items
designed to provide a safe trading environment for the contractor.
Items that must be included in the offer include at least the following

the contractors name and details (address, license number, phone numbers etc)
the clients name and details
the date of the offer
a description of the work to be performed under the contract
the price, in both words and figures
reference to trading conditions such as those in a standard conditions statement
any variations between the offer and plans/specifications belonging to the job
a date fixing the duration of the works, where the offer is a fixed price
sales wording, designed to promote the offer to the client

A sample of a standard letter, to be used as a quotation is supplied on the following page.


This offer is provided as a quotation for the electrical work associated with the building
of a group of town houses, for which the client has provided a set of plans and
specification.
The contractor has established that the project is expected to commence in March, and be
completed by the end of October of the same year. A fixed price has been requested by
the client. As a consequence, the contractor has allowed to cover until the end of the
following month, but requires adjustment should the project take longer.
Reference is made to the standard conditions of tender, ensuring that they become a
component of any contract based on this quotation.
Details specific to the job are included, such as the use of different light fittings to those
specified.
Note that the contractor has not allowed to supply the ranges or water heaters,
transferring the responsibility to the client for the supply and delivery of these expensive
items. This reduces the on site risks for the contractor in a work area where the items may
be stolen or damaged during the work period.
Note that the contractor has used the requirement for RCD protection as a chance to
promote the offer to the client.

Copyright Ken Postill

Page 111 of 199

DESTRUCTION ELECTRICS PTY LTD


1 Bankruptcy Place, Richville 8266
Phone 89666 666
LICENCED ELECTRICAL CONTRACTORS
Lic No. EC 999
To :

Date : 2nd Feb 2010

Amazing Developments
3 Affluence Street
Lootville 8222

Attention :
Re :

The Manager
Town House Development, Crowd Street, Crampedville

Dear Sir,
Please find below our bid price for the electrical installation work to be carried out at the above project.
The bid covers that work detailed in the plans and specification supplied, with the following notations :
(a)
(b)
(c)
(d)

(e)

The bid is based on the information detailed on plans 1 and 2, no issue number.
We allow for Alto Cat No. XYZ exterior lights in lieu of the specified Acme Outsider fittings, which
appear to be unavailable at the time of tender.
We allow to use TPS cabling, as per AS/NZS3000 Wiring Rules and standard trade practice, in those
areas not requiring conduit for cable installation. Where used, conduit shall be PVC with PVC
cabling, as per specification.
We allow, at no extra cost, to use DIN style safety switches on all light and power circuits. This will
allow the residents simple resetting in the event of misuse or overloads, and also allows for a neater,
more compact switchboard in the individual units. We remind you that a suitable location will need
to be provided for the switchboards within the kitchen cupboards.
We include for the following items :
(i)
All light and general power installation
(ii) Connection to, but not supply of ranges and water units etc.
(iii) Approved telephone block cabling system
(iv) Balanced colour television aerial system
(v)
Overhead mains connection to the installation

Our bid price for this work is FOURTEEN THOUSAND NINE HUNDRED DOLLARS - $14,900.00.
This price may be considered as a fixed price up until 30/11/2010 after which we reserve the right to claim
variation to the price, based on rise and fall as per NICAP building industry indices.
We trust that you find the above to be to your satisfaction, and remain most willing to respond to any
further enquires you may have.
Yours faithfully,
I. Madill
Manager
(This tender is subject to our attached standard conditions of tender).

Copyright Ken Postill

Page 112 of 199


Standard conditions of tender
There is a wide range of variables or what if conditions that can have a serious impact
on the costs to perform contract works. These include, but are not limited to :

asbestos or other hazardous materials on site


possible changes to GST or other taxes
changes to wage rates/labour cost
changes to employment conditions/labour cost
non compliance of existing installation wiring, switchboards etc.
industrial action
changes to costs related to supply authority requirements

Considerations such as those above, and many others, apply to most contract jobs, and
can be addressed by developing a standard condition of tender that applies to all quotes
issued by the contracting operation. This greatly reduces the time and effort required in
developing quotations.
The importance of a well detailed contract cannot be over emphasised.
A fully detailed contract is the first line of defense against non payment by a client.
Unfortunately, there are a significant number of clients that will attempt to avoid payment
for work, often by fabricating a dispute as the reason for non payment. In other cases, the
client may have insufficient funds to pay all contractors on site, resulting in those with a
strong case being paid in preference to others.
Other customers (such as large building contractors) may simply try to keep the sub
contractors money for as long as possible, using it as trading capital or investment funds.
Consider this anecdotal story
Kenny, an electrical contractor, observed that his mate Smithy seemed to be in serious
financial trouble. Smithy was a great salesman, who had gone into business selling
cleaning chemicals to the contract cleaning industry. Unfortunately, Smithy had sold
large amounts of stock to cleaning contractors that could not or would not pay their
debts, leaving Smithy unable to pay his suppliers.
When Kenny said to Smithy I guess you mustnt sleep at night with all these problems
Smithy replied what problems? I owe them money and cant pay it they are the ones
with the problems!.
Smithy said Thats Murphys Golden Rule whoever has the gold, rules.
i.e. the person that owes the money is in charge of the situation.

Copyright Ken Postill

Page 113 of 199

Without a correctly detailed contract, the contractor is at the mercy of the client.
In NSW, the Office of Fair Trading has established a maximum value for work that can
be done without a written contract.
This amount is $ ___________
(available from the internet) at .........................................................................................
As a contract cannot contain an illegal act, where a contractor does work for a value
greater than that above, without a written contract, the customer is under no obligation to
pay for the work.
Consider this anecdotal story
Ray, an electrical contractor and air conditioning installer went to the home of a wealthy
client to install a window mounted air conditioner. He did the job without a written
contract. When he had completed the work the client congratulated him on the job, and
said While you are here, I will get you to do some more work, such as ....
This resulted in Ray returning each day for the next week to do more jobs in the premises.
Each day Ray provided an update of the costs.
When all the work was completed, Ray presented a carefully detailed invoice for the
work, which the client casually tore in half, handed back, and said Thanks for a good
job, pity that I wont pay you for it. You should have got me to sign a written contract.
Another consideration for most work is that materials, once delivered to site, become the
property of the client, regardless of payment. i.e. materials cannot be removed from site
in the event of non payment.
Obtaining progress payments as the work proceeds is an effective method of minimising
the impact of non payment. The contractor has effective bargaining power while the
work remains incomplete, but only the power of the contract once the work is complete.
Note that it is a breach of law to over claim (claim for work not yet performed).
However, contractors are permitted to ask for advance payment for some types of work,
but only for a small part of the contract value (see Office of Fair Trading site).
Further study of contracts and related issues it is recommended if you are considering a
career in electrical contracting.
The following page contains samples of clauses that may occur in specifications.
Following from that are samples of clauses that be used in the formulation of a Standard
Conditions of Tender

Copyright Ken Postill

Page 114 of 199

TYPICAL CLAUSES FROM SPECIFICATIONS, AND THE


POTENTIAL IMPACT ON PAYMENT.
Below are some typical clauses that appear in specifications associated with electrical
contracting work, and their potential impact.
Note that where the client makes a deduction from the contractors claim, the deduction(s) often occur from
the final claim, after the works have been completed, and the contractor has minimal bargaining power.

TYPICAL CLAUSE FROM A


SPECIFICATION OR CONTRACT
All work is to be carried out in a neat and
1

3
4

6
7

orderly manner, to the satisfaction of the


architect or his appointed representative. Any
work deemed to be of a sub standard nature
shall be repaired or replaced to the satisfaction
of the architect at no cost to the client
It shall be the contractors responsibility to
ensure the works comply with all relevant
standards and authority requirements. No
claim for additional costs through authority
requirements will be allowed.
All work shall be carried out by qualified
tradespersons, under the employ of the
contractor
The contractor shall maintain competent
tradespersons on site at all times during the
progress of the works
The bid submitted shall be a fixed price not
subject to variation without the written
authorisation of the architect or his
representative
The contractor shall be liable for the repair of
any damage to any surfaces for the duration of
the project
This contract shall include all items included
in the specification and plans, and all other
items deemed obvious, but not necessarily
detailed
The contractor shall provide for all site
storage and amenities required in the
performance of the works

The contractor shall co-ordinate with the


works of other trades, and will be liable for
costs incurred through delays to the works

10

All materials and installation practices shall be


in conformity with appropriate standards and
regulations, and this specification

IMPACT ON TRADING FOR THE


ELECTRICAL CONTRACTOR
If the customer intends to use a condition of
dispute to avoid or prolong payment, this contract
condition provides an opportunity. A mechanism
for appointing an independent arbitrator is
essential, to force resolution of the dispute, and
payment.
What if there is an increase or new fees for supply
authority work, such as mains connection,
inspection fees, etc.
What if there is an increase in GST or other taxes
and fees.
This excludes the use of apprentice or trades
assistant labour resources. It also excludes the use
of sub contractors
This means that tradespersons must be on site,
regardless of availability of useful work. The
contractor becomes liable for unexpected costs
incurred by the client that may have been avoided
if the contractor was on site
The contractor is unable to claim costs where the
project goes on for an unexpected length of time
The client is in a position to deduct money from
the contractors payment for any damage, without
proof of the source of the damage
The contractor is placed in a position of being
required to pay for items that have occurred
through omissions in the design, etc.
The client can deduct money for the use of toilets,
car parking, lunch rooms, and for the provision of
a first aid person or equipment, temporary power
supply, scaffolding, hoists etc.
The contractor will need to be in constant contact
with all other trades, relieving the client of the
responsibility to co-ordinate and run the job, and
become responsible for delays caused by other
trades or other circumstances
Where the specification calls for an item that is
not available or impractical, and the contractor
provides a similar item without written consent of
the client, the contract is incomplete, resulting in
a possibility of non payment.

Copyright Ken Postill

Page 115 of 199


TYPICAL CLAUSES FOR A STANDARD CONDITIONS OF TENDER

DESTRUCTION ELECTRICS PTY LTD


STANDARD CONDITIONS OF TENDER
Unless specifically stated otherwise, the following standard conditions of tender shall apply to this and all
other tenders issued by this firm.
This tender is open for acceptance for a period of 30 days from date of tender. After that period we reserve
the right to vary the bid in line with our current trading conditions.
This quotation is based on a 38 hour working week. We reserve the right to claim additional costs for
works performed outside normal industry trading hours.
Trading terms are strictly C.O.D or 7 day terms from date of invoice. We reserve the right to suspend
works or cancel further works without jeopardising the claims due should payment of claims become
overdue.
It shall be the responsibility of the client to provide a safe workplace for the employees of this firm. Where
hazards such as toxic materials or unsafe working environments exist, this firm shall be paid additional
costs, and reserves the right to suspend the works until such time as the hazards are removed.
Where this bid includes trenching, it shall be for excavation works in soft soil only. Works involving rock
or heavy rubble excavation shall constitute a variation to the bid price.
While every attempt to conform to the works schedule will be made, this firm does not accept
responsibility for delays caused through suppliers inabilities to provide required materials, or through the
action of parties outside the direct control of this firm.
This bid is subject to variation in conformity with the adjustments to material and labour costs specified
under NICAP building industry conditions. The base indices shall be those ruling at the time of tender.
This firm reserves the right to claim variation to the bid in the event of changes to statutory costs such as
sales tax, authority fees, etc.
Works will be performed under the supervision of suitably licensed tradespersons, to the standards of
normal trade practice, and to the satisfaction of the appropriate supply authority. We reserve the right to
use apprentice or other trained labour resources, as per normal trade practices. We allow to maintain staff
on site only at those times that suitably productive work is available.
The bid allows for the supply and use of all tools and equipment required under normal electrical trade
practices. It does not allow for the supply of site facilities such as toilets, meal rooms, electricity,
scaffolding, hoisting, parking and storage. It is reasonably assumed that such items will be supplied by
others.
In the event of dispute, this firm reserves the right to claim arbitration through a third party. Unless
otherwise agreed, the third party will be a person appointed by NECA. Where resolution of dispute results
in costs, those costs will be born by the client.

NOTE THAT THIS LIST IS AN INDICATION OF THE TYPE OF TENDER CONDITIONS THAT
MAY BE ADDRESSED USING A STANDARD CONDITIONS OF TENDER. IT IS NOT A
COMPLETE LIST AND SHOULD NOT BE USED IN TRADING.

