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

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“You’re going to have to get estimating software.” – Mike Holt

For those of you that are not familiar with Mike Holt, he is a well-respected author and developer of software, books and video training programs for the electrical industry. Click here for more information.

TurboBid is the only estimating software that Mike recommends. He has worked closely with the folks at TurboBid to ensure that it follows the same terminology and principles that he teaches in his estimating course.

TurboBid’s founder, Bill Ruffner, was invited by Mike to come down to Florida and take part in filming his new estimating DVD. During filming, Mike made the following comment that made a lot of sense. The truth is that most guys that open their own shops are coming out of the field. While they might have been great electricians, running a successful contracting company takes a whole different skill set. You’re going to have to decide to become a business person.

Mike said “You need to make a decision. The reality is that if you’re going to be a business person, you’re going to have to get estimating software. You need to make the decision that, ‘I’m going to be a business person’. Once you’ve made that decision, that’s your goal. Then number two is, ‘What’s your plan? How are you going to get there? What are you going to have to do?'”

Following is a video excerpt from Mike’s Electrical Estimating Deluxe DVD Package.

 

 

The concepts that Mike goes over in his video are very important to the success of your company. Every day that passes by without taking action is a wasted opportunity. You owe it to yourself, your family and your business to take a few minutes out of your day to see for yourself how TurboBid can help you win more profitable jobs and improve your professional image.

Give us a call at (888) 417-2458 x102 or click here if you would like to schedule a specific time for us to call you so that we can have a brief chat or live demonstration.

How Do You Find the Right Estimating Software?

Invest1How Do You Find the Right Estimating Software?

It can be a daunting task when you start to look for an estimating software program that is best suited for your own particular needs.  Every company is saying the exact same thing: Our software is easy to use, it is the most accurate, it is the most consistent, it will help you win more bids……… In fact, you might even start to think that they are all pretty much the same.  This couldn’t be further from the truth.

TurboBid is quickly becoming well known for both its estimating software’s capabilities as well as it’s stellar customer service.  All you have to do is listen to what our customers are saying and you’ll understand why.  But as a contractor who is not currently one of our customers, you have had very little contact, if any, with our company.

So how do you know if what we are saying is true?  Doesn’t every estimating software company make the claim that they are better than the next?  Sure, you could do your research and peruse the various blogs and forums on the internet and see all the positive press for TurboBid. While it would certainly help, would you truly be 100% convinced?  Or you could even go to Mike Holt’s website and see that TurboBid is listed as the “Best Buy” among his listing of major estimating software solutions. You might even discover that TurboBid was designed around the principles taught in Mike Holt’s Illustrated Guide to Electrical estimating.

Again, how do you know which is the best estimating program for you?

Just remember: Without using the software in real life situations, on real bids, you are just making a decision based on what others are saying. Instead of casually looking at a limited trial version, we want to help you really use the software and prove that TurboBid is a winning solution.  We are offering you the opportunity to utilize TurboBid for 14 days, performing actual takeoffs. This isn’t just a trial where you download the software and find out that you’re left on your own to figure things out. This trial includes the full support of our company.

Download today and learn first hand why contractors across the country are so excited about TurboBid.

www.TurboBid.net

Why square foot pricing is not a good idea

The ultimate goal of any company is to make money. What determines if your company makes money? You simply have to sell jobs for more than what they cost you to do.

Contractors that use square foot pricing run the risk of losing money on jobs because they neglect to identify and account for all of their costs.

The description of neglect in Websters dictionary is “to give little attention or respect to”.

If a company’s ultimate goal is to make money, why would any contractor use a method of estimating that gives little attention to or respect to identifying and accounting for all of their costs? I have to believe that it’s simply because they don’t know any better.

Producing highly accurate estimates in a timely manner is not at all difficult if you know how to do it.

TurboBid provides a simple step by step process of estimating and bidding that allows you to systematically identify and account for all of the costs involved in a job.

We take great pride is our ability to personally help contractors become better business people. We have a passionate desire to help our customers succeed. Honestly, there is no better feeling in the world than receiving a letter from one of our customers thanking us for helping them provide a better life for themselves and their family.

Following is what needs to be considered when estimating and bidding on a job. Would you prefer to do all of this manually or would you prefer to use the power of TurboBid?

