The Importance of Knowing Your Break-Even Cost in Contracting

Before you can determine how much to sell a job for, you need to know exactly how much the project is going to cost you to complete. This is called your break-even cost. Only after you have calculated your break-even cost are you in a position to determine your bid price.

Profit is only possible if you know your break-even cost

Please allow me to tell you a little story about my own experience back when I was an electrical contractor.

I was the type of person that desperately wanted to win every single job that I bid on. Once I took off my “Estimator” hat and put on my “Sales” hat, I was determined to convince my customer that they would be crazy to award the job to anyone else. Even if my price was a bit too high, no problem. I would enter into negotiations that would make any diplomat proud.

It’s important for you to understand that my electrical contracting company used to do a lot of work for many of the big home builders back during the housing boom. I’m talking about communities consisting of hundreds of homes that would take a few years to build out. These were incredible contracts for my company to be awarded.

I was fortunate enough to be able to develop strong personal relationships with the contract managers for these builders. They were very important players in my universe. After all, they had the sole discretion to award these really lucrative contracts and, right or wrong, having a good personal and professional relationship played an important role.

Not to say that these guys were pushovers. Just the opposite. They were tough. They liked their jobs and wanted to keep them. Why wouldn’t they? They had a bunch of chumps like me that would wine and dine them while treating them with the utmost respect and deference.

Their job performance was based on their ability to keep construction contract costs down. So much so that there was a saying at the time that “If they’re a buyer, they’re a liar“.

While this may sound a bit harsh, the truth is that some of these guys took great delight in squeezing the lowest price out of their vendors. I don’t know how many times I heard the following: “Come on Bill, you’re killing me. Out of the three proposals that I’ve received, yours was the highest! If you want this job my friend, you’re gonna have to sharpen your pencil!”

I’m pretty sure that I was told this more than once even though I wasn’t anywhere close to being the highest bid. Don’t get me wrong, I truly appreciated the opportunities that I was given to negotiate my price in order to win jobs.

What I didn’t appreciate at the time was that my old estimating system didn’t give me confidence in my numbers. Truth be told, that’s one of the reasons that I created TurboBid. I needed a systematical method of identifying and accounting for ALL of my costs. The only thing I disliked more than losing jobs was losing money!

Please keep this in mind. When you’re estimating a job, it is of the utmost importance that you know exactly what the project is going to cost you to complete. If you sell a job for less than your break-even cost, you will lose money.

How do you determine your break-even cost?

Many contractors end up losing money on jobs because they fail to accurately identify their break-even cost. This has been the cause and reason for the demise of many contracting companies.

Business is no place for guessing.

Unfortunately, in our industry, many new companies don’t have the required knowledge needed to accurately calculate their direct and indirect costs.

Following are some examples of what should be included when calculating your break-even cost.

Material
  • The cost of material to be installed
  • Waste
  • Theft
  • Sales tax
Labor
  • Material installation time – How many man hours the job will take to complete
  • Direct labor cost – This is simply the number of hours that the project will take to complete, multiplied by each field employee’s hourly pay rate.
  • Burden cost – This is the additional costs that your company incurs on behalf of your field employees.
    • Payroll taxes
    • Workman’s compensation
    • Liability insurance
    • Health insurance
    • Paid time off
    • Paid holidays
    • Bonus’
  • Future pay rate increases – If you will incur a payroll rate increase during the project, you need to calculate the additional labor cost for the job
  • Skill Level Adjustment – If the job includes an employee with a lower skill level that reduces his productivity, you must account for the additional time that the job will take to complete.
  • Additional Labor
    • Material handling
    • Meetings
    • Paperwork
    • Job setup and breakdown
    • Sweeping
    • Drive time
    • All additional tasks that the crew will perform other than installing
  • Labor Hour Adjustments – Different types of work require labor hour adjustments. For example, you can’t use the same labor units to estimate commercial and residential projects.
Miscellaneous Expenses
  • Miscellaneous Direct Job Expenses
    • Permits
    • Inspection fees
    • Equipment rentals
    • Service mobilization fees
    • Trash
    • Anything and everything thing that you’ll spend money on to complete the project
  • Subcontracts
  • Tools and tool replenishment due to wear and tear
Overhead

Overhead consists of the costs that you incur to run your business.

