The Design Builder's Blog

Yellow Pad Estimating For Contractors: The Good and the Bad

Many contractors start out estimating and learning how to estimate using what I refer to as the “Yellow Pad Method”.    Using paper and a pencil they can create estimates any time and on the fly.   However as the business grows, particularly when others take over the management and building of projects sold, the typical yellow pad estimate may not give the build team the information they need to build the project on their own.  Also, the information within the yellow pad estimate may not be in an intuitive and organized format, making it hard to find the information they need. 

I came to this realization as I built my company and eventually formalized my estimating method and started using a better tool to get it done.   I learned at lot by attending training seminars, reading articles and plenty of trial and error.  In this blog post I’ll share a little about what I learned during the evolution in hopes it will help your estimating evolve.  

I’ll even offer you a free copy of my recently updated Excel Estimating Spreadsheet Template.

The Good

Actually I think yellow pad estimating is the best way to learn how to estimate.   I say this because every time you do a new estimate you start out with a blank canvas.   This allows you to be creative and try new ways to estimate and organize your info each time you do one.  Using the yellow pad I learned how to do estimates in a variety of formats.   For example the information in the estimate could be listed in critical path order, the same order I promised my client and therefore wanted my production team to build it.  For another client I assembled the information room by room so they could decide what to do at a later date if the total cost came in higher than their current budget.

Using the yellow pad I could also do quick estimates for small projects on the fly.   This often allowed me to sell the job at the first visit as long as I could also easily write up my proposal ready for a signature.   That was back in the good old days when work was plenty and hand written proposals were the norm.

The Bad

Eventually I became frustrated with many of the limitations of using the yellow pad to estimate.  Here is a brief list of what I ran into that motivated me to make the switch to using Excel spreadsheets instead.

• I had to add up all the numbers with a calculator multiple times before having enough confidence to give it to my prospects because I didn’t always get the same number!
• Cutting and pasting to insert missed tasks was literally cutting and pasting using scissors and tape.
• If a prospect who several months back had said no to my price called back to go ahead, making updates to the estimate was not possible, I had to do it all over again.
• If the customer wanted to make product substitutions or wanted suggestions to value engineer the project, to be confident about the price differences I had to do the estimate all over again for each option.
• After hand writing the estimate and proposal me or my staff then had to also hand write out the sub contractor agreements and the materials lists.
• When I had to do another estimate for a similar project trying to reuse an old estimate wasn’t as simple as copying and pasting or changing the quantities like it could be using a computer to do so.

Then I started using Excel to Estimate

Eventually, after a lot of experimenting using the yellow pad I eventually incorporated what I had learned into an Excel Estimating spreadsheet I created on my own.   Doing so definitely improved the speed and accuracy of my estimating methods.  The end result also provided the majority of information the production team needed so they could build the job without me around, leaving me time to sell more work.

For more on how I advanced my estimating methods and how I used the Excel estimating template check out this previous blog post titled “Don’t Underestimate Your Estimating System’s Potential”.

Click on the button below to get my NEW UPDATED Estimating Template now!

Guest Blogger: Melanie Hodgdon is a Certified QuickBooks ProAdvisor who has been providing financial analysis and QuickBooks training for contractors since 1994. She’s the co-author of A Simple Guide to Turning a Profit as a Contractor.  Melanie and Shawn often coordinate their efforts when helping remodelers develop financial systems for their businesses so they serve the contractor, not just their accountant.

Understanding and Including General Production Costs in Your Estimates

Estimators are pretty good about including costs for permits, materials, subs, and equipment rental in their estimates. And the really topnotch ones are also adept at estimating the amount of labor time based on knowledge of what their crew(s) can produce. But there is another element that often eludes even the most careful of estimators: the cost of those “necessaries” that will be used on a job but not easily assigned to specific jobs.

