You can't figure out how he does it. You did a similar job, computed your costs, and have a pretty good idea as to what your costs will be on this new job. You wonder, how can he be that much lower than me? If you've been a contractor very long, you likely have been in this position. If you haven't been in this position, it may be even worse for you, because you may be the one who's bidding less than direct cost.
It's easy to get upset by this kind of a situation. But don't get upset, you're likely not the problem.
My guess is that your competition does not know his costs. In talking and visiting with contractors, I am continually amazed at how few contractors have an accurate, current cost accounting system.
Things are changing so rapidly that it is more important than ever to have a good cost accounting system. Labor, of course, is the largest variable in our business. Therefore, making sure that we account for all of the hours on a job and that we cost them at the current rate is very important.
For example, our labor contract calls for $1 per hour increases every six months for the duration of the contract (which expires in July 2006). With our increased FICA contribution and other increases directly associated with payroll costs (workers' compensation, insurance, unemployment insurance, etc.), we have to increase our cost for labor by $1.25 every six months. If we failed to do so, on just a 60-hour job we would be understating our costs by $75, just for one labor increase.
This whole situation was brought into focus recently as we experienced a significant increase in galvanized steel pricing. The increase was substantial, and we were given very little warning. I was surprised at the number of contractors who didn't adjust their pricing accordingly. I can only assume it's because they are not keeping close track of their costs.
National associations report that average net profit for contractors is in the range of 3 percent. Obviously if one or more of your costs increases significantly, it is very easy to lose not only this net profit but to end up with a loss. It should be clear that it is necessary to maintain accurate, up-to-date costing information.
Although today's computers make cost accounting much easier than it was in years past, remember that the computer only does the calculating. It is still imperative upon you to make sure that the information on the computer is kept current.
Labor And Material CostsSince labor is the biggest variable in our business, it is extremely important to make sure that your systems for tracking labor costs are accurate. I realize that getting employees to turn in accurate time card information is difficult. You must impress upon your personnel the importance of obtaining that information. They should buy into the fact that their job and the existence of the company is dependent upon the company's ability to track its costs properly.
Keeping track of material costs is also very important because they often make up nearly 50 percent of the job costs. Have an easy-to-use material "pick list" and make sure that all employees use one whenever any material is taken for a job. Whenever possible, if material or subcontractor invoices are for only one specific job, they can be charged immediately to that job's costs without any in-between steps.
Make sure you have a system in place whereby you can tell your costs on every job you perform. Remember that more contractors go out of business in good times than in bad times. That's because when times are good, contractors who don't know their costs do more and more business losing more and more on each job. Make sure you aren't the competitor who is bidding less than the direct costs. Know your costs.
Guest columnist Butch Welsch operates Welsch Heating & Cooling in St. Louis. He can be reached by e-mail at Welsch1@primary.net.
Publication date: 03/08/2004