You feel very comfortable doing the job. How do you know if you made money? What are all the factors that you need so you really know the answer? Before you started the job you created an estimate of what the job would cost you and what kind of profit you needed to make. Let’s see if you have considered everything. The following are the costs.
How much do you cost?
As opposed to what you might think you are not free to the company. The cost the company incurs for you is the same as if the company were hiring someone to accomplish the functions you perform. What your skills are worth on the market is what it costs the company for you and, if you want to have a company that continues to exist and grow, you must figure the cost of you into everything for which the company uses you.
How much do the other people (labor) cost?
There is an hourly rate that can be applied to each of the people you have on the job. This is only a part of the cost of the people you hire. There are costs involved in supporting them and that is called labor burden.
How much is the labor burden?
The following chart indicates the burden for each individual in the company who works on the job. These are added to the hourly rate to tell the true cost of the people on the job.
Expense | Calculation Basis |
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% of annual wage % of annual wage % of annual wage |
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% of annual wage % of annual wage Lump sum per year |
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% of annual wage Lump sum per year Hours per year – 6% of Salary in Canada Hours per year – 3.6% of Salary in Canada Hours per year |
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Lump sum per month Hours per year Lump sum per month Lump sum per month Hour per month Lump sum per month |
How much will it cost for all the materials that were used?
When you figure the cost of materials used on the job the waste must be included. The cost of materials also includes those used for setup, cleanup and administration of the job. All the materials the supervisor uses must be included in the cost. Also, how much does it cost to pick up and deliver the materials?
How much will it cost for waste?
We are not just addressing waste relative to materials. Waste is a factor to be considered in terms of how much the people waste by being late which may cost for time of other waiting. There is also waste for parts of the job done more than once. Waste is also a factor to be applied to the tools when the tasks are done over and over. Each change, over-run and mistake has a waste factor that needs to be considered. As a rule 2% – 8% of the entire job cost should be added for waste. If you are doing roofing 10% is a good number and for finishes anywhere from 2$ – 50% depending on the intricacy of the job.
How much do equipment and miscellaneous items cost?
All the equipment, like cranes, that you might rent has a cost. Some of them are costed by the hour of use while others that you have purchased could be costed that way or might be a lump sum but, their cost must not be forgotten. In some cases contractors think of scaffolds as equipment and other as miscellaneous but all the items that fit into that category must not be forgotten.
How much will it cost to manage the project?
Not only is there a cost for the hours spent managing a project but the hours spent with the client and at the office in planning, communicating and guiding the project to closure so, when you figure the hours for the supervisor all of that must be included. Some successful contractors use a factor from 3%-9% of the cost of the job for the cost of administration.
How much will it cost for non-chargeable items?
The first of these is the time and efforts that go into creating and presenting the quote to the prospect. This does not only include the time for figuring it out and creating the quote but the time talking with the subs, pricing material, etc. These are costs that need to figure into the cost of the job. This fits into the category of overhead.
How much does it cost for project preparation and cleanup?
The costs of pulling permits, the permits, getting the plans, the plans, temporary needs, etc. and the cost of cleanup such as the dumpster, loading and transportation of it for each job and they need to be included. These are costs that are sometimes forgotten when estimating a job.
How much are the office expenses?
The office does not run for free. All the costs that go into running the business need to be included when putting together each quote. The fixed costs like rent as well as the variables like office supplies need to be considered. This fits into the category of overhead and figuring what your overhead costs is a very good exercise. Overhead and labor burden are really the only categories of expense over which you have any control so, analyzing your overhead every month will keep you on target.
All of that sounds complicated so let’s look at a simple equation that business schools have created for you. In order to maintain and grow any business you need a 7% – 10% net profit. They say that if you don’t get at least 7% you have a hobby or another way to put it is an unintentional non-profit and it is a very expensive hobby. They also say that in order to get the net profit you need you will have to get between 35% and 40% gross profit. Overhead and all the costs of getting and doing listed above make up the difference between gross profit and net profit.
This has a major impact on the product you sell. Unless you do an enormous amount of jobs like a Wal-Mart and can afford to discount, you need to sell value to make a living. There cannot be anything that resembles a “half price sales event”
Selling Value Instead of Price
Selling value means putting the extra value into the product you sell so your customer will show it off with pride. Making the job implementation the best It can be is only one factor in selling value. Just as important are communicating adequately and accurately, being on time and cleaning up professionally all the way through the job – in a nutshell, meeting and beating all the commitments. It means branding your company name as the go to place for quality customer service.
You will have trouble undercutting another contractor and making the net profit you need so, what you sell to the client is that you will be around when they need assistance or for their next job done while the other contractor may not, and you will only be telling the truth.
Thank you for stating that some heavy equipment should be rented for the hour while some should just be bought. When it comes to cranes, which would you say is the better choice? I thought renting might be better, but I would like to hear the opinion from someone who has the proper knowledge.
Whether to rent or purchase would depend on the frequency of your usage of the equipment. Using the purchase price and the frequency as the factors of he decision you can derive a number of times you use the equipment for payback if you purchase. Then, count the number of times you would have to rent the equipment to have paid for it. The results of the equation will give you the answer.
Luke I’m a new contractor and I’ve been going over some of these numbers myself. My five year plan is to have enough work to make owning my own crane the option. Just to assist you along a bit, and without knowing what your needs are, I looked at a 90 foot extension crane, Ford 5500 series with full outriggers and less than 120,000 miles on it and it was $60,000. So, maybe this helps.
Byron, thank you for pointing me toward this chapter. You pointed out a couple things I had overlooked like a dumpster {!} and reading what you wrote it makes me feel like I’m on the right path in other ways. I’m going to keep reading for sure.