INDEPENDENT 9/18/07 12:02 PM Page 16

PROFITABLE CONTRACTOR

Laying the Base

ACCURATE JOB ESTIMATES CAN RESULT IN HIGHER PROFITS FOR YOUR BUSI-
NESS. HERE’S A LOOK AT HOW YOU CAN AVOID ERRORS. By J. Mike Rudd

I
deally, sound job estimates are the foundation for every
new project. If done correctly, they enable the company to
operate effectively and profitably. Unfortunately, many
estimates contain costly errors, which often produce bids
that are too low or too high. If they are too low, the com-
Estimating Oversights and Solutions
Without a comprehensive understanding of the company finan-
cials, estimating oversights and errors occur frequently. Some of
these include:
■ An inability to apply an overhead rate to the bidding process

pany can actually lose money on a job. If they are too high, – Many companies develop their pricing mechanism based on arbi-
chances are the company won’t get the job in the first place. trary numbers that have little to do with the genuine overhead or
profit of the company. Every company has to recover its overhead
The Accounting Picture on every single job. Knowing this rate and how it applies to vari-
To better control the bidding process, companies use a chart of able and fixed costs allows owners to establish break-even points.
accounts (COA). The COA is a listing of all the accounts used to
record the financial transactions of the business. It represents an
accounting picture of a company’s operations and is an essential
tool in the job estimating process. The categories include assets, lia-
bilities, equity, income and expenses. This chart details different
income categories, and can be broken down into building or serv-
ice types, including new construction, remodels, tenant improve-
ments, industrial and commercial. To prepare a solid bid, owners
need to know and understand what the real costs of doing business
are in each of the service types. That means asking two key ques-
tions: “What do I need to know, and when do I need to know it?”
Within the expense category is a cost of goods section. This is
particularly important to the job estimate. Cost of goods includes
variable costs, indirect overhead and fixed overhead. Variable
costs are items such as labor, materials, subcontractors, equip-
ment rental and other expenses related to the production of the
project. Indirect overhead is the measurement of overhead
expenses related to the production of the project, but they are
not directly associated with any specific business activity. These
costs can include supervisors’ wages, estimating wages, small
tools, consumable supplies, repair and maintenance of equip-
ment and trucks, field communications and fuel and oil.
Fixed overhead, on the other hand, is stable and doesn’t fluc-
tuate, regardless of revenue. Sometimes, this category is known
as general and administrative overhead and includes items such
as interest expense, lease expense, depreciation, owners’ wages,
office wages, advertising and utilities.
Data from these categories can help business owners under-
stand the costs of doing business and establish break-even points
on every bid.

16 ■ CONSTRUCTION TODAY ■ OCTOBER 2007