Copyright Ken Postill

Page 116 of 199


NECA produces a range of pro forma contracts, at a nominal cost for members, with
standard conditions on the reverse side.
NECA also provides contract and legal advice to its members, including assistance with
debt recovery etc. Members are alerted to difficult clauses that appear in contracts within
the industry, and advised of procedures to work with various forms of contract.
An example of trading conditions is available on most delivery dockets from electrical
wholesalers (TLE, Turks, L & H etc.). As these are usually available to non managerial
staff, such as site personnel, it is recommended that you ask for access to the delivery
docket, and read the conditions on the reverse side.

Copyright Ken Postill

Page 117 of 199

NOTES

Copyright Ken Postill

Page 118 of 199

NOTES

Copyright Ken Postill

Page 119 of 199

NOTES

Copyright Ken Postill

Page 120 of 199

Copyright Ken Postill

Page 121 of 199

Copyright Ken Postill

Page 122 of 199

SECTION 7

ADDENDUM
ANCILLIARY INFORMATION FOR
STUDENT EXERCISES
This section provides some information to assist in the student work associated with the
learning for UEENEEC003 Prepare quotations for service or installation jobs
A limited number of labour units for a range of tasks is included, to allow practice with
unit rate method estimating.
These rates are for exercises only, and must not be used for actual applications in the
marketplace. These rates have not been evaluated against actual work.
Fully detailed rates for unit rate estimating are available from the NECA Manual of
Labour Units, available through most NECA offices.

Copyright Ken Postill

Page 123 of 199

LABOUR UNITS ADDENDUM


The labour units included below are intended as an addendum to the manual used in the
practical part of this course.
The labour units specified are not to be used in actual workplace applications without
rigorous assessment.
No responsibility is accepted for the accuracy of these units.
TASK
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

Unit

Fit 2x36 watt troffer fluorescent to T bar ceiling. Lights


ea
pre wired with flex and plug
Fit 2x36 watt troffer fluorescent with emergency pack to T ea
bar ceiling.
3 pin surface socket, loom wiring above suspended ceiling ea

Labour
hours
0.20
0.83
0.25

3 channel skirting duct body (back plate)


3 channel skirting duct - cover
3 channel skirting duct internal corner
3 channel skirting duct external corner
3 channel skirting duct socket outlet kit

m
m
ea
ea
ea

0.4
0.1
0.3
0.3
0.2

4 pr Cat 5 LAN cable


Terminate 4 pr Cat 5 cable
RJ 45 outlet single jack and plate

m
ea
ea

0.04
0.17
0.36

To access a range of researched labour units, refer to the NECA sponsored Manual
of Labour Units, available through NECA offices in Australia and New Zealand

Copyright Ken Postill

Page 124 of 199

STUDENT EXERCISES
Select the best of the provided answers for the following questions.
Question 1
The purpose of estimating is to
(a) determine the profit in a job
(b) forecast the direct cost of labour and materials for the work
(c) forecast the number of items of material in a job
(d) allow for overhead costs in a job
Question 2
Gross profit margins are best expressed as
(a) a percentage of the direct costs of a project
(b) the amount of profit, in dollar terms
(c) the profit after overhead costs have been deducted
(d) a percentage of the sale value
Question 3
Gross profit is
(a) the profit available after direct costs have been deducted from the sale value
(b) the profit available after all costs have been deducted from the sale value
(c) an exceptionally large profit
(d) the profit after overhead costs have been deducted
Question 4
The purpose of reconciliation for estimating purposes is to
(a) provide a quicker estimating method
(b) compare the labour and material components of a project
(c) determine a price to offer the client
(d) provide feedback to the estimator
Question 5
The most commonly used estimating method in small to medium sized contracting
operations is
(a) experience based
(b) unit rate
(c) historical
(d) methodic
Question 6
The method of labour estimating that uses a manual of time allocations to specific tasks is
(a) experience based
(b) unit rate
(c) historical
(d) manual

Copyright Ken Postill

Page 125 of 199

Question 7
The most commonly used estimating method in large contracting operations, employing
full time estimators on large projects is
(a) experience based
(b) unit rate
(c) historical
(d) methodic
Question 8
In general, for contracting work in NSW the maximum value of work that can be done
without a written contract is
(a) $1000.00
(b) $100.00
(c) $5000.00
(d) non of the above
Question 9
In general, for contracting in NSW, a written contract
(a) must be signed by both parties
(b) need be signed by the client only for domestic work
(c) is not required for domestic work
(d) is not required for commercial work
Question 10
A contract is based on
(a) any payment for services rendered
(b) acceptance of an offer
(c) any agreement between two parties
(d) any agreement between two or more parties
Question 11
Estimating of labour in a project is done in hours for the purpose of
(a) forecasting the labour cost of the project
(b) allowing adjustments for productivity influences
(c) facilitating a reconciliation process
(d) all of the above
Question 12
On costs for labour are calculated as a percentage of wages to
(a) allow simple use when estimating
(b) avoid recalculation in the event of a change in wage rates
(c) avoid recalculation in the event of a change in working conditions
(d) line up easily with profit, when expressed as a percentage

Copyright Ken Postill

Page 126 of 199

Question 13
The direct cost of materials is the
(a) actual price paid by the contractor for the materials
(b) trade list price for the materials
(c) retail list price for the materials
(d) value of materials as sold to the client
Question 14
Where more than one productivity factor applies to the estimated labour hours the
(a) factors are added numerically
(b) factors are subtracted from each other
(c) factors cancel each other
(d) factors are compounded by multiplying
Question 15
Productivity factors are applied to the estimated hours by
(a) multiplying the hours by the factor(s)
(b) dividing the hours by the factor(s)
(c) adding the hours to the factor(s)
(d) subtracting the factor(s) from the hours
Question 16
When estimating labour for a project, using experience based methods, labour is based on
the productivity of
(a) the slowest employee in the group
(b) an employee regarded as typical
(c) the fastest employee in the group
(d) an average for the group of employees
Question 17
A factor influencing labour estimating is
(a) the number of workers on a site
(b) multi storey construction
(c) temperature
(d) all of the above
Question 18
The type of project that requires the highest gross profit margins to be profitable is
(a) work with a high materials content
(b) work with a low materials content
(c) labour only work
(d) work with a low labour content

Copyright Ken Postill

Page 127 of 199

Question 19
The purpose of a standard conditions of tender is to
(a) reduce the amount of effort required when formulating an offer to the client
(b) allow compliance with Australian Standards
(c) ensure the tender complies with standard conditions
(d) detail the clients requirements and specifications
Question 20
The body that regulates electrical contracting in NSW is
(a) Standards Australia
(b) NECA
(c) Consumers Advocacy
(d) Office of Fair Trading

Copyright Ken Postill

Page 128 of 199


CALCULATION BASED QUESTIONS
Exercise 1
An installation job has been estimated to have the following components
Direct costs materials -$4200
labour 40 hours
The trading structure of the company has
labour cost - $28.00 per hour + 38% on cost
overhead burden of $14.00 per working hour
Determine the nett profit available from the job if it is won at a gross profit margin of
20%
Exercise 2
An installation job has been estimated to have the following components
Direct costs materials -$1200
labour 40 hours
The trading structure of the company has
labour cost - $28.00 per hour + 38% on cost
overhead burden of $14.00 per working hour
Determine the nett profit available from the job if it is won at a gross profit margin of
20%
Exercise 3
An installation job has been estimated to have the following components
Direct costs labour 60 hours (no materials)
The trading structure of the company has
labour cost - $28.00 per hour + 38% on cost
overhead burden of $18.40 per working hour
Determine
(a) the nett profit available from the job if it is won at a gross profit margin of 20%
(b) the margin required if the job is to produce a nett profit of $600.00
Exercise 4
An installation job has been estimated to have the following components
Direct costs materials -$8600
labour 48 hours
The trading structure of the company has
labour cost - $32.00 per hour + 40% on cost
overhead burden of $9.60 per working hour
Determine the nett profit available from the job if it is won at a gross profit margin of
16%

Copyright Ken Postill

Page 129 of 199


ESTIMATING EXERCISE
Estimate the cost and develop the direct cost to a bid price for the following project A three phase supply, comprising consumers mains and main switch board is to be
installed to a factory.
The mains cables are to be installed in Cat A conduit in an underground run of 25 metres
(cable length), from a kiosk type substation, with a prospective fault level of 22K amps at
the sub station terminals.
The estimated maximum voltage drop in any sub circuit within the installation is
12 volts in three phase circuits, and 8 volts in single phase circuits.
Maximum demand of the installation is 400 amps per phase. The maximum single phase
load on any phase is 80 amps. A significant part of the three phase load involves electric
welders and computer controlled (CNC) machines.
The sub circuit arrangements in the factory include 10 x three phase circuits, with a maximum loading of 60 amps on any circuit
15 x single phase circuits, with a maximum loading of 20 amps on any circuit
The best price for supply of a cubicle type switchboard, from Cataclysm Switchboards, is
$15200.00
The switchboard includes all equipment, including 15 spare pole spaces on the circuit
breaker panel, for future expansion.
The switchboard will be located in a main switch board room, with a lockable door.
Direct cost of labour is $25.00 plus on cost of 38%
The hourly overhead burden of the electrical contracting business is $16.20 per hour
Determine the projected nett profit for the project, if the project is priced on the following
market parameters Margin on main switchboard (supply only) = 10%
Margin on all other parts of the project
= 20%
Where time permits, profit enhancing alternatives to the specified installation method
should be investigated.

Copyright Ken Postill

Page 130 of 199

ESTIMATING EXERCISE INDUSTRIAL SUB MAINS SUPPLY


An electrical contractor, Destruction Electrics Pty Ltd, has been asked by a prospective
client, Dodgipay Pty Ltd, to tender on the installation of a set of 300 amp per phase sub
mains.
The cabling is to be installed on a 35 metre run of cable tray, fixed directly to the
underside of a concrete slab, at a height of 2.4 metres. The cables, with a total length of
40 metres, are to be fixed to the tray with heavy duty cable ties. Cabling may be
multicore or SDI cables, copper conductors, with a maximum three phase voltage drop of
6.0 volts.
The cable tray route involves twelve changes of direction, which can be achieved by the
use of sire manufactured bends, or overlapping of the cable tray, butting lengths, etc.
The cables are to be lugged and fitted to existing switchboards at each end of the route.
The trading structure of Destruction Electrics is as follows
Total overheads, including regular time lost by the owner/operator on non productive
work of $60,000.00 per annum
Total annual productive hours of two tradespersons, each with 44.6 weeks, 36 hours per
week
One owner/operator, with 44.6 weeks, 24 hours per week
Direct cost of labour = $25.00 per hour, plus 36% on costs
Step 1 - determine the cable size and tray size that provides the most economic outcome
Step 2 Estimate the job, using the experience based method, ensuring that each part of
the job is costed in a manner that follows the chronological sequence of the project.
Total the labour hours and material costs on the take off sheet.
Step 3 Using the same material costs, re estimate the labour component using a labour
units book
Step 4 Check the variations that may occur in the labour hours determined in the above
steps.
Step 5 Determine a break even price for the project, using a minimum hourly return
method.
Step 6 Determine a sale price, to be tendered to the client that has a gross profit margin
of 20% (expressed as a percentage of the sale price)
Step 7 Determine the expected nett profit from the project

Copyright Ken Postill

Page 131 of 199

Copyright Ken Postill

Page 132 of 199

Copyright Ken Postill

Page 133 of 199

Copyright Ken Postill

Page 134 of 199

Copyright Ken Postill

Page 135 of 199

PART 2

CONTRACTS,
PROJECT
MANAGEMENT
AND
FINANCIAL
CONTROL
FOR
ELECTRICAL
WORK
Copyright Ken Postill

Page 136 of 199


Part 2 of the book addresses operating the business, covering areas such as managing
each job as an individual project, involving
establishing a contract
using a written contract to form an agreement
organising and planning labour
purchasing and supply of materials
costing of labour and materials
management of contracts
variations and associated claims
progress and final claims
management of sub contractors
management of penalty areas such as liquidated damages
retention and other deductions
reconcilliation of actual costs to estimated costs
assessment of estimating accuracy and job productivity
compliance with sales targets
Other areas covered in this part include developing sales budgets, taxation requirements,
business structures, management of overheads, etc.

Copyright Ken Postill

Page 137 of 199

CONTENTS
Section 1
Section 2
Section 3

Section 4
Section 5
Section 6
Section 7

Forms of contract
Contents and use of contracts
Managing projects - Overview
Managing projects - Labour
Managing projects - Materials
Managing projects - Claims
Managing projects - Liquidated damages
Managing projects - Variations
Business operation - Sales Budgets

Copyright Ken Postill

Page 136
Page 145
Page 161
Page
Page
Page
Page
Page
Page
Page
Page
Page

Page 138 of 199

SECTION 1

FORMS OF CONTRACT
A contract occurs when two or more parties agree to perform tasks or provide a service
for reward.- a contract occurs when a party accepts the offer of another party to perform a
service foe a specified reward.

OFFER + ACCEPTANCE = CONTRACT


The purpose of a contract is to formalise the agreement between two or more parties
that involves the provision of a service for payment.
For electrical contracting, as with most other contracting trades, the agreement usually
involves the creation of a functioning new installation, or the repair of an existing
installation.
In small jobs or service work the details of the work are generally arrived at by verbal
discussion, where the contractor and the client each state their requirements, and a
mutually acceptable agreement is formed.
Larger jobs generally involve the client developing documents that detail the required
work, and the contractor developing an offer based on the documents and any other
details sourced from the client.
In building work the contract is usually between the builder and the sub contractor, and is
entirely unconnected to the contract that is made between the builder and the head client.
HEAD CLIENT
The contract between the builder and the
head client is independent to the contracts
between the builder and the sub contractors

The head client is not liable for payments owed by the


builder to the sub contractors.

BUILDER

SUB CONTRACTOR

SUB CONTRACTOR

Copyright Ken Postill

Page 139 of 199


Larger building projects may involve many parties.
EACH SET OF ARROWS INDICATES A CONTRACT THAT IS COMPLETELY
INDEPENDENT OF OTHER CONTRACTS
Failure of contracts at the top of the arrangement will impact on the contracts formed
between those parties at the bottom of the arrangement.
Failure of the head client to provide payment to the architect will necessitate cessation of
the work, causing a flow on to all other parties. Many contracts address this situation by
including a clause termed force majeur or termination by frustration.
This relates to circumstances outside the control of either party to the contract.
HEAD CLIENT

FINANCE SOURCE
(BANK ETC)

ELECTRICAL CONSULTING
ENGINEER

ARCHITECT
MECHANICAL
CONSULTING ENGINEER

BUILDER

SUB CONTRACTOR

SUB CONTRACTOR

SUB CONTRACTOR

Copyright Ken Postill

SUB CONTRACTOR

Page 140 of 199

Contracts may be verbal, involving a spoken agreement between the parties where each
party describes the component of the contract that they require, and the agreement to
provide the component required by the other party.
In electrical contracting work the agreement involves an understanding of the service
required, and the amount to be paid for the service. Where all parties state agreement, a
legally binding contract can be formed.
However, because there is no fixed record of the details of the agreement, enforcement of
the agreement is rarely practical should one or more parties fail to fulfill the required
obligations.
From the electrical contractors perspective, some problems that may arise due to the use
of a verbal contract are
The client misunderstands or forgets the value of money required.
The person that makes the agreement with the electrical contractor is not
authorised to do so, and payment cannot be obtained from the person in charge of
finances. This is a common risk in multi domestic situations when work is
required in the communal areas, and also occurs in large commercial and
industrial sites.
The client cannot see value for the service supplied, and disputes the sum
required. In many electrical jobs most of the work is concealed in order to
produce a neat job, leaving the client with little physical evidence to justify the
cost.
The client rejects the hourly rate as too high. Many clients are unaware of the
effects of overheads and on costs on the minimum hourly return required by the
contractor.
The client has no intention to pay, and intends to obtain the contractors work
without payment.
Without the availability of an impartial witness disputes in verbal contracts cannot
be resolved through legal channels.
Once the job is finished, the contractor is wholly reliant on the goodwill of the
client to secure payment for the work.
An old saying in the contracting industry is
A verbal contract is not worth the paper it is written on!
In short, for the purposes of professional trading, verbal contracts should not be used.

Copyright Ken Postill

Page 141 of 199


Written contracts cover a wide spectrum of size and complexity. For small jobs a
simple single sheet contract remains viable and cost effective. For jobs of increasing size
the time frame introduces complexities such as multiple progress claims, variations to
contracted work, changes in costs, liquidated damages and other penalties, etc. and
requires a more complex form of written contract.
Since the purpose of a written contract is to protect each party against failure of the other
party to perform the required function, the contract must be suitable for use as a legal
document in the event of dispute. It must include at least the following parts
The names of all parties to the contract
The signatures of all parties to the contract
The date on which the contract is formed
Details of the service to be provided
Value of monies to be paid
All conditions associated with the offers of all parties (refer to Section 6 Part 1)
In addition to the basic components listed above, contracts may also contain items such
as
Time frames for completion of the works
Fixed or cost variation adjustable price
Provision for variation to the contracted work
Use of sub contractors
Retention monies
Public liability insurance
Provisional sums
Site requirements
OHS requirements
Working hours
Details of documents forming part of the contracted works (drawings and
specifications, etc.)
Defects liability
Liquidated damages
Method of progress claims
Payment schedules
Method for dispute resolution
Liability for damage to areas outside the work.

Copyright Ken Postill

Page 142 of 199


As a general rule, the complexity of a contract reflects the complexity and time frame of
the work.
Small jobs have a lower risk value, and can be usually performed using a simple single
page contract. Where the job has a relatively low financial impact, and is to be completed
in a relatively short time frame, the added expense and time consumed in the
development of a complex written contract may not be justified.
Suitable single page contracts can be developed by an electrical contractor, or as an
alternative are available through NECA as a service to their membership.
The contracts developed by NECA are in pad form with duplicate copies, so that copies
are provided for both the client and the contractor. These contracts include standard
conditions on the reverse side of each copy, and are a product of long term development.
Some stationery suppliers sell compact work order books that can be used as simple
contracts for small jobs. These are suitable for those contractors that restrict trading to
very small jobs where the risk of non payment or dispute is known to be negligible.
Large jobs, which usually cover longer time frames, require more detailed contracts.
Many large building companies have engaged legal staff to produce contracts suited to
their business. As a sub contractor to these building companies, it is wise to ponder the
reasoning behind the (expensive) development of customised contracts, and the fairness
that this may imply.
If required to enter into a trading relationship based on this style of contract, it is essential
that the contract is thoroughly perused prior to signing. Where possible advice on the
usage of these contracts should be obtained. The following section of this book provides
some guidance in this matter. As a service to its members NECA provides guidance on
contracts developed by large builders, with specific guidance on clauses that may
disadvantage the contractor.
An alternative to using contracts developed by building companies is Australian
Standard AS 2545 Subcontract conditions. This is a well laid out, thorough contract
that protects the interests of both parties equally.
Where a fully detailed contract is deemed desirable, this contract can be used for most
electrical contracting jobs.
Time spent in obtaining and carefully reading one of these contracts is a good investment
for any existing or prospective trade related contractor.

Copyright Ken Postill

Page 143 of 199


Service work, and do and charge or cost plus work should not be undertaken
without the use of a written contract that details the agreed rates of charge, and the rate at
which materials will be supplied by the contractor to the job.
This sector of the market is often a source of non payment or dispute between the client
and the contractor.
Many clients are unprepared for the costs that accrue during the period covered by this
type of work, just as many contractors view the work as being of low value and payment
risk. Detailing rates before the work commences, and obtaining written agreement greatly
reduces the risk of dispute.
Unfortunately there is a small number of potential clients that can be termed professional
debtors. These clients will engage the services of a contractor, with the intention of
disputing the account, and not paying. In general, when presented with a written contract
for signature, they will attempt to avoid signing the document. Where the client refuses to
sign the contract, it is best to consider the risk and not to commence work.
In general, materials can be sold at a rate that is trade price plus 20%. This reflects most
other industries that supply materials as part of trading.
Note that trade price is the published list price of suppliers, and not the discounted
purchasing price that is offered by many suppliers to their contractor clients.
A contract used for service work, or do and charge work should include at least the
following details

The names of all parties to the contract


The signatures of all parties to the contract
The date on which the contract is formed
Details of the service to be provided
Rates at which labour will be supplied (there may be variables for out of hours
work, service charge, apprentice labour, etc.)
Rate at which materials will be supplied (generally trade list price plus ....%)
Payment schedules (COD, 7 days, 30 days)
All conditions associated with the offer of the contractor (a standard conditions
of work, on the reverse side of the contract is suitable in most cases -refer to
Section 6 Part 1)

Copyright Ken Postill

Page 144 of 199

NOTES

Copyright Ken Postill

Page 145 of 199

NOTES

Copyright Ken Postill

Page 146 of 199

NOTES

Copyright Ken Postill

Page 147 of 199

SECTION 2

CONTENTS AND USE OF


CONTRACTS
PURPOSE
The purpose of this section is to provide details of contract components, and precautions
that should be considered when undertaking to use a contract that includes those
components.
Due to the myriad complexities of contracting work, and the associated contracts, there
will be some items that are not covered in this section.
Why use a written contract?
To comply with regulations such as those legislated by Office of Fair Trading in
NSW
To reduce the risk of dispute between the parties
To reduce the risk of non payment by the client
To provide a structured method for dispute resolution
To provide a mechanism for the legal recovery of outstanding funds
To enhance the professionalism of the contractor
Which two of the above items would an electrical contractor rate as most important?
In the event of non payment, the contractor must begin procedures for the recovery of the
outstanding funds. Since few contractors are competent in the intricacies of debt recovery
and the associated legal requirements, in many cases the contractor is best advised to
enlist the services of a mercantile agent (debt collector) to recover the funds. The success
of this process depends heavily on the quality of the written contract that has been used.
Where the documentation is of sufficient quality the costs for the collection are levied
against the contractors client, and interest is claimed for the duration of the non payment
period.
There are a number of clients that will avoid payment where possible (termed
professional debtors) who are aware of legal processes and the penalty cost risks
associated with those processes.
Where the contract is suitably professional, the issue of a letter of demand by the
contractor or collection agent regularly results in a quick payment of the debt, and avoids
court costs for the threatened party.
The following pages cover many, but not all, items included in contracts, with
explanatory notes and cautions that apply to each item.
Many of these items can be satisfactorily addressed by inclusion in the offer to the client,
as standard conditions of tender.

Copyright Ken Postill

Page 148 of 199

Copyright Ken Postill

Page 149 of 199

CONTRACT
ITEM

EXPLANATION

Client name

This is the name of the party


entering into the contract with
the contractor. Where this party
is a company, the full name of
the company is required

Contractors name

. Where this party is a company,


the full name of the company is
required
This date is the day on which the
contract is signed by all parties.

Date of the contract

Details of the work

Documents associated
with the contract.

Conditions of the
contractors offer to the
client.

The value of the contract

This specifies the works to be


provided by the contractor.
Where the contract is for work
quoted from drawings and
specifications, the details of
these documents must be
included in the details of the
work.
Documents such as drawings
and specifications from which a
quote has been provided, local
site requirements, legislations
etc become an integral part of
the contract.
Conditions specified in a quote
are included when the quote is
specified as part of the contract.
Standard conditions of tender, as
used by the contractor, or
conditions detailed in the
contractors offer that are specific
to the project.
This details the monies due to
the contractor for the
performance of the work.

CAUTIONARY NOTES
The person signing should be identified by
both name and signature in the contract
document The person signing on behalf of
a company or body corporate etc must be
authorised to do so. Ask for evidence of
this authority.
The person signing should be identified by
both name and signature in the contract
document
The contract commences from this date,
making the contractor liable for the
performance of all work after this date.
Work performed prior to this date is not
part of the contract works unless otherwise
specified.
Do not start work without a written
contract.
Poorly specified work details are a prime
source of dispute, making the contractor
vulnerable to payment problems.
The exact nature of the work must be
specified in order to facilitate dispute
resolution and collection of funds.
Where the work is a product of a quote
from plans and specification, these must be
identified in the contract by drawing
number etc. Copies should be sourced for
on site use, and the originals safely stored
in the job file. As most jobs involve
changes to the original details, access to
originals is essential when claiming costs
for variations.
Ensure that any conditions that are part of
the contractors offer are referred to in the
contract document as defence against the
client arguing that such conditions were not
apparent at the time of agreement via the
contract signing.
Always write the amount in words and in
figures, as insurance against mistakes,
confusion or alteration. The client will look
for the price in figures when first perusing
the contractors offer, making the use of
figures unavoidable. Detailing the price in
words is purely an insurance.

Copyright Ken Postill

Page 150 of 199

CONTRACT
ITEM

EXPLANATION

Terms of payment

This details the timing of


payments for the work.

Date of completion of
the work.

For all but very short term small


low risk projects, the contract
should include the proposed
completion date of the work.

Costing for variations to


the contract works.

The costing method for work


that is performed as variations to
the contracted work. Materials
costs would typically be trade
price plus a margin, and labour
at an hourly cost determined by
the contractor, or by negotiation
with the client.
The costs for supervision, claims
etc should be included in the
agreed hourly rate.