  • Office staff
  • Vehicles
  • Advertising
  • Physical business location expenses – Lease, repairs, trash, maintenance, etc.
  • Financial – Accounting, loans, tax preparation, etc.
  • Insurance
  • IT, website, email, etc.
  • Legal fees
  • Office expenses – Ink toner, paper, postage, software, etc.
  • Owner salary
  • Tools
  • Training
  • Utilities

What are the benefits of knowing your break-even cost?

  • Before you can determine how much to sell a job for, you need to determine exactly how much the project is going to cost you. This is your break-even cost. Once you know your break-even cost, you can determine your bid price by adding the profit that you need to make on the job.
Are you missing the final piece to your success?
  • You’ll be in a position to negotiate your bid price without the risk of losing money. If it comes down to it, you’ll be able to tell your customer with conviction that as much as you want to do their job, if you lower your price any more, you will lose money. At that point, tell them in no uncertain terms that they need to be very careful about awarding the job to anyone that claims they can do it for less.
  • If you’re bid prices are consistently too high, and you are including a reasonable profit margin, chances are that you need to reduce your costs. By having a detailed break-down of your costs, you have the ability to look for areas that you can reduce costs. Overhead costs are usually a big surprise to most people and can usually be reduced.
  • If you have a high degree of confidence in your break-even cost, and you really need to win a certain job, in theory (as strange as it sounds) you could take a job for zero profit if…..
    • You have a project winding down and you need a new job for your key field employees.
    • Work is slow and you need cash flow to pay your company’s bills.
    • If you work with the tools, you are not just an owner. You are an employee. If you’re not out working with the tools, you’re not earning a paycheck as an employee.
    • You want to develop a relationship with a new customer that could lead into a lucrative long term relationship. I’ve been known to “buy jobs” in the past.

In conclusion, building a profitable business is really hard work. While you may be the world’s best electrician or plumber when working with the tools, becoming a business person is a whole different matter. If you want your business to prosper, you have to know your costs.

Best regards,

William Ruffner
Founder & CEO
TurboBid

Follow TurboBid via Twitter, Facebook, LinkedIn or YouTube. Contact TurboBid directly at Support@TurboBid.net

If you liked this post please share it with you colleagues using the “share” buttons below:

Starting Your Own Electrical Contracting Business

Thinking of starting your own electrical contracting business?

I’ve found that one of the most rewarding aspects of owning an electrical estimating software company is that it has provided me an opportunity to get to know people that have made the life altering decision to start their own electrical contracting business.

The image depicts starting your own business
Starting your own contracting business?

I know from experience that running your own electrical contracting business is not for the faint of heart. It takes up a lot of your time and it can be a lot of hard work.  But it can also offer unimaginable satisfaction. There is a lot to be said for taking control of your own destiny, for having the power to make your own decisions, to make your own mistakes, and to have the opportunity to make a better life for you and your family.

What are some motivating factors?

The reasons that people have for making the decision to start their own electrical contracting business often follow a similar thread. One of the most common scenarios I hear is one where they had become extremely competent at performing their job duties while working for someone else. Their job duties ranged from working in the field as an electrician, whether as a Journeyman, Foreman, Superintendents, or those that were working in the front office. They said that as long as everything was rolling along smoothly, they were quite happy and content working for their employer. But the moment grief and aggravation became a common theme in their daily work, nagging whispers of “Why am I putting up with this grief and making money for this company when I know that I can start my own electrical contracting business?” began to awaken the entrepreneur within them.

