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Business Strategy / Brainstorm

Common Errors in Construction Job Costing

Proper Methods

March 7, 2016   |   

Caluculating an effective bid requires certain elements to achieve :

Seems simple. But many contractors are missing any number of the required data points necessary to accomplish what should be a simple, if managed task. Such as:

  • A formal budget which would establish parameters for an engineered profit.
  • A break- even analysis to calculate absorption.
  • An understanding of what constitutes true overhead burden.

Many contractors, especially small and mid-size companies employ time honored and habitual systems as opposed to a more scientific and accurate system to bid various projects. The biggest culprit is a true understanding of overhead burden. Without proper forecasting and budgetary systems in place, it would be be close to impossible to create an effective bid which would lead to profitability.

For many owners of contracting businesses, there is a strong possibility that any particular project will have begun without any real chance of profitability. In other words, it was never designed to achieve the required profit. Many contractors also lack the ability to take corrective action, both on a particular project as well as on the overall profitability and various trends of the company as a whole. To do this effectively, the company would need to have systems in place to monitor functions such as work in progress reporting and project reconciliation. Many companies may utilize bits and pieces of these systems, but do not maintain a comprehensive mechanism to ensure accuracy.

So as an owner of a contracting business, you must ask yourself ” do I have the proper methods in place to compete in the marketplace and still hit the proper pre-determined profit goals I want to achieve? ” It is a proven fact that the chance of long term survivability and growth in a contracting company will be enhanced if the business owner embraces the time proven methods employed by the larger and most successful contractors.

Below is a simple example of how to calculate a true labor cost and hourly mark-up: 

Quick Calculation

Labor Cost                                               $ 351,518

Employer Tax Contribution                       $  36,316

Workmans Comp.                                     $  11,512

Union Welfare ( If Needed )                     $ 215,580

Total Forecasted Burden                       $ 614,926

Hours Worked                                              9800          (Average Hourly Rate   $ 35.87)

Burden Per Man Hour                            $   62.75

Forecasted Overhead                                   27 %

Engineered Profit                                          10 %

Minimum Hourly Labor Bid                    $  99.60