Know Before You Go: The Five Elements of Accurate Bidding
Subcontractors Can Create Winning Bids and Increase Margins with A.C.E. Construction Software
"It doesn’t matter if you have made thousands of good calls – all it takes is one bad call and that is one too many.” Jeremy Jones, a legendary snowboarder, on avalanches.
This sentiment applies to both of my passions: snowboarding and construction. In the scenario of snowboarders and avalanches, all it takes is one moment of poor planning for the mountainside to come crashing down. It’s the same concept for construction. As trade contractors, we’ve all been in a place where we’ve gotten halfway through a job before realizing our budget is shot. We better get out of there quick before the losses on one project take our entire company under.
The vast majority of company costs are connected with projects. That’s why it’s important to KNOW all of your costs BEFORE YOU GO on taking a project - to ensure you don’t get caught under a cost avalanche. Regardless of the size of your business, mastering cost estimation for each project will allow you to enjoy a smooth ride every time you “get off the lift,” so to speak.
To accomplish this, I suggest using a quality software program that allows you to create highly detailed bids. A.C.E. Construction Software is a well-rounded choice, featuring top-notch bidding functionality, plus project management, material ordering, labor tracking, job costing and additional features that allow you to compare your estimates with actual project costs. That way you can learn from your jobs and bid better in the future. A novel concept, I know.
You might be thinking, “but I don’t have the time to create detailed estimates.” I get it. You’re going a million miles an hour trying to keep up with your work and you don’t think you have the bandwidth to make these changes. Having been a subcontractor myself, I understand the challenges you face.
However, I can tell you from experience that creating more detailed bids will improve your company’s operations tremendously and actually save you time and money. Here’s a few reasons why:
If you make your bid the game plan for the build, then your field employees will not have to do repetitive work on what they’re expected to accomplish when it comes time to execute.
Calculating detailed labor, material, and equipment costs for each task during the bidding phase allows managers to make sure you’re not going over budgets every step of the way.
Understanding the many various project costs upfront dramatically reduces your chances of taking on a losing project.
Detailed bidding improves communication between estimators and field staff, so the bidding process can continue to improve and your company can significantly increase profits
Trade contractors should be aiming to create extremely accurate bids that include detailed breakdowns on all costs. These costs include labor, material, equipment, overhead/profits and general liability. Every job is unique so we should be basing costs of the takeoff quantities, project specs and company rates on each specific project. This article will go over the five steps trade contractors must take to create winning bids.
1. Create Structure: The Game Plan For Your Build
Structure helps with organization, not only for the bid but for the build too. Think of your estimate as the game plan for executing the project. Break it down into “general tasks” and “subtasks.”
General tasks are the major tasks that need to be accomplished to get the job done. Think of them as the days on the schedule. For example, if you are a plumber working on a new residential project, your first general task would be to trench and install underground plumbing.
Subtasks are the individual tasks that must be completed each day to get the general task accomplished. For example, if you're a painter aiming to accomplish the general task of painting the walls, you're going to need to complete the subtasks of rolling the walls, cutting in the doors casings, cutting in the ceiling, etc. Each subtask takes a combination of labor, material and equipment to accomplish and should be small enough that it is only associated with one takeoff quantity.
This two tier structure allows for both extreme detail and general summarizing. Breaking it down by subtask ensures you’re accounting for every single cost it takes to complete a job, while including the general task framework allows you to collect data during the building process without bogging down reports with too many specifics.
Building your estimate as the game plan for production sets your field team up for success. It also allows them to pinpoint problem areas in the bid and communicate that back to the estimators, so the estimators can learn from this information and improve their bids moving forward. Learning and continuing to improve is essential to the success of any company, regardless of how long it’s been in business. If you can learn from every project and translate that knowledge into improving future bids, you can make significant strides toward avoiding losing projects and even increasing your profit margins.
2. Calculate Each Labor Costs Upfront
I’ve worked with many contractors and have seen a lot of shortcuts made when it comes to calculating labor hours needed during the bidding process. Some calculate labor based on a percentage of the total material costs; others summarize a group of tasks into one labor calculation. Some trade contractors might feel justified in taking these shortcuts because labor isn’t typically the biggest cost in terms of percentage. However, it is the cost factor that we (as subs) have the most control over. I also haven't heard of any cases in which material has installed itself or equipment has operated on its own to complete a project (yet, anyway), so thinking about labor in terms of hours needed to complete each subtask helps create the best game plan for execution.
Start by calculating how long each task will take and how much you’ll be paying your tradesman. Set some set standards for each task: the crew rate (pay rate of crew that typically performs this job) and pay rate (the rate that will use the take off quantity to calculate how much the crew will be paid). There are two types of pay rates: piece/quantity (the amount you will pay the crew for each piece of work complete) or piece/hour (the amount you expect your crew to get done per hour worked). You probably already have a preference for which type you prefer. Once this information is determined, all you need to do is plug in the takeoff quantity and wallah! You have your labor costs. Below are examples of both calculations.