Another common scenario for making the decision to start their own electrical contracting business is that their employer could not provide them with steady full-time employment. Depending on what segment of the electrical construction industry you work in, some employers struggle with being able to consistently provide their employees with 40-hour work weeks. Unless you’re single and living in your parent’s basement, most working adults need to work full 40-hour weeks.

The image depicts waiting in line for a job
Looking for a job? Go to the back of the line.

I was a union electrician and I know how bad it can be when the job you’re working on comes to an end. If the company your working for doesn’t have another job lined up, they might be forced to lay you off. In the case of union electricians, if you get laid off, you have to go down to your local International Brotherhood of Electrical Workers  office and sign “the book”. Depending on how many other laid-off electricians are in front of you, it can take a substantial amount of time before they are able to send you out to another job.

My motivating factors

The motivating factors behind my decision to start my own electrical contracting business was a little bit different than most. First, I didn’t hate my job. The truth is that I actually loved my job. Secondly, there was not an issue with having steady work. If work slowed down in the field, I was fortunate enough to have enough additional value from my years working in the office as an estimator, running jobs as a foreman, and later being in charge of foreman as a superintendent, my employer always found a spot for me.

My motivation was simply that I didn’t want to work for someone else. I wanted to take control of my future and start my own electrical contracting business. If you think about, why would anyone want to put their family’s future in the hands of someone else? Why would you willingly give someone the power to give you your last paycheck and say, “I’m sorry but we have to let you go”. Forget that. This is America and it’s still the greatest country on earth. It’s one of the few places where you have the ability to be whatever you want to be. If you’re not afraid to put in the hard work, and if you have enough faith in yourself, you can be as successful as you want to be.

Fortunately, I was able to build a very successful electrical contracting business. I won’t lie and say it was easy in the beginning because it wasn’t. It required a great deal of dedication and a whole lot of hours.

Some things to think about now

You should start planning everything that you’ll need to do to start your own electrical contracting business as soon as possible. I would advise that you start networking potential customers as soon as possible. There are many community organizations you can join that will give you the opportunity to develop relationships with builders and other potential customers in your area.

Start researching the various expenses that you’ll incur. Make a detailed list of expected overhead expenses as well as anticipated burden costs. Our TurboBid estimating software includes an overhead calculator as well as a burden calculator. Feel free to contact us and we’d be happy to show you in a free screen share what these expenses consist of. Don’t let these expenses freak you out. You’ll account for them in your estimate and recoup them in your bid price. Just make sure that you’re accurately accounting for them in your estimate.

I would also suggest that you try to get terms at your local supply store. If you can get Net 30 or Net 60 terms, it means that you will have 30 or 60 days before you have to pay your material invoice. This gives you the opportunity to use cash flow to pay your invoices. Remember the phrase “Cash is King”.

Vehicles can be a big expense. You don’t need to buy new. I would suggest that you get yourself a well-maintained used van, and if needed, a pull behind cargo trailer.

Remember that these vehicles are traveling billboards that you can use to advertise your electrical contracting business. Don’t skimp on the graphics. You want your graphics to make a statement about your company. With that being said,  always keep your vehicles clean and well maintained.

Your vehicles are not just a mode of transportation. They are a means in which to achieve efficiency. We used to set up the inside of the pull behind cargo trailers with shelves and keep a modest material inventory. Rather than tying up a van, we would drop the trailer where the crew was working so they would have the tools and material they needed to complete the job.

Conclusion

Starting your own electrical contracting business, or any contracting business, can be extremely rewarding. While it is a lot of hard work, I believe that the potential benefits are well worth the effort.

When speaking with our customers on this subject, most of them feel that in spite of the hard work that was required to start their business, they absolutely love being in charge of their own destiny and have absolutely no regrets.

There are still many more aspects to discuss on this subject. I will continue my thoughts in a future article.

Best regards,

William Ruffner
Founder & CEO
TurboBid

Follow TurboBid via Twitter, Facebook, LinkedIn or YouTube. Contact TurboBid directly at Support@TurboBid.net

If you liked this post please share it with you colleagues using the “share” buttons below: