In this sixth and final installment of a multipart series on estimating, we examine the bid process.
Electrical contractors are not in the business of selling electrical work at or below cost doing so will quickly put them out of business. Successful contractors know how to accurately price a job to cover their break-even cost and still make an adequate profit.
Picking up where we left off last month, once you determine the estimated cost of a job (or the break-even cost), you need to determine the job's selling price, or bid price. Determining the bid price includes identifying profit, adding other final costs, performing a bid analysis, and developing a final bid proposal.
A responsible bid will include a reasonable amount of profit. Errors in the estimate or a poorly managed job will result in unplanned expenses such as labor overruns, overtime, increased material use, or unanticipated direct costs. If you have not estimated the job properly, your profit margin will be negligible.
How much profit is reasonable? If your estimate is accurate and you manage your company efficiently, you don't need a large profit on any given job to stay in business. A reasonable profit margin is 15% to 20% of the break-even cost.
It may seem like we're done, but there are several other potential snags that can affect your estimate. Other factors like competition and the economy, management, job size, and risks can have a noticeable impact on how you apply profit.
Competition and the economy.
Consider the number of contractors bidding the job. A recession or shrinking market will create a highly competitive climate and drive selling prices down. Conversely, if the economy is strong or the market is expanding, increased profits will be more feasible. The law of supply-and-demand dictates that you raise your prices when you're busy and lower them when business is slow.
.Profitable contracting and good business sense demands that you sell the job for more than what it costs to produce. To accomplish this goal, you must remember to manage your resources efficiently and effectively, which will help you keep costs down. Many inexperienced electrical contractors do not operate an efficient or organized company, resulting in low or nonexistent profit margins. The market does limit the selling price, but your efficiency determines your profit margin to a great extent.
In general, it's more acceptable for a small job to garner a greater profit margin than a larger one. A job of 100 hr or less calls for a profit margin of at least 30%, but it's not often you can sell a job of 1000 hr with more than a 20% profit margin. Lower profit margins on larger jobs are a result of competitive pressure. Remember: Don't apply more than a 4% profit to expensive pieces of equipment like generators or UPS systems.
. If you're going to bid on a job that includes equipment or installation practices unfamiliar to you, consider increasing your profit margin to cover the risk of field errors. However, you need to understand the risk might not be as great for your competitors, which may allow them to supply a lower bid. Use caution when bidding high-risk jobs; better yet, educate yourself to reduce the risk and become more competitive.
Other final costs
At this stage of the process it makes sense to review the specifications and blueprints one final time before you submit your bid. Make sure you completely understand the following conditions on the job.
. Bear in mind, what you estimate a portion of the job at may be less than what the customer wants to spend. If the customer decides he wants to spend more on lighting fixtures, for example, you do not have to absorb this cost. When the specifications require you to provide an allowance, be sure to include this cost in your bid.
. These are deductions from your payments that cover an expense incurred by another contractor. If you think this job will have back-charges, you better include the costs now.
. There are several types of bonds, including the bid bond, that the specifications might require. A bid bond guarantees the owner you will complete the project free of liens according to the contract. Allow 1.5% and 3% of the total selling price of the job for the cost of a bid bond.
. Some clients charge a late penalty of $100 to $500 per day for each day past the scheduled completion date. Take this cost into account when you determine your final bid price.
. If you have a job that will require special financing, calculate this cost and apply it at this time.
Gross receipts or net profit tax
. Depending on where you operate, you could encounter an annual gross receipts tax between 2% and 4% of total sales. In addition, some areas have a net profit tax, which is not the same as the gross profit tax. In general, you must pay this tax before you pull the permit, and it can range from 1% to 3% of the job cost.
. Some inspectors enforce their opinions on how you should install the equipment. It's generally not cost-effective to argue with the inspector for nickel-and-dime items. Make sure you account for this expense as a cost of doing business.
. Some jobs require that a portion of each payment (typically 10%) be held for a period of time (typically 90 to 180 days) after final electrical inspection. By holding back the money (retainage), the owner can be sure you have installed the electrical system correctly and according to the contract before paying you the full price. You can add a few dollars to cover this factor, or consider it a cost of doing business that will be recovered by anticipated profits.
. Sometimes work slows down, and you have to find ways to keep your key employees busy. You may have them clean out the shop, wash the trucks, or restock inventory. This work may be productive for you, but it doesn't benefit the customer, so you can't apply the labor cost to a specific job. However, you should consider the effects on your overall net profit.
Once you've taken all of these factors into consideration, you need to perform a final bid analysis. When estimating manually, you will be limited in your analysis, but you can at least compare the following components of the bid with those you have completed and submitted in the past:
. Divide the individual job costs by the bid price and compare the results against past jobs (Table at left). Using the numbers from our example once again:
Cost per sq ft
. For this analysis, divide the bid price by the total sq ft of the building. In this case, it would be $3.17 ($7983/2520 sq ft).
. Sometimes looking at labor from a different perspective can be enlightening. Breaking down labor figures into hours, work days, and even work weeks can uncover trends that were previously hidden. For example:
Total hrs = 97 hrs
Total 8-hr days = (2 men) x (97 hrs/16 hrs) = 12.12 days
Total 5-day weeks = (12.12 days/5 days) = 2.42 weeks
It never hurts to reference your previous bids. Comparing the preceding examples against prior estimates can help alert you to portions of the current bid that may seem odd unless, of course, you used incorrect methods in the past.
The final step in this comprehensive estimation process is creating your bid proposal. After you've completed your bid analysis, you must submit a written proposal that clarifies what your price includes and excludes.
Creating an estimate is no easy task it took us six months to adequately describe the process. Software manufacturers continue to churn out new programs that make estimating easier, but computer automation will only get you so far. Understanding which figures to use and when is crucial to drawing up a profitable bid. Too many contractors apply questionable (though widely accepted) methods for determining different cost structures, which can have a strong impact on profits.
However, if you follow the steps we've laid out since January, you're sure to have much more success in winning a bid and making money on the job.