Dispatch #53 - Cost Estimating As COVID-19 Profit Strategy
Some of the contractors I work with are reporting a double whammy: weaker market demand = lower revenue, and a downward pressure on bid price = lower profit margins. The next few job cycles will take particularly skillful navigation.
One way to protect profit and cash flow in this cycle is to look deeply at the fundamental practice of job cost estimating: labor, material, equipment, subcontractors, services, and general requirements.
Being confident−really confident−about how much it costs to build, install, replace, repair, or maintain a unit of work performed gives the contractor a competitive advantage.
It helps to know “how low you can go” in terms of bid price and still make the minimum required profit after marking up for overhead and profit. Result: sales go up.
Conversely, it gives you the confidence to walk away from a job that does not fit with your company’s profit and cash flow model. Result: job losses avoided.
Finally, it prevents dollars from leaking out of the system in the form of cost overruns. Result: profit margins protected.
Here are two resources for better job cost estimating that you might find helpful:
One is an August 2020 article by Kim Slowey called, 7 bidding mistakes that can throw off a project. It’s a quick read and very practical. Calculation errors, for example, are the first mistake listed.
Kim’s article dovetails nicely with a much deeper dive into cost estimating: Nail Your Numbers by David Gerstel. During shelter in place, I poured through this 388-page, 2.66-pound book and it motivated me to dig deeper with clients into their true costs of construction.
The book tilts toward the smaller company, residential light-frame general construction, but I found most of it immediately applicable to the larger commercial and specialty trade contractors I work with as well. To learn more, check out this helpful review, re-published at David Gerstel’s website.
Need help with this or other financial matters faced by construction contractors? Let’s talk!
David Stern CFO makes every effort to provide useful and accurate information. This content, however, is not intended as a substitute for specific business-related financial advice. We disclaim all warranties and liabilities from its use.