CAUTIONARY NOTES
Where possible negotiate COD payment
terms. This should be practical for most
small work, and especially for non
commercial customers.
Where possible, ask for a deposit prior to
commencing work (note regulations such
as OFT).
Specify progress claims for all but very
short term jobs.
Progress claims should be made as often as
possible, for as much as possible, reducing
the financial risk to the contractor in the
event of dispute or financial collapse by the
client.
Terms greater than 30 days leads to the
contractor paying for materials before
collecting from the client, thereby
providing trading capital for the client, and
requiring the contractor to fund the project
for both labour and materials.
As most electrical contract work is done on
a fixed price basis it is essential to guard
against the job extending to excessive time
without the provision to be able to adjust
the price in line with inflation or other cost
changes.
Never agree to a fixed price that does not
have a specified completion time.
The method of cost adjustment for times
past the contract completion date should be
specified in the contract.
Variations to the contract work are a
normal part of electrical work, and one of
the greatest sources of dispute/non
payment.
Variation work should be approved in
writing before commencement, and
approved immediately upon completion. A
tally of all variation work should be
maintained and regularly validated by all
parties as the work proceeds.
All variation work and costs should be
approved by the client before the contract
works are completed, reducing the risk of
dispute or non payment.
Always be aware that the contractors
bargaining ability reduces dramatically at
the completion of the work.
The cost for variations should be detailed
separately to the contract work, and
claimed as part of progress claims where
ever possible.

Copyright Ken Postill

Page 151 of 199

CONTRACT
ITEM

EXPLANATION

CAUTIONARY NOTES

Liquidated damages

Liquidated damages is a
financial penalty imposed where
the contractor causes delay to the
progress of the work of the
client.
This is a common contract
component in building work. In
most cases it is levied at an
amount per day of delay.

Defects liability period

The defects liability period is the


time frame in which the sub
contractor agrees to provide
guarantee work at no cost to
repair defects to the work.
This is typically six months or
one year.
This is a common component in
large jobs.

Never enter into a contract that includes


liquidated damages without the amount of
the penalty being specified. ie. never accept
unspecified liquidated damages.
Where unspecified, the client is in the
position of determining any amount to suit,
and deducting this from the sub contractors
amount payable.
The amount of liquidated damages in a sub
contract should not exceed that detailed in
the main contract.
When dealing with large building
companies, many inexperienced sub
contractors suffer the impact of liquidated
damages penalties through poor
management of time extension claims.
Where ever the work of the sub contractor
is delayed through the actions of others,
weather, inaccuracies in site drawings, etc.
time extension claims should be made, and
endorsed by the head contractor. For long
term projects, time extension claims are
less likely to be disputed in the early to mid
stages than in the latter stages of the project
By accumulating a bank of time extensions
the risk of liquidated damages penalties can
be minimised.
Liquidated damages penalties are usually
applied as a deduction from the sub
contractors final claims, when the work is
complete, and the sub contractor has
reduced bargaining power
Defects liability period commences from
the time of completion and handing over of
the work. For sub contractors whose work
is finished prior to handing over by the
head contractor, the defect liability period
begins at the hand over, rather than the
completion on the sub contractors work.
Never accept a contract that has an
unspecified defects liability period.
In general, the defects liability period for a
sub contractor should not exceed that
applying to the head contractor.
Note that OFT regulations apply to
guarantees for work performed in NSW in
building or specialised contract work. The
regulations detail minimum and maximum
guarantee periods, where such details are
not covered in a contract.

Copyright Ken Postill

Page 152 of 199

CONTRACT
ITEM

EXPLANATION

CAUTIONARY NOTES

Retention

Retention is a sum of money


withheld from the contractors
payment(s), and held by the head
contractor as a guarantee that
obligations under the defects
liability period will be honored
by the sub contractor.
Where the sub contractor fails to
rectify defects, the head
contractor can use these funds to
engage another contractor to
rectify the work.

Rectification work

Rectification work is the repair


of defective work or replacement
of defective equipment.

Never enter into a contract that includes


retention unless the amount and the method
of accruing the amount are specified.
Retention is often deducted from the sub
contractors progress claims at the rate of
10% until the head contractor has acquired
a sum that is 5% of the contract sum.
This means that the sub contractor does not
receive full payment for progress claims
made in the earlier stages of the project.
It may also allow the head contractor
access to monies that can be used for
interest free trading capital.
Some contracts allow for the retention sum
to be reduced to 2.5% after handover,
which is after final inspection of the work.
The contract should also include a
specified procedure of notifications that the
head contractor must follow before using
the sub contractors funds to perform
rectification work. The sub contractor must
be provided with reasonable notice of the
need for rectification work, and be
provided with site access to perform the
work.
Since rectification work may be required at
any time during the defects liability period,
it is essential to establish limitations to the
liability.
Items such as lamp replacement, and
replacement of equipment covered by other
guarantees should be excluded at the time
of contract negotiation.
The exclusion of lamp replacement as
warranty work should be covered in the
standard conditions associated with the
contractors bid.

Bank guarantee

Bank guarantee is an alternative


to the deduction of retention
monies from the sub contractors
funds.
Under this system, a bank
provides a guarantee to fund
rectification work up to the value
of the specified retention amount
in lieu of the head contractor
deducting retention.

While banks will provide this service only


to contractors with a reputable trading
history, and charge a fee for the service,
this system is usually preferable to
retention, as it frees up trading capital for
the contractor.
For small amounts of retention, it is not
viable due to the fees charged.
Bank guarantee is a commonly used
method among major contractors.

Copyright Ken Postill

Page 153 of 199

CONTRACT
ITEM

EXPLANATION

CAUTIONARY NOTES

Timing of claims

The contract should specify the


time at which progress claims
must be lodged. For 30 day
trading terms, this usually means
the nomination of a date in each
month as the latest time that a
claim can be lodged.

Trading hours

The contract should specify the


hours that work will be
performed.

Site access and times

Site access details the times that


the site will be available for the
contractor to work without
restraint.

Site provisions

Site provisions include the


supply of temporary power,
hoisting, scaffolding, telephones,
storage, amenities (toilets and
meal facilities), vehicle access
and parking.

Many large building contractors require


sub contractors to submit progress claims
no later than 20th 23rd of the month.
Claims submitted after this date will not be
processed until the next claims period,
resulting in 60 day trading terms for that
claim.
Some major clients pay claims based on a
statement of all claims for the month of
trading. They will not pay on invoices for
each job. In many cases, if the sub
contractor submits multiple invoices, but
no statement, nothing will be said until the
sub contractor makes contact to arrange
collection of payment. At this time the
requirement for a statement will be
detailed, pushing payment back a further
30 day minimum.
Many projects involve a 6 or 7 day week,
resulting in sub contractors paying penalty
rates for labour.
Ensure that the trading hours are
established at the time of contract, and that
work done outside these hours attracts
extra payment to cover wages penalty
rates.
The price submitted for the work should
include any predictable wages penalty
rates.
Where site access is impeded or limited in
a way that affects the contractors
productivity, the contractor should
immediately claim an extension of time as
a hedge against liquidated damages
penalties.
Where an increase in cost has been
incurred, the contract should have
provision for a claim.
The contract should detail which party
bears the costs for these and similar items.
Should a sub contractor not negotiate these
items at the time of contract, the main
contractor is at liberty to deduct an
unspecified sum from the sub contractors
funds.
In many cases this will occur as a
deduction from the final claim, when the
work is complete, and the sub contractor
has little or no bargaining power.

Copyright Ken Postill

Page 154 of 199

CONTRACT
ITEM

EXPLANATION

CAUTIONARY NOTES

Safe work place

Safe workplace means a


workplace free of hazards that
may impede the contractor in the
performance of the work.

Use of secondary sub


contractor(s)

This refers to the use of


specialist sub contractors or
employees of labour hire
providers.

Termination by
frustration

This refers to a situation where


the project cannot be completed
due to circumstances outside the
control of the contracted parties.

Arbitration

The nomination of an arbitrator


and the process for the
settlement of disputes is
necessary in the event of
deadlock between the contracted
parties, and an integral part of
the legal process involved in the
recovery of funds where dispute
has led to non payment.

The discovery of hazardous substances,


such as asbestos, toxic chemicals etc will
impede the contractor in the performance
of the work, causing both delay and costs.
Provision for extension of time and
increased cost claims must be included in
the contract.
Where the work practices of others also
occupying the site results in delays or
costs, the same provisions will be required.
The contract should be arranged such that
the contractor has the freedom to use sub
contractors or body hire labour on the site.
Should a contractor engage such persons
without provision in the contract, the risk
of dispute and non payment becomes a
reality.
Situations such as heritage issues, changes
in legislation, local government
classifications, etc. that prevent completion
of the work, or the inability of a head client
to pay the main contractor, and hence the
sub contractors should not incur a financial
impact on the sub contractors, as their
contract is with the main contractor, not the
head client. The contract should allow a
provision for the sub contractor to claim
costs against main contractor.
Because of the inherently technical nature
of the contracted work, arbitrators form
outside trade areas are rarely the best
option.
If the client is in a position to specify an
arbitrator, the arbitrator may not
independently address the best interests of
both parties. The contract should specify
the appointment of a technically suitable
independent person. This would generally
be an electrical consultant. NECA can
provide access to suitable arbitrators.

Copyright Ken Postill

Page 155 of 199

CONTRACT
ITEM
Prime cost item (PC
item) or separable
portion

Schedule of Rates

EXPLANATION

CAUTIONARY NOTES

This is a sum of money allowed


in a specification, tender, offer or
contract for the provision of
items such as light fittings,
cooking ranges, data systems,
security systems etc.
Where the client has yet to
decide on a specific item to be
supplied, it is a common practice
to pc the item as separate part
of a quote or contract.
Tender documents often call for
a schedule of rates to cover
variations to contracted work.
A schedule of rates is a fixed
price for variation work,
generally detailed on a per
point basis.

The contractor can incur considerable costs


co ordinating the delivery and installation
of pc items, and should include a profit
margin to cover these costs where possible.
Where the profit margin is dependent on
the type of equipment that has been pc,
the contract should detail the amount (often
as a percentage mark up on the cost) and be
agreed to by all parties prior to work
commencing.

Amendments to standard
or pro forma contracts

Pro forma written contracts will


often have clauses that do not
suit the needs of the parties to
the contract. These parts of the
contract must be deleted or
amended to suit the requirements
of the agreement.

Substantial completion
time, and Extension of
time for substantial
completion

Substantial completion time


refers to the projected
completion date of the work.
Extension of time for substantial
completion refers to claim(s) to
extend the completion date,
made due to circumstances
outside the control of either
party to the contract.

