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How to Create Profitable Estimates: Part 1 - Figuring Out Your Costs

 Posted on October 18, 2018


There are many ways to create an estimate, but if you want to ensure that your jobs are profitable it comes down to figuring out your job costs and adding a margin that covers your overhead and allows you to make a profit.

In this series we’ll go over the basics of creating profitable estimates, starting with figuring out your current costs and profits.

To start, review your most recent job and ask yourself these questions:

What Is Your Fully Burdened Labor Cost?

Your fully burdened labor cost is your average hourly employee wage plus insurance, taxes, and benefits. You can calculate this by taking the total payroll cost for a month or quarter, and dividing that by the number of hours paid. This calculation gives you your average fully burdened labor cost per hour and can be used to calculate your labor cost for each job.

Example: Let’s say we have 3 employees that we pay $25 per hour and they worked a total of 480 hours this month. Along with employee wages, we paid taxes like Social Security, Medicare, and Unemployment, insurance including Workers Comp, and medical insurance benefits.

Monthly Employee Wages: $25 x 480 = $12,000
Monthly Taxes: $1,350
Monthly Insurance: $1,050
Monthly Benefits: $1,650
Total Monthly Payroll Cost: $16,050

In this case our total payroll cost was $16,050. We divide the total payroll cost by the 480 hours of work to get a fully burdened labor cost of $33.50 per hour.

$16,050 / 480 = $33.50

If you’re a one person company and don’t pay yourself an hourly wage, you can calculate your effective hourly wage to understand how much money you're making per hour on each job. We’ll show you how to do this calculation below.

How Many Hours Did You Work?

How long did your team spend on the work, including any prep and cleanup?

Example:
If you had 3 people onsite from 9am-5pm for 5 days, that’s 120 hours of labor.

What Were Your Jobs Costs?

Labor cost

Calculate your labor cost by multiplying your fully burdened labor cost by the number of hours worked on the job.

Example:
120 hours onsite x $33.50 per hour = $4,020 labor cost for this job

Other costs

How much did you spend on materials for the work? This includes job specific materials, like gallons of paint for an interior painting job, but you’ll also want to include other supplies like plastic, tape, and drop cloth. Other costs can also include items like equipment rental and subcontractor expenses.

Example:
Materials: $2,500
Additional Supplies: $200
Equipment Rental: $300
Total Other Cost: $3,000

Once you know your labor and other costs, add them together to get your total job costs.

Example:
Labor Cost: $4,020
Other Costs: $3,000
Total Cost: $7,020

What Was Your Gross Profit?

Take a look at your revenue, which is simply the amount of money you were paid for the job. Then subtract all the job costs to get your gross profit.

Example:
Let’s say the customer paid us $9,000 for this job. So, we’d take our revenue of $9,000 and subtract $7,020 of job costs to get a gross profit of $1,980.

It’s also a good idea to calculate your gross profit margin, so you can more accurately compare the profitability of your jobs. To calculate your gross profit margin, divide your gross profit by your revenue.

Example:
Gross profit $1,980 / $9,000 revenue = .22, or a 22% gross profit margin

What Was Your Effective Hourly Wage?

If you’re a one person company and don’t pay yourself an hourly wage, you can calculate your gross profit by subtracting the other costs from your job revenue. To calculate your effective hourly wage, divide your gross profit by the number of hours you worked.

Example: Our revenue for this job was $9,000 and our other costs totaled $3,000. We’d subtract $3,000 from $9,000 to get $6,000 as our gross profit. Then we’d divide that $6,000 by 120 hours worked for an effective hourly wage of $50.

After doing this calculation some contractors realize they’re taking home much less per hour than they were expecting. After reviewing your effective hourly rate across several projects you’ll want to choose an hourly wage to aim for which will help you estimate your labor cost for future jobs.

Overhead

Gross profit doesn’t paint the whole picture. You still need to account for overhead expenses like vehicle cost and maintenance, equipment, office and administrative expenses, rent, accounting and tax preparation, marketing, and more. These expenses are paid out of your gross profits, so even if you’re making a gross profit you may be losing money after accounting for overhead expenses. We’ll talk more about how to make sure you’re covering overhead in your bids in a later article.

Now that you’ve calculated the costs and gross profit for a single job, go back and do this for more jobs. Look for jobs with small or no profits and try to figure out what went wrong to help prevent these issues from happening in the future. If a lot of your jobs have small or no profits you may need to either raise your prices or lower your costs to stay in business.

Next time we’ll show you how to predict your costs when estimating a job by calculating your labor and material production rates.

What do you think is key to creating profitable estimates? Let us know in the comments or on Facebook, Twitter, or LinkedIn!


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