To “engineer” profit into a bid proposal requires an intimate knowledge of all related project costs. Estimating materials is pretty cut and dried. Labor, on the other hand, is a more tricky proposition. That estimate depends on a lot of subjective factors such as level of expertise, reliability and ability of the job-site employees, the weather, the ability of other trades to stay on their schedules and other rather random events.
Subcontractors who participate in a project offer a bid-a fixed price- that places the risk of poor estimating on them. But there are additional costs that a job must absorb such as other direct costs related to the particular job site; such things as licensing, storage, fencing, porta-potties and other non-labor or materials expense.
But what about the overhead costs (G&A-general administtrative) costs such as office rent , administrative personnel, insurance, accounting and legal fees, equipment leases used on all jobs, etc? Oh, yes, how about your salaried project managers who cover several jobs at the same time? All expenses that need to be paid each month- no matter how many jobs are generating income- need to be somehow included in each job estimate. We call those costs “Overhead, Fixed costs or G&A.
Unfortunately, contractors are continually bidding and estimating jobs to keep the “pipeline” filled. If they bid too low, they can win many jobs but run the risk of only generating cash flow and very little profit. Others prefer to bid on jobs they know will provide the chance to have a decent profit margin. Low bidding for cash flow is a formula for disaster and usually demonstrates that a contractor doesn´t have a good idea how to engineer a profit or what the profit should be. Those contractors usually use “rule-of thumb” bidding, which may not accurately represent real costs. Without a doubt, the least understood cost is “overhead (G&A).
Overhead (G&A) and how to allocate it to your jobs
Now I can see your eyes roll back and you´re probably thinking, “please spare me the boring details and get to the meat of it!”
OK, here it is.
- Step 1: Look at your monthly expenses for the past 12 months. Add all expenses related to the job site and put them in a column labeled “Direct Costs.”
- Step 2: Now identify all those expenses that you need to pay each regardless of income or number of jobs for the month. Label this column “Overhead” or “G&A.”
- Step 3:Whatever is left over, take half of that amount and add it to the “Direct Costs” costs and the other 50% add to the “Overhead costs.”
- Step 4: Now, divide the total 12 months of Overhead or G&A costs by 12 to give “an average monthly Overhead or G&A cost.”
- Step 5: With this average monthly Overhead or G&A cost, you can allocate a percentage of that monthly average to each current job. For example, if you have five jobs, you estimate what percent of total monthly Overhead or G&A to charge to each job. You can base the percentage cost on percent of monthly revenue generated by each job or you can estimate the percent of estimated administrative time needed for each job.
Keep in mind that the total of all job overhead costs for each month should be close to the average monthly overhead cost. Of course, this important number needs to be constantly updated when any of the overhead cost line items change.