Providing a schedule of rates allows for


simplistic costing of variations, and can
often leave the contractor out of pocket for
work that becomes complex due to
unforeseen circumstances. If a contractor
provides a schedule of rates with high
margins built in, it should be remembered
that the same rates will apply to variations
that involve a reduction in the number of
points, etc.
Where a part of a contract is to be amended
or deleted, the change should be initialed
by all parties to the contract. Items to be
deleted should be ruled through and
initialed. Where a specification has
components that are to be amended or
deleted, these should be treated in the same
manner.
When dealing with large building
companies, many inexperienced sub
contractors suffer the impact of liquidated
damages penalties through poor
management of time extension claims.
Where ever the work of the sub contractor
is delayed through the actions of others,
weather, inaccuracies in site drawings, etc.
time extension claims should be made, and
endorsed by the head contractor. For long
term projects, time extension claims are
less likely to be disputed in the early to mid
stages than in the latter stages of the project
By accumulating a bank of time extensions
the risk of liquidated damages penalties can
be minimised.
Liquidated damages penalties are usually
applied as a deduction from the sub
contractors final claims, when the work is
complete, and the sub contractor has
reduced bargaining power

Copyright Ken Postill

Page 156 of 199

Copyright Ken Postill

Page 157 of 199

Copyright Ken Postill

Page 158 of 199


As a means to helping develop a knowledge of content for written contracts, and as an
exercise in considering the use of standard conditions of tender as part of the contract
process, consider each of the contract components detailed in the following table, and
make decisions on how they can be addressed.
Record your decision by putting an X in the appropriate part of the table, or writing
NA where the item is not applicable. In some cases, you may place an X in multiple
boxes as indicating that the answer has many options.
SMALL JOBS
CONTRACT
ITEM

To be specifically
detailed in writing

Addressed using a
standard
conditions of
tender

LARGE JOBS
To be specifically
detailed in writing

Client name
Contractors name
Date of the
contract
Details of the work
Documents
associated with the
contract.
Conditions of the
contractors offer to
the client.
The value of the
contract
Terms of payment
Date of completion
of the work.
Costing for
variations to the
contract works.
Liquidated
damages
Defects liability
period
Retention
Rectification work
Bank guarantee
Timing of claims
Trading hours
Site access and
times
Site provisions
Safe work place
Use of secondary
sub contractor(s)
Termination by
frustration
Arbitration

Copyright Ken Postill

Addressed using a
standard conditions
of tender

Page 159 of 199

Answer
SMALL JOBS

LARGE JOBS

CONTRACT
ITEM

To be specifically
detailed in writing

Client name
Contractors name
Date of the
contract
Details of the work
Documents
associated with the
contract.
Conditions of the
contractors offer to
the client.
The value of the
contract
Terms of payment
Date of completion
of the work.
Costing for
variations to the
contract works.
Liquidated
damages
Defects liability
period
Retention
Rectification work
Bank guarantee
Timing of claims
Trading hours
Site access and
times
Site provisions
Safe work place
Use of secondary
sub contractor(s)
Termination by
frustration
Arbitration

X
X
X

X
X
X

X
X

X
X

Addressed using a
standard
conditions of
tender

To be specifically
detailed in writing

X
X
X

Addressed using a
standard conditions
of tender

X
X

X
X
X

NA

NA

NA

NA

NA

NA
X
NA
X
X
X

X
X
X

X
X

X
X
X

NA
X

Copyright Ken Postill

X
X
X
X
X

X
X

Page 160 of 199

PRACTICE WITH THE INTERPRETATION OF WRITTEN


CONTRACTS
This exercise is based on the use of
Australian Standard AS 2545 Subcontract conditions
To use this exercise material you will need a copy of the standard. AS 2545 is the product
of input from a wide range of industries, and is an excellent example of a well formatted,
complex contract that is fair to all parties.
If an electrical contractor was offered a substantial job by a builder or client with whom
the sub contactor was unfamiliar, the request to use a contract such as AS 2545 should be
reasonable to both parties.
Where the builder is reluctant to use an independent contract such as AS 2545, and insists
on the use of a contract developed by the builder, the sub contractor should be extremely
cautious.
Many of the large building companies have specialised sub contracts that they have paid
to be developed on their behalf by legal professionals. The use of such contracts in place
of independently developed contracts is a tactic designed to put the builder in an
overwhelmingly strong negotiating position during the progress of the works.
ANECDOTAL TALE
Kenny, an electrical contractor got a good job with a large building company installing
temporary builders supplies on a large site. At the time of starting the job the building
project manager told Kenny that the job would span three months, and that they would
require an ongoing tally of costs, updated each week, with a single invoice for all the
work at the finish.
Kenny thought that was okay, and having had a brief look at the contract supplied by the
builder, signed it and commenced work.
Having supplied the tallies as required, and completed all the work Kenny submitted a
well formatted claim at the end of the works period for $18,990.00
After delays in payment of 105 days, Kenny finally received a cheque for $6990.00
When he contacted the project manager, he was directed to the contract, which stipulated
90 day trading terms, and included a clause that said the contractor shall supply all site
storage and amenities for his works.
The builder had deducted $12,000.00 for use of the toilets, rental of space for on site car
parking, use of the temporary power, provision of hoists, scaffolding, etc.
As Kenny had failed to notice the impact of this clause, and had failed to have such costs
detailed in the contract, or had failed to have it removed from the contract, he had no
recourse but to accept the values as detailed by the builder.
The following pages contain exercises in the use of contract interpretation,
using AS 2545

Copyright Ken Postill

Page 161 of 199


EXERCISES
As a means to becoming familiar with the layout and use of contracts such as AS 2545,
answer the following questions.
Question 1
The details of which party is responsible for the costs associated with temporary builders
electricity supply, scaffolding and hoisting are detailed on Page ........ of the contract.
Question 2
The amount to be detailed as liquidated damages is detailed on Page ...... of the contract
Question 3
Where bank guarantee is used as an alternative to sums held as retention, the written
details are provided on Page ......... of the contract.
Question 4
The contract provides for the detailing of all clauses that have been deleted or modified.
This list of deletions or modifications occurs on Page ......... of the contract.
Question 5
In most cases the defects liability period commences at the time of substantial
completion.
The contract provides for written confirmation of substantial completion on Page .........
of the contract.
Question 6
At the completion of the defects liability period, the head contractor is provided with a
maximum number of days in which to notify the sub contractor of outstanding defects
which require rectification. This number of days is specified as ............... days in Clause
37 of the contract.
Question 7
The provision for detailing the amount of the contract sum, either as a lump sum, or a
schedule of rates occurs on Page ......... of the contract.
Question 8
Each page of the contract must be subjected to what process? (See page 64,
approximately mid way down the page)
.............................................................................................................................................
.............................................................................................................................................
Question 9
The full details of both parties to the contract are detailed on Page ......... of the contract.
Question 10

Copyright Ken Postill

Page 162 of 199


The value of the tender offered by the sub contractor to the head contractor is detailed on
Page ......... of the contract.
Question 11
The rate at which retention monies are to be deducted from progress claims is detailed on
Page ......... of the contract.
Question 12
The amounts of public liability insurance required under the contract are detailed on Page
......... of the contract.
Question 13
The amount specified for liquidated damages, on a daily basis is specified on Page .........
of the contract.
Question 14
The times in which claims must be submitted are detailed on Page ......... of the contract.
Question 15
The contract provides for the various parties to require documentary evidence from those
parties required to provide public liability insurance under the contract.
This is covered in Clause ........ of the contract
Question 16
The requirement for the sub contractor to have workers compensation insurance for
employees is detailed in the contract.
This is covered in Clause ........ of the contract
Question 17
Where resolution of a dispute requires the use of an independent arbitrator, the contract
provides for an arbitrator sourced from
............................................................................................................................................
This is covered in Clause ........ of the contract
Question 18
Where a contract cannot be completed due to circumstances outside the control of either
party, and must be terminated, the processes are detailed in the contract.
This is covered in Clause ........ of the contract
Question 19
The contract specifies a maximum time for the lodgment of the final claim by the sub
contractor, after the defects liability period has ended. This time frame is ............. days.
This is covered in Clause ........ of the contract
Question 20

Copyright Ken Postill

Page 163 of 199


Having submitted a claim labeled final claim, can the contractor submit further claims
for any items that may have been overlooked? ...............................................................
This is covered in Clause ........ of the contract
Question 21
For the purposes of AS 2545, which party to the contract is responsible for cleaning up
the waste material, etc, created by the sub contractor? .........................................................
This is covered in Clause ........ of the contract
Question 22
Where a sub contractor is required by the main contractor to perform variations to the
contracted work, is the sub contractor obliged to perform the work?
.........................................................................................................................................
This is covered in Clause ........ of the contract
Question 23
Where a sub contractor is required by the main contractor to perform variations to the
contracted work, is the sub contractor entitled to extra time to complete the works?
.........................................................................................................................................
This is covered in Clause ........ of the contract
Under what conditions can this be varied? ....................................................................
.........................................................................................................................................
.........................................................................................................................................
Question 24
If, after substantial completion of the works has been achieved, the main contractor
requires variations to the work to be performed, is the sub contractor obliged to perform
the variation work?
............................................................................................................................................
This is covered in Clause ........ of the contract
Question 25
In respect to breaches of the contract by the main contractor, the sub contractor must
provide a claim for costs within a specified period where AS 2545 is used. This time
period is ..................days.
This is covered in Clause ........ of the contract
Question 26
Name at least five things that will permit a sub contractor to claim extension of time for
substantial completion.
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
............................................................................................................................................
............................................................................................................................................
This is covered in Clause ........ of the contract

Copyright Ken Postill

Page 164 of 199


Question 27
What is the maximum time permitted under AS 2545 for a sub contractor to provide the
main contractor with a claim for extension of time for substantial completion?
.......................... days
This is covered in Clause ........ of the contract
Question 28
Where the sub contractor, through failure to perform the works as required under the
contract, causes the main contractor to suffer liquidated or other damages, can the main
contractor impose penalties greater than liquidated damages on the sub contractor?
(see page 35)
.........................................................................................................................................
This is covered in Clause ........ of the contract
Question 29
If an electrical sub contractor failed to provide the main contractor with a copy of the
relevant Certificate of Compliance, for electrical work performed in NSW, would the sub
contractor be in breach of the contract?
(See page 20)
.............................................................................................................................................
This is covered in Clause ........ of the contract
Question 30
Where the work involves the supply of a major item, such as a machine, light fittings,
switchboard, cooking ranges, etc. does AS 2545 provide for the contractor to claim for
the goods prior to the delivery and/or installation? (See page 40)
............................................................................................................................................
What conditions apply to this?
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
...........................................................................................................................................
This is covered in Clause ........ of the contract

Remember contracts such as AS 2545 are intended to provide a


balanced agreement between all parties, and as such allow for penalties
to be applied to either party in the event of failure to comply with the
contracted works.

Copyright Ken Postill

Page 165 of 199

NOTES

Copyright Ken Postill

Page 166 of 199

NOTES

Copyright Ken Postill

Page 167 of 199

NOTES

Copyright Ken Postill

Page 168 of 199

SECTION 3

MANAGING PROJECTS
PURPOSE
The purpose of this section is to provide details of project management methods, contract
use and compliance, and precautions that should be considered when undertaking the
management of projects as a contractor.
Due to the myriad complexities of contracting work, and the associated contracts, there
will be some items that are not covered in this section.
The rationale of managing projects is reflected in multiple needs, such as
minimising the costs associated with the project
minimising the risk of non payment
minimising the risk of incurring penalties
developing a rapport with the client as a means of obtaining further work
maximising the income produced from the project
providing cash flow for operating the contracting business
avoiding mistakes on the job and the associated rectification work
minimising time used to manage the project
As you can see, all of the above items are directly related to making an income.
The primary function of project management has a financial focus.
As detailed in Part 1 of this book, the most precious asset of any contracting operation is
time. To optimise profit in a contracting business, time management must remain a
significant consideration in all management and production functions.
For a contracting operation,

time = money

Copyright Ken Postill

Page 169 of 199


Time is the most important of all resources for a contractor. The most difficult of all
resources for contracting is time because it is a fixed value that cannot be expanded. Time
wasted on duplicating effort or rectifying mistakes is lost forever.
For a contractor, time and money are interconnected.
The labour resource of a contracting operation is difficult to expand or shrink without
problems. Labour time expended on low profit work is time that could be used on other
work where acceptable profit margins are available.
Operating a successful contracting business means using the time resource wisely. This
means that you should

avoid low profit work by operating at rates that are viable. If a sector of the
industry will not permit acceptable levels of profit, avoid operating in that
sector.
know what profit margins are required to allow successful trading. Profit
margins need to cover all costs, including overheads, and return a profit.
use the sale of materials to provide profit. Work involving the sale of
materials can be rewarding at lower profit margins than those required for
labour intensive work.
avoid labour intensive work as this limits the amount of sales/profit that can
be achieved in a given time frame. Alternatively, use a charge rate that
compensates for the loss of profit from material sales.
use the take off sheet as a tool for planning labour. When estimating, the
time required to perform the various stages of a project has been estimated
through careful study of plans etc.. Avoid replanning the labour requirements
by studying the job plans - use the estimated values.
use the take off sheet as a tool for purchasing materials. When estimating,
the materials required to perform the various stages of a project has been
estimated. Avoid replanning the materials requirements by studying the job
plans - use the estimated values.
use a purpose designed computer program to operate the contracting
business. These programs will automatically keep track of costs, sales and
profit margins, plus provide a reconciliation between estimated and actual
costs to report on the accuracy of estimates. The use of purpose designed
computer programs will ensure correct processes within the contracting
business, optimising profit while reducing time used on administrative
functions.
ensure that a fair contract is used so that the customer is not placed in a
position that can disadvantage the contractor
avoid disputes with clients by following all required contract procedures, and
keeping the client informed on all aspects of the contracted works. Disputes
consume large amounts of time, robbing time from profitable applications.
maintain customer satisfaction, using this as the primary source of work
operate to a planned trading structure, including the use of a sales budget,
planned profit targets, management of overheads, etc.
Copyright Ken Postill

Page 170 of 199


MANAGING AN INSTALLATION PROJECT
The following flowchart shows the procedure for correct financial management of an
individual installation project.