These include things like:

• Bits
• Blades
• Rags and other cleaning supplies
• Sanding disks and sand paper
• Trash bags
• Small tools
• Dust masks
• Assorted fasteners
• Caulking and adhesives
• Pencils, markers and chalk

Here are some more candidates:

• Cost to repair and maintain tools and equipment
• Cost to maintain a jobsite trailer
• Propane for the space heater
• HEPA filters
• Bungies, ropes and tie downs
• Trash barrels or bins

These can be considered General Production Costs and you should have a method to allow for them in the job price.

Two ways to price your work

Basically, pricing consists of identifying the actual cost of X and then adding a markup. The purpose of the markup is to allow the selling price to cover not just what X costs, but also it’s fair share of the company overhead, with enough left over to contribute to company profit.

Option A: Include in the estimate

When you include an allowance for General Production Costs in your estimate, you increase the predicted cost of the job. When you apply a markup to the cost, you will also be marking up the predicted General Production Costs. Because you are charging your customer for the cost (income account), the matching cost should be considered Cost of Goods Sold.

For many contractors, including an allowance for these costs in the estimate will increase the likelihood that the costs will be covered.

Option B: Include in the markup

If you consider General Production Costs as being part of the cost of doing business (overhead), then you will account for them by increasing your markup on the job.

Ideally, both methods will result in the same selling price. However, in my experience, far too many contractors decide on a markup based not on the financial requirements of their company, but rather on a figure they found in an article, or what scuttlebutt tells them their competition is using. This WAG (wild ass guess) approach decreases the likelihood of capturing these costs in the markup.

Why I typically recommend Option A

Also, as companies have diversified with changes in the economy, the type of work they do has also changed in many cases. Burying these costs in overhead can make the changes less obvious than placing them in Cost of Goods Sold where significant changes are more likely to be spotted. For example, companies performing lots of RRP work might see a significant increase in these costs due to the requirement for filters, respirators, contractor bags, signage, duct tape, Tyvek suits, etc. The effect on the gross margin (when these costs reside in Cost of Goods Sold) might be noticed more quickly and reliably than remembering to deliberately dig into the overhead accounts to find and monitor them.

Estimating vs. job costing considerations

Once your General Production Costs are part of Cost of Goods Sold, an allowance for the inevitable cost can be included in the estimate. This means that you will charge for them as part of your pricing strategy. However, because of their very nature, you won’t be able to attribute them to individual jobs, so when you look at job cost reports, you will not see an “actual cost” for these items, making the jobs appear slightly more profitable than they probably are. The achieved margins of all the jobs will look higher than the overall achieved margin from the Profit and Loss Statement since the Profit and Loss Statement will contain the dollars spent on General Production Costs and the individual job reports won’t.

How to calculate General Production Costs for estimating purposes

The simplest way is by comparing General Production Costs with Materials costs. Express the relationship as a ratio or percentage. For example, if in the last twelve months you spent $500,000 on materials and $8,000 on General Production Costs, you will need to add 1.6% ($8,000 ÷ $500,000) to your estimate to cover them. When estimating, this figure can be added as a line item as shown in the sample estimate template below.

 Screen shot from Shawn's new estimating Template

Final thoughts

Each job has enough surprises in it. Why not at least plan your sell price to include an allowance for the costs you know you can count on?

Need help with General Production Costs?

Call or  Email Shawn today. 

Do it now so you can be confident you are pricing your spring and summer projects correctly!

MA Workers Comp Rates For Contractors May Go Up, Retroactively!

The Workers Compensation Rates and Inspection Bureau of Massachusetts (WCRIBMA) submitted a rate filing on December 27, 2013 to the Division of Insurance on behalf of its members recommending a 7.7% increase in average rates for industrial classes. Workers compensation rates for construction workers fall under the industrial classes. 

So if the rate hike is approved contractors can expect their workers compensation premiums to increase. Using some quick math that means for classification code #5403, Carpentry- not otherwise classified, the rate for a carpenter being paid $25.00/hr will increase by about $.74/hr, or a total increase of about $1539.00 for the full year (2080 hours). 

