Just as all jobs are not built the same, construction companies differ in their costs. Contractors need to win jobs to stay busy, but the real trick is making enough profit to cover your costs and have something leftover. Having a customized estimating strategy is crucial and requires a thorough understanding of your business’ unique cost structure.
While your previous year’s numbers might be a good starting point for considering the overhead you need to recover this year, you also need to consider changes you have made that will impact your costs:
- Have you hired office personnel, such as additional estimators, accounting personnel, or secretaries?
- Have you purchased additional trucks for construction supervisors?
- Has there been a significant increase in employee benefits?
- Have you increased your office space by renting an additional facility or adding to your existing office space?
- Do you warranty a portion of your work? Do you have a lag summary to estimate the amount of future claims you might need to cover?
Once you have a budget for your overhead, consider how you will allocate the dollars among your projects. Are all of your projects performed similarly? Are some more labor-intensive while others are more equipment-intensive? An estimating strategy that allocates overhead appropriately will more accurately portray the profit on your jobs and help you submit more competitive bids. No estimating strategy is perfect, nor is it a “one and done” process. You will want to re-evaluate periodically and no less than annually—assuming no major changes in your overhead in the interim.
You can use job estimates for more than winning work. You can compare your estimates during open projects to real-time data to ensure jobs are on track. If something looks awry then investigate. Is something going wrong on the job that’s causing additional work or overruns? Is there a change order or claim that needs to be submitted? Can you make corrections and get the project back on track? Was something missed during the bidding process, and if so, how can you prevent that from happening in the future?
If you find your company consistently losing out in your bidding, consider a bid analysis:
- Are you losing out on one type of job but winning bids in other areas? Is it because your overhead isn’t allocated appropriately? Is your overhead top-heavy and you need to find ways to reduce it?
- Do you have a team of estimators with some hitting bids but others falling short? Do you need to conduct cascade training?
- Are you losing consistently to the same competitors? What are the spread on the bids you lose and they win? On the other hand, if you are consistently winning bids, build analysis to determine if you are leaving money on the table.
A CPA expert in your industry can help you analyze your business’ unique cost structure to determine where you can afford to make cuts in either your costs or your bids. An industry-savvy CPA can help you find niches in types or sizes of jobs where you can win bids and maximize your profits, and even provide training to your team to get everyone estimating more effectively.
Understanding your cost structure is imperative to helping you attain the profit you require to grow your company and your personal wealth. A CPA focused on the construction industry can be a trusted advisor and provide invaluable support.