ESTIMATED
MATERIAL
COSTS

ESTIMATED LABOUR HOURS


ESTIMATED LABOUR COSTS
ESTIMATED
DIRECT COSTS

ADD DESIRED PROFIT


MARGIN

OVERHEADS AND
MARKET
INFLUENCES ARE
CONSIDERED

SALE VALUE

OFFER TO THE CLIENT

TRADING
CONDITIONS ARE
CONSIDERED
AND DETAILED

CONTRACT

WORK
PERFORMED

CLAIMS
SUBMITTED

MONIES
COLLECTED

PROGRESS
OF THE
WORK IS
COSTED

MATERIALS
COSTS ARE
RECORDED
LABOUR HOURS
AND COSTS ARE
RECORDED

FEEDBACK
TO
ESTIMATOR
ON THE
ACCURACY
OF LABOUR
AND
MATERIALS
ESTIMATES

ADJUSTMENT
FOR
VARIATIONS

ACTUAL COSTS ARE


DETERMINED

PROFIT IS
DETERMINED
AS A MARGIN
OF SALE

RECONCILLIATION PROCESS,
COMPARING ACTUAL COSTS TO
ESTIMATED COSTS

Copyright Ken Postill

Page 171 of 199


USING A CORRECTLY FORMATTED TAKE OFF SHEET AS A PROJECT
MANAGEMENT TOOL
A correctly formatted take off sheet will have labour and material requirements detailed
for each stage of the project, arranged in a chronological manner. The take off sheet can
be used to plan/allocate labour to the job, and to purchase materials as required.
This reduces time spent managing the project, providing time for other projects.

A correctly
formatted
take off sheet
with materials
and labour
arranged in a
chronological
manner to
match the job
requirements
Time has
been
consumed
during the
estimating
process to
analyse the
project in
order to
predict the
labour hours
and materials
required .
Reuse this
time effort to
manage the
project

wages paid
labour
allocated as
required

materials
ordered as
required

production
stage of the
work

labour
hours and
costs
recorded
materials
costs
recorded
wages paid

labour
allocated as
required
materials
ordered as
required

production
stage of the
work

labour
hours and
costs
recorded
materials
costs
recorded

costs of both
labour and
materials are
recorded as
the job
progresses.
material costs
are recorded
in dollars.
labour is
recorded both
in hours and
dollars

wages paid

labour
allocated as
required
materials
ordered as
required

production
stage of the
work

labour
hours and
costs
recorded
materials
costs
recorded

reconcilliation of estimated costs to actual costs, performed on an


ongoing basis provides reports on
cost recovery required for progress claims
labour productivity
materials usage/wastage etc
estimating accuracy
possible unrecorded variation work as a cause of
unexpected costs

Copyright Ken Postill

Page 172 of 199


Managing small jobs, such as service work or cost plus jobs where site time is limited
to less than one day is relatively simple when compared to jobs that last many months,
with multiple periods on site.
The process for managing most small jobs is shown below.
The customer makes
contact

Charges, trading and contract


conditions are explained to the
customer and a verbal acceptance is
obtained before traveling to the job

Before commencing any work the


contractor provides a written contract
for the customer to sign, detailing both
labour and material charges. Call out
charges and labour rate per hour is
detailed, materials charges are detailed
as trade price plus a percentage

Work is performed, keeping the


customer informed as to progress and
accumulating costs.

An invoice is prepared for the


customer and presented for payment
The customer is briefed on the
arrangement of costs and provided
with a contact number for further work

Remember that time is the most


important resource for a contracting
operation.
Most payment disputes arise from
misunderstandings of expected costs.
Informing the customer of costings, and
gaining verbal consent will greatly
reduce the chance of rejection of the
offered contract. Should the customer
reject the contract conditions, the time
lost traveling to the job is a serious cost
to the contractor.

Never start work without a written


contract.
A correctly formatted and utilised
contract minimises the chances of
dispute and/or non payment.
Most customers view correct contract
procedures as a sign of professionalism
by the contractor.

Keeping the customer involved reduces


the chance of dispute through the
customer being surprised by the cost
accumulation

Presentation of the invoice is the final


stage of the on site component. It is also
a good opportunity to establish an
ongoing relationship for future trading.
A good rapport with a customer
produces work through word of mouth
advertising, providing access to a wider
trading customer base.

Payment is collected, either as COD or


on the trading terms negotiated at the
time of signing the contract

Income is transferred to the contractors financial management


system, being reported to the monthly sales budget and stock
control system. Stock used from the vehicle is replaced.

Copyright Ken Postill

Page 173 of 199


The labour charge rate for small jobs should be established as part of the financial
management of any contracting operation before undertaking such work. This rate should
be set to allow the business to recover all associated costs and return an acceptable profit.
Therefore the rate should include, but be not limited to items such as
direct cost of wages, including on costs
cost of overheads, including vehicle use
profit
As a general rule, the materials component of minor work, or service work, is small, and
should not be relied on as a consistent profit source. Therefore the labour cost for service
work should be calculated to provide the profit return required for the time consumed by
each small job.
An extract from Part 1 of this book is shown below, as an example of the labour rate
required by a small contracting operation, operating as a one man band, doing minor
work in the local area.
For this example, it is assumed that the contractor operates the business from home, and has no unnecessary
overhead commitments. It is assumed that the contractor is able to achieve a productivity that allows 30
hours per week as chargeable work, with the remaining 8 hours lost on non chargeable tasks such as
traveling, preparing quotes, bookwork, etc. This 8 hour non productive time becomes an overhead.
On costs are assumed to be 38%, which reflects a common value for many contracting operations.
The contractor has chosen to aim for a wage of $35.00 per hour.
Labour cost per hour = $35.00 + 38% = $48.30 per hour
Overheads are as follows
Van = $15,000.00 per annum (includes all running, insurances and depreciation)
Telephones (mobile and land line) = $3,000.00 per annum
Insurances (public liability, fire, theft) = $2,000.00 per annum
Accountancy fees = $1,500.00 per annum
Advertising, petty cash, entertaining, etc = $100.00 per week or $5000.00 per annum
Tool replacement = $1,500.00 per annum
Non productive hours = 8 hours x 44.2 weeks = 353.6 @ $48.30 = $17,078.00
Total overheads = $28,000.00 + $17,078.00 = $45,078.00
Hourly overheads = total overheads =
productive hours

$45078
= $34.00 per hour
44.2 x 30hrs

Therefore the minimum hourly rate, to achieve a wage (without profit) is


$48.30 + $34.00 = $82.30 per hour
Expressed as a margin of sale, this is $34.00 = 41.3%
$83.30

Note that the charge rate determined above provides only a wage to the contractor profit
is not included. Margin on materials would be the sole source of profit. Where a
contractor worked for rates less than this, he/she would be much better off working for
another contractor, with greatly reduced responsibility and a secured wage income.
As a service to its membership, NECA provides a list of recommended charge out rates, which reflects the
myriad of costs that must be included in order for the work to provide an acceptable return.

Copyright Ken Postill

Page 174 of 199

Copyright Ken Postill

Page 175 of 199

Copyright Ken Postill

Page 176 of 199

MANAGING LARGER PROJECTS


As the size and length of a project increases, so does the level of risk associated with
dispute or non payment.
Encountering a non payment for a small job is a bad experience encountering a non
payment or a large job is a disaster. Consequently larger jobs require greater attention to
management of the job, on an ongoing basis.
Larger projects, unlike small jobs, provide continuity of work, improved cash flow and a
better standing within the industry.
The profit margin, as a percentage of the sale value, associated with larger jobs generally
reduces as the project size increases. Where a commercial project with 100 hours of
labour might be won with a margin of 25% down to 20%, a larger project, say with 1000
hours of labour may require a margin of 15% down to 10% to be competitive in the
market place.
Gross
profit
margin

50%
40%
20%
10%
5%
Small jobs
and service work

Medium
projects

Large
projects

Very large projects

However, where a contractor takes on a larger project without expanding the overhead
burden of the operation, the relatively low profit margin of a larger project remains a
profit, in addition to providing work continuity and improved cash flow.
In most cases, all but the smallest contracting operations require some larger projects to
provide a pool of work, from which labour can be drawn to carry out the smaller jobs,
while providing continuity for the pool of labour.
Reliance on small work for trading results in erratic trading volume, poor cash flow,
and loss of labour time at those times that insufficient work is available.

Copyright Ken Postill

Page 177 of 199


Successfully managing larger projects involves a set of procedures, including but not
limited to

organising the delivery of materials as required for the work


organising labour as required for the work
monitoring costs as the job progresses
tracking and claiming variations as the job progresses
making progress claims as the job progresses
monitoring profitability by reconciling actual costs to estimated costs as the job
progresses
attending site meetings throughout the time span of the work
monitoring the time path for the project
gaining time extensions as each cause warrants a claim, as the job progresses

ORGANISING MATERIALS FOR THE WORK


Materials should be delivered to site as needed, using a just in time method, to avoid
stockpiling on site, and thereby reduce the risk of loss through theft or spoilage.
An efficient method is to use the quantities detailed on the take off sheet to order
materials directly from the appropriate supplier, using an ordering system that integrates
the job number.
This allows simple transfer of costs to the job costing system via the priced details drawn
from the suppliers invoice.
Ordering materials for more than one job on the same invoice requires breaking the
various components of the pricing up into each job. Where a separate order is used for
each job, the supplier provides the costing for the job materials via the priced invoice.
Using stock from the work vehicle for larger projects greatly increases the effort
associated with costing the work, as it not only requires tracking the material costs for the
job, but also requires restocking the vehicle.
Carrying stock should be avoided where possible. Carrying excess stock results in a loss
of trading capital, weakened cash low, increased spoilage and loss through theft.
Ask yourself If I have only one box of socket outlets in the van, how many am I likely to lose? If I
have three boxes of socket outlets in the truck, am I more likely to lose some?
or - If the job needs nine socket outlets, and I supply ten, will the surplus outlet be recovered and secured
into general stock, or is there a good chance it will be lost, stolen, or damaged?
or If the job requires 30 metres of cable, and the site staff are supplied with a 100metre roll, will the
remaining cable be returned, or will the job costing show the discrepancy, and the site staff be impressed
when questioned why the costs blew out?
Will this reduce pilfering of materials from the costed jobs?
or If the job is not costed, will I know that materials have been pilfered or lost?

Copyright Ken Postill

Page 178 of 199


Think about this
A counter staff at a supplier, who is not scrupulous, needs some drinking money, and steals a box of socket
outlets from work, selling it at a discount cash price to a mate who is in the trade. Having done it
successfully, he now needs to repeat the process. However, due to the inventory system used by his
employer he feels that the risk of discovery is too high.
His solution is to add single items to the pick ups of the poorly managed contractors, comfortable in the
knowledge that their filing system is on the floor of their van, and at the end of the month, when they get
their statements, they will have no idea of what they picked up several weeks ago.
As there is no order to correlate to the invoice, the contractor has no recourse to dispute the statement (if he
has any recollection of the materials picked upon the day)
Think about this
An employee of a poorly managed contracting operation, when picking up materials for a (non costed) job,
adds some cable and socket outlets for a weekend job that he is doing.
If he keeps the amounts relatively small, will the employer detect the losses? Could this go on for a long
time?
Think about this
A poorly run contracting operation maintains an account with a supplier that has branches in several
suburbs. Another contactor goes to a branch where the staff are not familiar with the account holder, and
purchases a modest mount of materials on the account. He does not make a large purchase, in order to
avoid questioning about identity. Later, the operator of the contracting operation identifies that materials
have been purchased by someone else and disputes his statement from the supplier. Is he liable for the debt,
where it can be shown that he purchases without a requirement for identification, or order number? The
answer is that he is liable for the debt.

ORDERING MATERIALS
A typical example of a poorly run electrical contracting business is an everyday event at
most suppliers, where electricians turn up on most mornings to pick up materials required
for the days work. Many of these businesses do not use an ordering system, operating
accounts spaced over a wide geographic area, picking up on an ad hoc basis with little or
no planning or accountability.
These contractors not only lose valuable trading time, but are at risk of loss through
incorrect billing by the supplier, plus the inconvenience of finding that the supplier does
not have sufficient stock on hand to meet the contractors immediate needs.
Ordering materials from the take off sheet, using a purchase ordering system, several
days in advance of the expected job time allows for

greater time on the job, with increased profit


reduction of time lost through unavailability of specific items, as the supplier is
given time to source materials that are not held in stock, or offer alternatives
where items are not available
free delivery by the supplier to site, or to the contractors office
reduction of risk through incorrect billing by the supplier
reduction of losses through pilfering or theft

Ordering materials with an ordering number system, and avoiding ordering for multiple
jobs on the one order, greatly simplifies the transfer of materials costs to the job costing
file.
Copyright Ken Postill

Page 179 of 199


A simple system of using the job number as a prefix to the order number means that all
materials on that order can be costed to that specific job. As the supplier provides the
costings with the invoice it is a simple matter to transfer the cost of that delivery to the
job.
Example
All purchases for job No 12345 have purchase order numbers starting with 12345
Eg. 12345/1 12345/2 12345/3
When the costed invoice for each purchase arrives from the supplier, the cost is easily
recorded to the job file. In this way the supplier does the job costing for the contractor,
freeing up the contractors time for profit producing work.
REMEMBER THAT THE MOST IMPORTANT ASSET OF A CONTRACTOR IS
TIME. Avoid consuming time on tasks that can be done by others.