That should help motivate contractors to add employees and help stimulate the economy...  Ready for more good news?

Paying more is one thing, how about having to pay retroactively!

The proposed effective date of the rate filing is January 1, 2014. That means if the rate hike is approved as submitted insurance companies will be able to retroactively charge contractors the new rate all the way back to the first of the year.  Again, using some quick math, if for example the rate hike is approved as of March 1st, 2014, that means for a $25/hr carpenter under classification code #5403 the retroactive premium for January and February would be just under $255.00

WC Code #5403 current rate: 9.61/$100 of payroll

WC Code #5403 proposed new rate: 10.35/$100 of payroll

Here’s the message the WCRIB is suggesting insurance carriers send out with all new and renewal policies:

“A filing is being considered by the Massachusetts Division of Insurance which may result in premiums different from those shown on the policy.   If it does, we will issue an endorsement to show the new premiums and their effective date.”

If you don’t like it you can speak your mind

A Hearing on the Rate Filing will be held at 10:00AM on Thursday, January 30, 2014 at the Division of Insurance, 1000 Washington Street, Boston, MA.  For more information you can refer to Circular Letter #2230 and Circular Letter #2231 for details.

If you go, can you please ask if they will also write into the changes that contractors can retroactively bill their customers for the increase as well, and that all customers must pay the increase within 30 days of receiving the invoice from their contractor….?

If you plan to attend the hearing

Any person who wishes to participate as an interested party in this hearing must comply with the procedures set forth in 211 CMR 110.05 (3).  Persons who wish to present unsworn oral or written statements at the January 30, 2014 hearing are asked to submit a notice of intent to comment no later than January 28, 2014. All other persons who wish to speak will be heard after those who notify the Division in advance.

It pays to be a NARI Member

I want to thank fellow EMNARI Member Tom Messier of Mason and Mason Insurance for making me aware of this so I could share it with you.  I have known Tom for over 15 years. One reason I continue to do business with him is because he proactively shares this kind of important information with me and the other contractors he works with.  Tom also shared with me that the state has not seen rate increases since 2001.  Maybe that makes us lucky.  They did try to increase the rates by 14% two years ago, but the increase was denied.  He also shared that in the past the rate increases typically have taken place on September 1^st of the year they were approved. 

Guest Blogger: Melanie Hodgdon is a Certified QuickBooks ProAdvisor who has been providing financial analysis and QuickBooks training for contractors since 1994. She’s the author of A Simple Guide to Turning a Profit as a Contractor.  Melanie and Shawn often coordinate their efforts when helping remodelers develop financial systems for their businesses so they serve the contractor, not just their accountant.

Who's Paying For Your Carpenter's Non Productive Time?

I was discussing the cost of labor the other day with a client, and he told me he really had a handle on what his costs were. “No kidding? That’s great,” I said. I then quizzed him on what factors he’d included, and was impressed that he’d gotten so many: wages; company-paid payroll taxes; Worker’s Comp; liability insurance; vehicles, cell phones, and small tools used by production workers; health insurance; retirement. “And what about non-productive time?” I asked. Puzzled, he asked me what I meant.

The fact is that while it’s relatively simple to calculate what it costs to pay a production worker for an hour of time, you have to remember that he’s not going to be available to perform the work that you estimated for 100% of that time.

Let’s do the math.

Assuming no overtime, a worker is typically paid for 8 hours/day, 5 days/week, 52 weeks/year. This adds up to 2,080 hours. So you’re paying him for 2,080 hours a year.

But for how many hours will he actually be available to you to perform the work you’ve included in your estimate for labor?  Subtracting for some common events, we see the number of hours available for producing the estimated work starts to evaporate.

What else cuts into that productive time? How about those weekly production meetings? OSHA safety meetings? Meetings about the new health insurance or retirement options? What about training and education? How about the requirement that they clean out the vans every Friday afternoon? Do they help clean up the shop? Maintain tools? Are they paid for commuting time?