Material costs and labor hours

  • The fastest and most accurate method of estimating is to use assemblies. An assembly should include your material costs and the amount of time to lay out and install the assembly. TurboBid currently includes over 45,000 per-built assemblies.

Assembly maintenance screen

Material Cost

  • Your material pricing needs to be accurate. TurboBid allows you to easily keep your material prices up to date.
  • If applicable, add a percentage of the material cost to account for misc. material.
  • If applicable, add a percentage of the material cost to account for material waste and theft.
  • Add material sales tax.

Labor

  • Manpower: In order to calculate your labor cost, you need to identify the manpower that will be used on the job. Your manpower costs should include the following:
    • The employee’s pay rate per hour.
    • The employee’s burden cost. Burden is the additional cost that you incur on behalf of your employees. This is typically in the form of payroll taxes, workman’s compensation, general liability insurance, health insurance, paid vacations/holidays/sick days, benefits, bonus’, etc.
    • View our manpower selection screen
    • View our labor burden calculator
  • Pay Raises: You should account for any employee pay raises that are incurred in the middle of the job and add the prorated cost to the estimate. TurboBid does this automatically.
  • Skill Level Adjustment: The material labor units used in TurboBid are based on a typical journeyman doing the installation. If you have employees that produce at a lower rate, they will cause the job to take longer to complete. You must calculate the effect that this lower productivity has on the entire crew and add it to the estimate. TurboBid does this automatically.
  • Additional Labor: This is where most contractors leave money on the table. Your estimate needs to include all of the additional time that you’re paying your employees for. This can include things like job set up in the morning, packing up to go home at the end of the day, material handling, meetings, paperwork, sweeping, travel time, etc. These tasks can be for one-time only, per day or per week. TurboBid automatically calculates these costs and adds it to the estimate.
  • Type of Work: You can’t use the same material labor unit to estimate all types of work. For example, residential typically has a faster pace and more repetition than commercial work. You need to be able to quickly adjust your labor units to accurately reflect the type of work that you’re estimating. TurboBid does this automatically.

Misc. Expenses

  • Misc. Direct Job Expenses: You must take the time to identify and account for all of your misc. direct job expenses.
  • Subcontracts: You need to add any costs for work that you’re paying a subcontractor to perform.
  • Tools: You should not only account for the cost of new tools that a job will require you to purchase but you should account for the cost of using your existing tools as it relates to tool replenishment. TurboBid automatically calculates this cost and adds it to the estimate.

Direct Cost Detail

Your estimate should clearly display the calculated values for all of the above.

Overhead

It is vital that you know your true overhead costs. Overhead is what it costs to run your company. It includes costs such as office personnel, vehicle expenses, advertising, office supplies, utilities, cell phones, etc. It’s basically all of the costs that your company incurs simply because you are in business. It has nothing to do with direct job expenses. TurboBid includes a calculator to assist you in determining your overhead expenses. It also includes the ability to break down your overhead cost into a rate per hour. In our opinion, this is the most accurate method of adding overhead to your estimate.

Profit

The are two steps in determining the price to provide to your customers.

  • Estimating: Estimating is the process of calculating how much it will cost you to do a job. This is also known as your break-even cost.
  • Bidding: Bidding is deciding how much to sell a job for. You simply need to decide how much profit to add to your break-even cost.

When I was contracting, almost all of my customers wanted to negotiate a lower price. If I only had a dollar for every time I heard the phrase “you have to go back and sharpen your pencil”, I’d be a rich man.

When negotiating a job, you have to decide, how badly do you want the job?

  • Maybe it’s for a new big customer than you want to develop a relationship with. This is also known as buying a job.
  • Maybe things are slowing down and you need the job to keep your key employees.
  • Maybe you need cash flow to cover your overhead expenses.
  • Maybe you need a paycheck.

Before I created TurboBid, I have to admit that, for whatever reason, I wanted to win every job that I bid on. What used to drive me completely out of my mind is that I didn’t know how low I could go before I would lose money on the job. At the time, I relied on my gut instinct but in reality, when I look back today, I didn’t have a clue. I’m cringing right now thinking about how many jobs I probably took at below cost.

One of the biggest benefits you’ll find in using TurboBid is that you’ll know your break-even cost. 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.

View our Bid Price Detail tab

View our Bid Price report

For more information, please visit www.TurboBid.net or call (888) 417-2458 Ext 102

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