Keeping Track of Material Costs

Apr 1, 2001 12:00 PM, By Mike Holt, Mike Holt Enterprises, Inc.

Now that we've discussed labor hours and labor costs, we've come to the third step in preparing an accurate bid price — determining material requirements for the job. We're all familiar with how to transfer the cost of material from the pricing worksheets to the summary worksheet. But once you accomplish this task, you must adjust this value to account for miscellaneous material items not accounted for on the take-off, waste and theft, small tools, fixture and switchgear quote indifferences, and taxes. Let's take a closer look at how each of these important items can affect your estimate and possibly put you in the red on your next job.

Miscellaneous material items

While preparing an estimate, there is never enough time to take-off every item required to complete the job. To manually complete an estimate in a timely manner, you must compromise the accuracy of the cost of material. However, if you use software to generate your estimate, you can probably avoid this dilemma.

If you decide to manually estimate a job, you need to account for as many items as time permits during the take-off phase. You can typically take-off about 90% of all material items needed for the job. Therefore, you'll need to adjust the total cost of material for those items you did not account for. These items, like phase tape, ground screws, and other inexpensive items, can add up.

What material cost adjustment is reasonable to account for miscellaneous material items you don't take-off? It depends on how accurate your take-off and bill-of-material is. If you estimate a job manually, your total cost of material will be low, possibly by as much as 7% to 12%. Therefore, you need to increase the total cost of material from the take-off to compensate for this shortage. Add 10% to the estimate to account for these items.

If you're generating an estimate with a software package, you don't need to adjust your material cost. You can program most estimating software to automatically include almost every item required for the job. In this case you should not add more than 2% or 3% to your estimate.

Waste and theft

In addition to adjusting your total material cost for items not accounted for in the take-off, you must be sensitive to the effect wasted material and stolen items will have on the job. Material waste can occur hundreds of times during the life of the job when an electrician drops wire nuts, connectors, screws, or boxes, or leaves material in the work area overnight. Sometimes the electricians will take home nail-aprons full of straps, connectors, drive pins, ground screws, couplings, and phase tape for themselves. This might not seem like a big deal — especially if you're not paying for it — but if 10 people do this each day, it could cost you thousands of dollars a year in lost material.

What material cost adjustment is reasonable for waste and theft? You can't control everything, but you can hold waste and theft to a reasonable amount, if you make it a priority. The more efficiently you organize, manage, and control your material, the closer you'll come to the suggested factor of about 5%.

Small tools

You must include the cost for ladders, cords, cordless drills, screw guns, and other small tools somewhere in the estimate. Some contractors recover the cost of small tools when they apply overhead, but most do not factor the cost into their estimates. Naturally, if you do not include the cost of small tools in the estimate, your actual net profit will be less than you anticipated.

How do you account for small tools? Electrical contractors typically record the cost for tools like drills, ladders, cords, and drill bits to the job for which these items were delivered. This cost is never accounted for in the estimate. This results in less net profit than anticipated.

What do you do if the cost for small tools is not recorded as an overhead expense? I suggest you provide an allowance of 3% of material cost for the cost of small tools. But you need to recognize that a job with higher material cost will have a greater dollar value for small tools than a job with lower material cost.

Fixture and switchgear quotes

In an attempt to generate the greatest profit margins, equipment manufacturers generally hold their prices until the last moment, thereby denying their competitors the chance to undercut them. You can overcome this obstacle by making sure you're ready to complete the estimate as soon as you get your quotes. But be careful not to make a mistake when you transfer the supplier prices to the summary worksheet. Also remember to insist on written quotes from the supplier and never estimate a job with a verbal quote.

Do not mark up the value of quotes. Many contractors add 10% to 20% to fixture and switchgear prices. Some have no idea why they do this — they just always have. Some contractors say, “Well, I should make money because I'm handling these items.” That may sound like a good justification, but you need to add profit at the profit stage, not when you're estimating the cost of the job. Others argue it's there to cover the cost of handling the items on the job. This is wrong. Handling material in the field is part of the labor-unit for field labor. The administrative cost of ordering material is an overhead expense.

Sales tax

Sales tax varies from state to state, county to county, and at times from city to city. Be sure you are familiar with the sales tax rules in the area for which you're preparing the estimate, and ask your accountant how to handle tax-exempt jobs. Be aware some states apply sales tax to labor cost.

The following example demonstrates how to determine the total material cost for a job including miscellaneous items, waste and theft, small tools, fixture and switchgear quotes, and taxes.

Over the past three months we've discussed the proper way to estimate labor hours, labor costs, and material costs. But we're only a third of the way through the estimation process. Next month, we'll tackle total direct cost.