Copyright Ken Postill

Page 180 of 199


MAKING CLAIMS FOR PAYMENT
Consider these anecdotal tales
ANECDOTAL TALE Kenny, an electrical contractor had been doing a range of work
for a customer over a period of more than twelve months, when he won a five month job
with the customer. As the job was scheduled to finish in July, Kenny decided to under
claim on each of the progress claims, leaving as much money as possible in the job for
the final claim. In this way he planned to move the income into the following financial
year, minimizing his taxable income for the current year.
Kennys mate Reg the plumber claimed as much as possible with every claim, leaving
very little in the job for the completion stage.
At the end of June the customer went into liquidation, leaving Kenny a great deal out of
pocket. Reg, having collected as much of the funds as possible by the astute use of
progress claims suffered only minor financial damage. Not for the first time, Kenny was
left wondering why plumbers are smarter than electricians.
ANECDOTAL TALE Kenny, an electrical contractor got a good job with a large
building company installing temporary builders supplies on a large site. At the time of
starting the job the building project manager told Kenny that the job would span three
months, and that they would require an ongoing tally of costs, updated each week, with a
single invoice for all the work at the finish.
Kenny thought that was okay, and having had a look at the contract supplied by the
builder, signed it and commenced work.
Having supplied the tallies as required, Kenny was careful to get each tally endorsed in
writing by the client. At the completion of all the work Kenny submitted a well formatted
claim at the end of the works period for $18,990.00
After delays in payment of 105 days, Kenny finally received a cheque for $6990.00
When he contacted the project manager, he was directed to the contract, which stipulated
90 day trading terms, and included a clause that said the contractor shall supply all site
storage and amenities for his works.
The builder had deducted $12,000.00 for use of the toilets, rental of space for on site car
parking, use of the temporary power, provision of hoists, scaffolding, etc.
As Kenny had accepted a contract that excluded progress claims, failed to notice the
impact of this clause, and had failed to have such costs detailed in the contract, or had
failed to have it removed from the contract, he had no recourse but to accept the values
as detailed by the builder. The job was completed and any bargaining position had been
surrendered.

RULE No 1 Claim as much as possible, as often as possible


Wherever possible negotiate the use of progress claims for all but the shortest jobs. It is
prudent to claim as much as possible with each claim, being mindful that it is illegal to
claim more than is due to cover the work and profit margin completed. In some
circumstances it is possible to negotiate a deposit, or advance, payment prior to

Copyright Ken Postill

Page 181 of 199


commencing work. Note that there are a range of regulations and limitations to the use of
advance payments in the consumer protection legislation of most Australian states.
RULE No 2 Once the job is complete the bargaining power of the contractor is
greatly diminished.
Once the work is complete the contractor is wholly reliant on the clients attitude toward
payment of claims. The enforceability of the contract and the ethics of the client become
the crucial elements in the chances of payment to the contractor. Claiming as much as
possible during the progress of the work minimizes the amount outstanding at the
completion of the work, thereby reducing the contractors risk and the incentive for the
client to engage in dispute or withhold payment.
RULE No 3 Claim for variations as they occur
Avoid leaving the claiming of variations until the completion of the work (remember
Rule No 2). Claim for variations performed to date with each progress claim.
RULE No 4 Discuss the value of the progress claim with the client prior to
formulating the claim.
The majority of clients are reputable in their dealings with contractors, but often have a
poor understanding of the sequence that costs will incur in electrical work. By advising
the client of the nature of a progress claim, and justifying it prior to submission, disputes
are much less likely.
RULE No 5 Submit all claims on or before the date specified in the contract.
Most large building contracts will specify that the subcontractors must submit claims by a
set date (usually 20th 24th of the month). Claims submitted after the specified date are
transferred to the following month, impacting on the sub contractors cash flow.
RULE No 6 Ensure that the claim is in a format to suit the client.
Many large businesses will process claims based on a statement rather than invoices. A
statement is a summary of all invoices submitted to the client for the specified period
(usually monthly). Many electrical contractors have submitted multiple invoices for
various jobs to a large business (bank, shopping mall, large builder, government
department etc) only to find that after waiting the specified time (30 day terms etc) the
claim has not been processed because a statement was not supplied. Once the statement is
supplied, a further 30 day terms are imposed prior to payment.

Copyright Ken Postill

Page 182 of 199


COMPONENTS OF A CLAIM
For a short time frame project, where progress claims are not used, the claim should
include at least
the client name and address
details of the work performed (location and description of the work)
the contractors name and address
the date of the claim
the method of payment of the claim
terms of trading (COD, 7 days, 30 days etc)
the amount of the claim
For projects where progress claims are used, the claim should include at least
the client name and address
details of the work performed (location and description of the work)
the contractors name and address
a declaration that it is a progress claim (not a final claim)
the date of the claim
the period of work covered by the claim
details of variations covered by this claim
details of all variations claimed to date
the amount of the claim
the total of claims to date
the method of payment of the claim
terms of trading (COD, 7 days, 30 days etc)
a summary of all claims for time extension where the work has been held up
through circumstances beyond the contractors control (to minimize the risk of
imposition of liquidated damages)
For projects where retention is applied, progress claims should also include
retention to be deducted from this claim (note that retention does not necessarily
apply to the costs associated with variations. This should be detailed in the
contract prior to undertaking the work)
total retention deducted to date
The final claim for work on a project that has used progress claims should include
the statement that it is the final claim
the claim for release of retention (commonplace contracts allow for 5% retention
of the contract value up to the final claim, at which time retention is reduced to
2.5% for the duration of the defects liability period)
all details relevant to the previous progress claims, including variations.

Copyright Ken Postill

Page 183 of 199


At the completion of the defects liability period a claim is made for release of retention
funds. This is a separate claim to the final claim, and is worded accordingly.

Copyright Ken Postill

Page 184 of 199


MINIMISING THE RISK OF LIQUIDATED DAMAGES PENALTIES
Liquidated damages is the financial penalty imposed by the client on a contractor where
the contractor causes the progress of the work to be delayed.
In most cases, the penalty is detailed in the contract, usually as a set value per day of
delay. The amount of liquidated damages penalty varies with the size of the project, and
can range from values as low as $100.00 per day, up to millions of dollars per day!
Mechanisms for reducing the impact of liquidated damages include
never accept a contract that has unspecified liquidated damages. Where the value
of the penalty is not specified, the contractor is at the mercy of the client should
delay occur. The client can nominate an amount and deduct it from the contractors
funds, with little or no recourse available to the contractor.
ensure that an acceptable sum is agreed upon for liquidated damages at the time of
negotiating the contract agreement. This is generally detailed as $??? per calendar
day, or per working day. Note that where it is per calendar day this will include
weekends, public holidays etc, when the contractor does not necessarily have
access to the work site and is unable to continue the work.
claim extension of time at all opportunities throughout the contract period. At
every occasion where the contractors work is held up through the actions of
others, or through weather etc, an extension of time claim should be made. In this
way the contractor can accumulate a padding of time which may be required at
the completion phase of the job in order to evade the imposition of liquidated
damages.
maintain a summary of accumulated extension of time claims, summarized with
each progress claim as the work proceeds. Ensure that the client ratifies this
summary, with the processing of each progress claim.
where a delay of several hours is caused by the actions of others (such as other
contractors on the site) the claim should include time lost to re establish or
relocate, and would typically be a whole day.
remember that time extension claims are easier to have accepted during the earlier
parts of the project time frame, rather than the latter parts where all and sundry are
conscious of the impending finish date.
the effect of wet weather delays, that affect all site contractors are generally dealt
with by the head contractor by extension of the completion date, rather than the
granting of time extensions. Ensure that such changes to the completion date are
notified in writing by the head contractor.

Copyright Ken Postill

Page 185 of 199

In the construction industry it is conventional for the project manager (the builder) to provide a detailed critical path analysis, in the
form of a bar chart, to each of the contractors involved in the project.
As the project progresses, the bar chart is updated on a regular basis (weekly or monthly) to provide each contractor with the
information required to co ordinate with other trades, and to act as a basis for the application of liquidated damages.
The time frames specified for each contractor are adjusted to allow for the effects of weather delays etc. as the work progresses.
The bar chart shown below is an example of a chart for a project involving the construction of a small single level shopping mall, to be
completed over a time frame of eighteen weeks.
The bar chart shown would be the initial chart, to be followed with adjusted time frames to allow for weather delays, delays caused
through the inability of specific contractors to comply with the construction schedule, etc.
Where the contract includes liquidated damages, the most recently issued bar chart is used as the basis for the imposition of penalties.
Week

10

Excavator
Concreter
Plumber
Carpenter
Block layer
Electrician
Roof fixer
Glazier
Plasterboard
Painter
Air cond/vent
Landscaping

The work for the electrician detailed in this chart is


Weeks 2&3 install underground conduits, cables etc.
Weeks 5&6 install conduits in concrete slabs
Weeks 13 to 18 inclusive install wiring and fit out the installation.

Copyright Ken Postill

11

12

13

14

15

16

17

18

Page 186 of 199


CRITICAL PATH ANALYSIS
Prior to a project being commenced the contractor should plan the sequence of the work
using a structured method that will allow all parties to understand the sequencing of each
task, and the time importance of each component of the project.
This structured method is generally termed a critical path analysis
An example of a critical path analysis is shown below for a project involving the
installation of photovoltaic panels in a grid connect PV project.

Initiate sales
approach to the
prospective client

Complete
design process

Develop an
offer to the
client

Formalise
contract for
the work

Estimate
costs

Organise
materials
for the
work

Allocate
labour for
the work

Obtain deposit
payment prior to
commencing work

Install and commission panels

Collect final payment

Where a project such as this is detailed on a bar chart, for a period of six weeks, the bar
chart would be as shown below.
Week
Sales approach
Estimating
Contract signed
Payments
Materials organised
Labour allocated
Installation

Copyright Ken Postill

Page 187 of 199

Copyright Ken Postill

Page 188 of 199

Copyright Ken Postill

Page 189 of 199

Copyright Ken Postill

Page 190 of 199

SECTION 4

BUSINESS OPERATION
SALES BUDGETS
A sales budget is an essential tool for monitoring the financial viability of an electrical
contracting business.
Using a sales budget to monitor the ongoing profitability of a business allows the
operator to determine the function of the operation as a successful, or unsuccessful
business.
Where a business is achieving the required results as detailed in the sales budget, the
operator is able to continue with the existing trading methods. However, where the
business is not achieving the outcomes specified in the sales budget, the operator must
undertake a change in trading methods, or follow a path to eventual business failure.
Many small contracting businesses trade for approximately two years before the operator
is forced to confront failure. In most of these cases the operator has not set a sales budget
prior to commencing trading, and continues in the market place unaware that the return
from the business is not sufficient to pay for overheads, tax, etc. This shortfall in
necessary income may be very small, but is an accumulating debt.
Eventually a process of robbing Peter to pay Paul becomes necessary to pay urgent
debts, with the gap between income and accumulating debts steadily expanding. At some
point a debt crisis arises that is too great for this process to forestall, and business failure
occurs.
In many of these cases the operator is forced to seek finance or to liquidate fixed assets,
such as the family home, to pay the debts.

required gross profit result

actual gross profit result

ever
increasing
gap leads to
business
collapse

July August September October November December January February March April May June

Copyright Ken Postill

Page 191 of 199

SETTING A SALES BUDGET


A sales budget is the sales and gross profit required for successful operation of a business
over a prescribed period, which is usually a twelve month period.
SALES

=
DIRECT COSTS + GROSS PROFIT
= (Direct cost of labour and materials) plus (overheads and nett profit.)

