Bidding with an All-In-One Labor Rate is Bad for Your Business
How to calculate an accurate labor rate for construction bids.
When I ask the contractors I talk to about their bidding process, many say they estimate the hours the project will take, then multiply that number by an all-inclusive rate to come up with their bid. They explain to me that they pay their employees $25 per hour, so they double the average hourly wages and charge $50 per hour as their standard labor rate.
Sounds pretty good, right? Who wouldn’t want to make 50% margins?
Unfortunately, these numbers aren’t a realistic representation of actual margins. When you take into account workers’ compensation and payroll taxes, their profits are much smaller.
Simply doubling your employees’ average hourly wages is not a winning formula for estimating labor costs.
It might seem like a fast and easy way to calculate your bids, but simply doubling your employee’s average hourly wages could hurt you in the long run.
This “all-in-one” labor rate that many subcontractors use to calculate their bids is supposed to cover all of their labor costs and expected profits. The problem with this strategy is that business owners aren’t taking into consideration payroll taxes and workers’ compensation costs. Therefore, they have an inflated sense of how much money they’re going to make.
Compounding the problem is the fact that payroll taxes and workers’ comp rates fluctuate. When these rates go up, it’s negatively impacting their bottom line even more. Overall, the all-in-one labor rate strategy is in essence, another example of the construction industry just wingin’ it. It’s been our favorite way to operate up until this point.
Change up your calculation strategy.
Instead of relying on this all-in-one labor rate to cover your various burdens and generate profits for your business, I advise all of the subs I speak with to make a more accurate calculation. Detailing out your labor rate for each bid really won’t take you that much more time and you’ll have a better idea of your costs and expected returns.
Each time you create a bid, you must factor hours, crew rate, payroll taxes, workers’ compensation and mark up. Opening your eyes to your actual costs and profit margins will also make it easier for you to assess whether a job is worth taking on; oftentimes subs take on jobs not realizing they were bound to lose money, break even or make only a negligible profit from the start.
The figure above demonstrates how your labor rate should be calculated in your bids. I’d suggest adding markup to all of your cost considerations in your bids, including material and equipment as well. All markups can be tallied to create your overhead/gross profit number, but remember your mark-up percentage is not the same as your gross profit percentage because math is weird.
To illustrate, if you have $100 and you mark it up 20%, you’d add $20 to the top for a total of $120. Gross profit percentage is equal to the difference of total revenue and total cost, divided by total revenue. So in this example: ($120-$100)/$120 = 16.66%. Your gross profit percentage is 3.33% less than the 20% markup you charged. This phenomenon gets more exaggerated the bigger your markup percentage is.
Save time by using a bidding software.
Using a bidding software might take more time than not when you first start using it, but it will save you time in the long run.
Benefits of bidding software include:
Create more accurate bids
Lay the groundwork for your build
Avoid taking on projects that will lose you money
Save time by saving templates for future bids
Better yet, try an all-inclusive construction software.
Bidding software can be hugely helpful in creating accurate bids, but if the data from your bids flows directly into project management and job costing, then you will save tons of time, money and headaches. It might take some time to get used to, but you’ll realize that processes will get easier, you’ll have transparency on your job costs like never before, you’ll make less mistakes and more money.
For example, if your bidding data flows into a project management system, then your purchasers will know exactly how much material to order because the info is included in your bids. They won’t have to reinvent the wheel every time, and you won’t have to deal with under or over-ordering like you might have in the past.
Also, a software that features a bidding portal in the same system as labor, material and equipment cost tracking will enable you to view job costing data in real time. You can compare bid numbers to actual costs in visual detail with just a few clicks of your mouse.
A.C.E. Construction Software is an all-inclusive construction management tool designed to assist trade contractors in every facet of their business. From accurate bidding to cost tracking to job costing to accounting and every step in between, A.C.E. has features that will dramatically streamline operations and empower you to build a financially strong and prosperous business.