Taking the time to understand all the labor costs upfront will save your field staff from having to do repetitive research during construction phases. It also sets clear expectations for your field staff and helps prevent them from performing extra work that was not bidded. Not saying any general contractors or clients would ever intentionally try to get extra work for free but…moving on!
3. Map Out Material Needs
Next, list out all of the types of material needed to complete each one of the subtasks you created. I can already hear you saying, “that could take all day!” But before you write me off, think about this: someone will have to do this eventually. Rather than going about it on the fly, I’d argue you would be better off figuring it out up front so there’s a lower potential for error later on.
Enter the following information for each product: the supplier, the source (whether it’s coming directly from the supplier or from your inventory stock), the usage rate (the rate that calculates how much of this product will be needed per your takeoff quantity), and the price per order you were quoted from the supplier. Since we are connecting these products to our labor tasks, the calculations should use the same takeoff quantity and be done automatically. The image below shows how this works for multiple products at once.
At this point, your estimate calculates the amount of each material that needs to be ordered and from which supplier it will come from. Ideally, you’ll be working with a software that handles both the bidding phase and the build phase, so this information will transfer over to project management and automatically build purchase orders per supplier. This will reduce the work for your operations staff when it comes to creating POs. It will also protect you from over ordering.
Since most subs get special pricing quoted from each supplier, the purchase order should also reflect your specific pricing. Having the purchase orders include their quoted prices has helped some of our clients catch thousands of dollars in billing errors on the part of suppliers. Not that any of your suppliers would purposefully overcharge you, but let’s face it! They sure as hell aren’t double checking every invoice they send you.
4. Account for Equipment & Subcontractor Costs
Just like material, equipment costs per subtask should be accounted for in the bid. If you are renting equipment for the job, it should absolutely be added to calculate your cost. Even if you own the equipment, you should try and associate the cost to the bid.
Many contractors think of equipment as an overhead cost because oftentimes it is a large expense that lasts for years, or even decades, and is used on hundreds of jobs. But it did cost you money, plus its upkeep and storage will continue to cost you money. I would strongly encourage you to factor even a small equipment charge into each bid, perhaps taking its useful life and dividing it by the time it will be used for each particular project.
If you’re subbing out work, I’d also make a point to factor in those costs at this time so you’re not covering the costs of other companies’ work as part of your overhead. Side note, but I’d strongly encourage you to keep as much work as possible in-house. Though subbing out work has been used as a strategy for limiting liability in the past, that protection is fading with new laws like California Assembly Bill No. 5 restricting who can be considered an independent contractor. Plus, technology like A.C.E. can help with controlling labor costs, eliminating the need for other companies to help manage parts of your job.
To calculate each equipment or subcontractor cost, you will need the following information: company name, the usage rate, and the price you’re being charged by the sub.
Not only is factoring equipment and subcontractor costs into your estimates part of determining your game plan for the bid, but it will give you a more accurate view on what the project actually took from a cost standpoint during the job costing phase.
5. Factor In Taxes, Burden & Overhead/Profit
Steps 2-4 account only for the direct costs. It is very important that we include all the other business rates into our project costs as well.
For labor, we need to include payroll taxes and workers compensation insurance. For contractors who have both high and low wage earners in their class codes, make sure you take into consideration those two different percentages when you’re calculating your estimate.
For material, you must consider sales tax. Use the sales tax percentage for wherever the job site is located if your material is getting delivered directly to the job site.
General liability rate should also be included in your bids. Make sure the calculation is done by adding all your costs together to get the most accurate number. If you're working for a general contractor that uses a WRAP general liability program, ask them if they want net or gross total. If they want a gross total, then make sure you include the percentage they charge for WRAP into the bid. If they ask for net, then set your general liability to 0%.
Last, but definitely not least, is markup rates and your gross profit numbers. If you have followed the steps above then these two numbers are truly the only numbers you can adjust in negotiations with clients. We cannot pay our men or subs less and we cannot use less material or equipment. The most important thing to remember is that your markup percentage is not equal to gross profit percentage. Quick example, if your costs equal $100 and you mark that up by 25% that will give you a bid total of $125. However your gross profit profit percentage is calculated by taking the total bid minusing all your costs and dividing by the total bid. So in this example 125-100= $25 then dividing by $125 gives you a gross profit number of 20% which is less than your 25% markup. So make sure your markup percentage is high enough to achieve the gross profit number you desire, which should cover all of your overhead costs plus the amount of profit you want to make at the end of the day. This is really the only number you can be flexible with in the bid.
There you have it! You’re on your way to better bidding and an overall more efficient, effective and profitable company. For more information on A.C.E. Construction Software’s robust functionality, visit www.aceconstructionsoftware.com/software-capabilities.