For a break even situation, giving no nett profit, gross profit = overheads.
Example 1
For this example, it is assumed that the contractor operates the business from home, and has no unnecessary
overhead commitments. It is assumed that the contractor is able to achieve a productivity that allows 30
hours per week as chargeable work, with the remaining 8 hours lost on non chargeable tasks such as
traveling, preparing quotes, bookwork, etc. This 8 hour non productive time becomes an overhead.
On costs are assumed to be 38%, which reflects a common value for many contracting operations.
The contractor has chosen to aim for a wage of $35.00 per hour.
Labour cost per hour = $35.00 + 38% = $48.30 per hour
Overheads are as follows
Van = $15,000.00 per annum (includes all running, insurances and depreciation)
Telephones (mobile and land line) = $3,000.00 per annum
Insurances (public liability, fire, theft) = $2,000.00 per annum
Accountancy fees = $1,500.00 per annum
Advertising, petty cash, entertaining, etc = $100.00 per week or $5000.00 per annum
Tool replacement = $1,500.00 per annum
Non productive hours = 8 hours x 44.2 weeks = 353.6 @ $48.30 = $17,078.00
Total overheads = $28,000.00 + $17,078.00 = $45,078.00
Hourly overheads = total overheads =
productive hours

$45078
= $34.00 per hour
44.2 x 30hrs

Therefore the minimum hourly rate, to achieve a wage (without profit) is


$48.30 + $34.00 = $82.30 per hour
Expressed as a margin of sale, this is direct cost = $34.00 = 41.3%
sale value
$83.30
From the above example the contractor must operate at an average margin of 41.3% of all sales to simply
make the equivalent of a wage of $35.00 per hour.
In the case detailed above, annual sales must be 44.2 weeks x 30 hours x $82.30 = $109129.80 at a margin
of 41.3%
That is Sale x gross profit percentage = overheads or $109,129.80 x 41.3% = $45,078.00 = overheads

The following page has a further example, where the effect of including profit from
material sales is considered.

Copyright Ken Postill

Page 192 of 199


Example 2
In this example a contracting operation identical to that used in Example 1 is used, with the additional
consideration of using profit from materials to offset overhead costs.
The annual sales budget required for a small contractor that trades with an average gross profit margin of
30% can be determined by considering that the gross profit must equal the overheads.
Therefore, if the small contractor has overheads, including 8 hours lost time per week, of Van = $15,000.00 per annum (includes all running, insurances and depreciation)
Telephones (mobile and land line) = $3,000.00 per annum
Insurances (public liability, fire, theft) = $2,000.00 per annum
Accountancy fees = $1,500.00 per annum
Advertising, petty cash, entertaining, etc = $100.00 per week or $5000.00 per annum
Tool replacement = $1,500.00 per annum
Non productive hours = 8 hours x 44.2 weeks = 353.6 @ $48.30 = $17,078.00
Total overheads = $28,000.00 + $17,078.00 = $45,078.00
the gross profit (which is 30%) must equal $45,078.00.
Therefore 30% of annual sales must equal $45,078.00.
Therefore annual sales = 45,078.00 x 100 = $150,260.00 at a margin of 30%
30
The number of trading hours per annum is 44.2 x 30 hours = 1326 hours
Therefore the sales per hour, being combined labour and material = $150,260.00 = $113.32 per hour
1326
This value is a combination of materials and labour, and relies on a gross profit margin of 30%
For the same overhead burden, if a gross profit margin of 20% is used, the hourly sales value is
Annual sales = 45,078.00 x 100 = $225390.00 or $225390 = $169.98 per hour
20
1326
From the above gross profit margins, if the contractor charges labour at $82.00 per hour, for a gross profit
margin of 30% he must sell ($113.32 - $82.00) = $31.20 of materials per hour of trading. This could be
seen as achievable. If he decides to charge labour at $60.00 per hour, the sales of materials must be $53.32
per hour, which is unlikely to be achieved.
However, for a gross profit margin of 20%, while charging $82.00 per hour for labour, the contractor must
sell ($169.98 - $82.00) = $87.98 of materials per trading hour, which is highly unlikely for a small
contracting operation. At $60.00 per hour, material sales per hour must be $109.98, which is not practical.
From the above example, a small contractor cannot operate at an average gross profit margin of less than
30%, while maintaining a charge out rate of $82.00 per hour for labour, and selling $31.20 of materials per
hour.

Copyright Ken Postill

Page 193 of 199


Exercise 1
Using the example detailed on the previous page, where it has been determined that the contractor must sell
$113.20 per hour (being a combination of labour and materials) with an average gross profit of 30%, the
contractor can then develop a sales budget for the financial year.
The contractor should take a range of trading variables into account, depending on the area of business in
which the bulk of trading will occur, and allocate sales values to each calendar month.
This approach recognises the inevitable variations in trading activity throughout a calendar year, rather than
assuming the contractor will always achieve a specified number of trading hours per week.
Complete the following table, using your personal estimation of the trading activity that the contractor
detailed in the previous examples is likely to encounter.
The annual sales of the contractor must be 44.2 weeks x 30 hours per week @ $113.32 per hour, with a
30% gross profit margin
Annual sales = 44.2 x 30 x $113.32 = $ 150,262.00 with a GP% of 30%
Divide this amount across each of the months detailed in the table, allowing for the variations in trading
activity for each month.
MONTH

MONTHLY TRADING STRUCTURE

July

31 days per month, no public holidays.


Medium trading activity
31 days per month, no public holidays.
Medium trading activity
30 days per month, no public holidays.
Medium trading activity
31 days per month, 1 public holiday.
Busy trading activity
30 days per month, no public holidays.
Busy to very busy trading activity
31 days per month, multiple public
holidays, many businesses closed
Christmas new year. Very busy trading
activity
31 days per month, two public holidays.
First half of the month is very low
trading, second half is medium trading
activity
28 days per month, no public holidays.
Medium trading activity
31 days per month, no public holidays.
Medium trading activity
30 days per month, three public
holidays. Medium trading activity
31 days per month, no public holidays.
Medium trading activity
30 days per month, no public holidays.
Medium trading activity

August
September
October
November
December

January

February
March
April
May
June

TOTALS

SALES @ 30%
MARGIN

DIRECT
COSTS

ACTUAL
GROSS
PROFIT

$150,262.00

$105,183.00

$45,079.00

Copyright Ken Postill

Page 194 of 199


Example 3
This example looks at the sales budget target for an electrical contracting operation that has two managers
and a crew of on site tradespersons.
The managers have decided to trade in the area of commercial fit out work, heavy industry and solar panel
installations. This decision is based on the trading characteristic that material sales will be equal to labour
sales, and both can be used to generate profit.
In addition to the decision to trade in material intensive areas, the managers are confident of achieving an
annual gross profit of 18% by staying in small to medium sized projects, and avoiding very large projects
where the available profit percentages are low.
Wages for each of the managers will be $140,000.00 per year, including on costs, being a total overhead of
$280,000.00
overheads are predicted to be as follows
2 vans @ $15,000 pa each
$30,000.00
telephones
$10,000.00
rent for a small factory unit
$20,000.00
accountancy costs
$2,000.00
insurances
$6,000.00
wages for two managers
$280,000.00
all other overheads
$10,000.00
Total overheads
= $360,000.00
For a break even trading outcome (no nett profit) gross profit = overheads = 18% of annual sales
Therefore if overheads are $360,000.00, and are 18% of sales, sales = $360,000.00 x 100 = $2,000,000.00
Annual sales of two million dollars seems daunting until the necessary trading requirements are analysed
Sales are comprised of 50% materials, and 50% labour.
Therefore sales from labour are $1,000,000.00.
The annual cost of labour for each employed tradesperson @ $30.00 wages per hour = $30.00 plus 38% on
cost = $41.40 per hour is
$41.40 x 38 hours per week x 44.2 weeks per annum = $69535.44
Adding an 18% margin, the return per annum from the labour sales per person
= $69535.44 x 100 = $84,800.00
Therefore the number of field staff required to support the two managers is $1,000,000.00 = 11.8 persons.
ie A staff of twelve full time tradespersons is the minimum number required to support this business.
However, this relies on the sales of materials of equal value to labour to support the business, while
maintaining a gross profit margin of 18%.
This means that the operators must avoid work that has low materials sales components, such as minor
domestic work, telephone cabling, service work, home units, etc. and trade in projects of a small to medium
size, avoiding very large projects with the associated low gross profit margins.
Remembering that a gross profit margin of 18% = overheads = $360,000.00, and that 1% = $20,000.00 if
the managers are able to trade at a gross profit margin of 20%, or 2% above the budget 18%, this would
result in a nett profit of $40,000.00 for the trading year.
Equally, a trading year that produces a gross profit margin of 16% will result in a loss of $40,000.00.
The following page provides the opportunity to examine the effects on the trading structure and
profitability of a range of variables to 50% materials, 50% labour, and a gross profit margin of 18%.

Copyright Ken Postill

Page 195 of 199


Exercise 2
For the electrical contracting business detailed on the previous page, complete the
following table to show the effects of variations in the ratio of labour to materials sales.
For this contracting business overheads are $360,000.00
Sales for labour per person, prior to adding the gross profit margin = $69,535.00
Annual gross
profit
percentage
18%
18%
18%
18%
15%
15%
15%
15%
10%
10%
10%
22%
22%
22%
22%
25%

Total annual
sales
$2,000,000.00
$2,000,000.00

Sales ratio of
labour to
materials
40% labour
50% labour
70% labour
100% labour
40% labour
50% labour
70% labour
100% labour
60% labour
40% labour
100% labour
40% labour
50% labour
70% labour
100% labour
50% labour

Total value of
labour annual
sales
$1,000,000.00

Annual sales
for labour per
person
$84,800.00

number of
field staff
required
12

$2,000,000.00

Using the results detailed in the table above, which of the trading structures are unlikely
to be achievable?
................................................................................................................................................
.
................................................................................................................................................
.
................................................................................................................................................
.
................................................................................................................................................
.
................................................................................................................................................
.
................................................................................................................................................
.
................................................................................................................................................
.
................................................................................................................................................
.
................................................................................................................................................
.

Copyright Ken Postill

Page 196 of 199


................................................................................................................................................
.
................................................................................................................................................
.
................................................................................................................................................
.
................................................................................................................................................
.
................................................................................................................................................
.

Copyright Ken Postill

Page 197 of 199


Answers for Exercise 2
Annual gross
profit
percentage
18%
18%
18%
18%
15%
15%
15%
15%
10%
10%
10%
22%
22%
22%
22%
25%

Total annual
sales
$2,000,000.00
$2,000,000.00

Sales ratio of
labour to
materials
40% labour
50% labour
70% labour
100% labour
40% labour
50% labour
70% labour
100% labour
60% labour
40% labour
100% labour
40% labour
50% labour
70% labour
100% labour
50% labour

Total value of
labour annual
sales

Copyright Ken Postill

Annual sales
for labour per
person
$84,800.00

number of
field staff
required
12

Page 198 of 199


The effect on the trading structure of labour to materials in sales can be shown on the
figurative graph below.
100%
labour

50%
labour
50%
material

100%
material

zero

maximum

number of field staff required for the business to achieve sales budget target

The effect of the change in gross profit percentage margin on the volume of sales
required by a business can be shown in the figurative graph below.
high gross
profit
percentage

low gross
profit
percentage

minimum

volume of trading

Copyright Ken Postill

maximum

Page 199 of 199


Exercise 3
Using the example detailed on the previous pages, where it has been determined that the contractor must
sell two million dollars of work per year, trading in commercial fit out work, heavy industry and solar panel
installations, complete the table below, using your personal assessment of the trading activity that would be
available at the months shown.
This approach recognises the inevitable variations in trading activity throughout a calendar year, rather than
assuming the contractor will always achieve a specified number of trading hours per week.
MONTH

MONTHLY TRADING STRUCTURE

July

31 days per month, no public holidays.


Medium trading activity
31 days per month, no public holidays.
Medium trading activity
30 days per month, no public holidays.
Medium trading activity
31 days per month, 1 public holiday.
Busy trading activity
30 days per month, no public holidays.
Busy to very busy trading activity
31 days per month, multiple public
holidays, many businesses closed
Christmas new year. Very busy
trading activity
31 days per month, two public
holidays. First half of the month is very
low trading, second half is medium
trading activity
28 days per month, no public holidays.
Medium trading activity
31 days per month, no public holidays.
Medium trading activity
30 days per month, three public
holidays. Medium trading activity
31 days per month, no public holidays.
Medium trading activity
30 days per month, no public holidays.
Medium trading activity

August
September
October
November
December

January

February
March
April
May
June

TOTALS

SALES @ 18%
MARGIN

DIRECT
COSTS

ACTUAL
GROSS
PROFIT

$2,000,000.00

$1,640,000.00

$360,000.00

Copyright Ken Postill