How might this affect estimating the cost of labor for a job?

Let’s say that you pay Will $20/hr. After adding all the burdens to that hourly rate, you discover that his total annual cost is $63,500.

You can look at this annual total in two ways: how much does Will cost you per paid hour, and how much does Will cost you per productive hour: the hours that he’s actually available to perform those labor tasks you included in the estimate when calculating the job’s sale price?

From the chart, you can see it costs over $5/hour more for Will’s time when you base the cost on his productive time.

So what does this mean in terms of pricing jobs?

Using the wrong labor cost can be devastating, particularly in jobs where there is a high proportion of labor.

Let’s see how it would play out in jobs with varying amount of labor.

For a 100 hour job, based on the burdened cost per paid hour, the estimated cost would be $3,053.

Those same 100 hours, based on the burdened cost per productive hour, costs $3,553. So the cost difference between using the paid vs. productive hr cost figure would be $500. For a 1,000 hour job, the cost difference would be $5,000.

Now let’s look at the selling price of the job, assuming a 50% markup.

For a 100 hour job, the difference in selling price would be $750.

For a 1,000 hour job, you’d be underpricing by $7,500!

So next time you estimate work, be sure you’re working from realistic costs. Labor is tricky to estimate anyway; getting a handle on what it really costs for that hour of nail banging will bring you closer to costing and pricing your jobs accurately.

Need help with figuring out your labor costs?

Call or Email Shawn today. 

Do it now so you can be confident you are pricing your spring and summer projects correctly!

Guest Blogger: Graeme Owen, based in Auckland NZ, is the builders' business coach.  Since 2006, he has helped builders get off the tools, make decent money, and free up time for family time, going fishing, and enjoying sports.  Get his free ebook: 3 Reasons Builders Lose Money and How to Fix Them for High Profits at TheSuccessfulBuilder.com

To Close More Free Estimates Be There for the "Which Builder?" Decision!

Are you wasting time preparing building estimates for jobs you don’t get? Frustrating!  And costly!  Maybe you are like so many builders making one of the most common estimating mistakes: Not being with the client when they are deciding which estimate to accept!

There is no doubt that the builder who is with the client when they are deciding on which estimate to accept is highly likely to get the job.  Wouldn’t it be great if you could be that builder? The thing is...you can.

Here are three keys to being present when the client is deciding "which builder" to hire,

1. Discuss Other Estimates

In your first meeting with your client make sure that you discuss with them how many other estimates they are planning to get. Even though they may like you and tell you you are the only one, it is highly likely that they will consult another builder - if only to check that you are not “ripping them off.”  Also, if they are borrowing money for the build, they may be required to get multiple estimates.

2. Set the Estimate Close-off Date

Having broached the subject, discuss the close-off date for accepting estimates.   Make sure that you give yourself enough time to get your estimate together and enough time for your client to talk to other builders.

3. Position Being There

Finally, in your first meeting ask permission to be with them when they are making their final decision. Set the date and time for that meeting on your first visit.

Here is an example

You say, “Will you be getting other estimates?”

They say, "Yes."

Accept this graciously with something like. “That’s great.” Then say,

“When do you think is a good date for us to have all the estimates together?”

“What we request is that when you have all the other estimates together we meet and go over them with you. This way you can be certain that you are comparing apples with apples. Now I know that you are probably quite capable of doing this yourself, but we have had cases where people have accepted estimates they have later regretted. They did not fully appreciate exactly what was covered and ended up paying more than they had expected. So it’s our company’s policy to do this. Is that OK?”

“When would be a good time for us to meet?”

Summary

Follow this simple procedure and you will increase the number of times that you are able to be with your client at the strategic time when they are making their decision on which builder to use.   Some will not agree.  But if you don’t ask, none will agree!

Post and share your comments below.

Would you try the scenario described above?

So, how many of the last 5 estimates did you close?

What have you found to be the best key to turning estimates into sales?