As part of my ongoing effort to provide free resources for the electrical industry I want to share with you my methodology for electrical estimating. This is a skill that can make or break a career, and make or break a company, and I want to help you understand the estimating and bidding processes so that your business can be profitable.

In this monthly newsletter series on electrical estimating, I'll explain how to determine the material cost, labor cost, and the calculation of direct job costs, overhead and profit, so that you know going into a job how you can avoid failure - which in some cases might mean not taking the job!

The following content is extracted from Mike Holt's Guide to Electrical Estimating.

Determining the selling price for a job has two separate components, the estimate price and the bid price. The estimate total is what the job will cost you to complete. Profit is then added and the new total is the bid price which is the amount you wish the customer to agree to pay for the work performed.

The Estimate Price
The purpose of estimating is to determine the cost of a project before you actually do the work. Estimating must take into consideration variable job conditions, the cost of materials, labor cost, labor availability, direct job expenses, and management costs (overhead).

The Bid Price
Once you know the estimated cost of a project (your cost), you add profit to determine the selling (bid) price of the job. Methods and formulas for the addition of profit will be covered later.

A good estimating system should help you to quickly and accurately determine the cost of a project in a manner that includes all anticipated costs. To be efficient and accurate, it must be systematic and routine in order to keep errors to a minimum.

1.3 Objectives and Purpose of an Electrical Contractor

All businesses exist for one reason and that is to make money (profit)! So while you may enjoy your work (and I hope you do) or are even passionate about it (and I hope you are), the purpose of an electrical contractor is to make a profit on every single job. Profit is a reward for taking risks, so it is important to be aware of and evaluate the degree of risk contained in each job. Providing the best service, with the most profit possible considering the market, is essential to your success.

To be a successful electrical contractor, you must provide a quality service to your customers at a competitive price where the price is greater than your actual cost. Successful electrical contracting is really just that simple—providing a quality electrical installation at a competitive price that exceeds your actual cost. Therefore, the first step to becoming a successful electrical contractor is to know how to determine your expected cost.

Most electrical contractors wear many hats—estimator, project manager, secretary, warehouse person, truck driver, supervisor, electrician, salesperson, and so on. There are not enough hours in the day or night to keep up with all of the demands of running a successful contracting business. If an electrical contractor is not careful, he or she might forget the most important hat—managing the job to ensure that a profit is made.

There are many reasons why people lose money on jobs:

• Forgetting to include costs, thinking there is no overhead because you are working out of your house
• Being too trusting and finding the customer cannot pay
• Missing things on the bid
• Forgetting to bill things out (including the job itself)
• Not following up to ensure payment is received (not paying attention to detail)
• Not seeking help before getting into trouble

Remember to manage the job to ensure that a profit is ALWAYS made on EVERY job! You must make that firm commitment.

If you do not know how to properly determine the cost of a job (estimate), you are not likely to be in business very long. Failure to know the cost of doing business (estimating) is probably the number one reason contractors fail. If your bids are high (too much profit), you will not get much work. If your bids are low (no profit), you will get lots of work, but of course you will have to close up shop.

Successful contractors manage projects to ensure profit. The estimate becomes your budget and you must track that job to be sure the targeted amount of profit is met. Actual cost is affected by job management. Estimating is both a science (gathering costs) and an art form (effectively managing the job).

With over 75,000 electrical contractors in the United States, competition is fierce. The successful electrical contractor must manage projects so he or she can compete profitably in today’s highly competitive marketplace. The actual cost of any project is significantly affected by how well the job is managed.

To properly manage a job, the project manager must have a budget, and the budget is derived from the estimate. The job budget must describe what material is required for each phase of the job, and when it will be needed. It must also describe the types and amount of labor (the number of hours, and the number and type of electricians) required to complete each phase of the job, and as with material, when it will be needed. With proper information, the project manager will be better prepared to complete the project as planned, and ensure it comes in at (or under) budget and a profit is made.

Author’s Comment: Information for project management is easy to acquire using computer-assisted estimating software.

Proper project management makes the difference between profit and loss on a properly estimated project. Effective job planning, labor scheduling, and material purchasing are all factors in the ultimate cost of a project. The field manager must understand how the job was estimated and continuous communication between the electricians performing the work in the field, the project manager, and the estimator is essential for profit.

Without a proper job budget, you will not know what materials or tools you need or when you need them. This can, and often does, result in not having the material or the tools on the job in a timely manner (poor field performance). That situation means your workers stand around wasting time and money. If you fail to manage your material properly, you might have too much on the job, thereby increasing the likelihood of it being damaged, wasted or stolen, or incurring unanticipated costs for moving extra material around the jobsite (handling multiple times).

Job management requires the project manager to know what labor is needed and when. Insufficient manpower can create conflicts with the other trades and with the owner. Too much manpower on the job at the wrong time results in lower productivity and increased costs that cannot be recovered. If you are going to be successful as an electrical contractor, you must manage your material and labor so they are at the job when required, ensuring productivity in accordance with the estimate and job schedule. You must also manage them in accordance with the estimate and agreed upon schedule.

As a job progresses it is often necessary to adjust the budget (estimate) based on information and feedback from the jobsite. Job conditions might be different than those expected, or the project manager, field manager, and/or field personnel might come up with ideas that improve production.

We'd love to hear from you about this series, and the ways you're using it. Send us your comments and feedback by clicking on Post a Comment below. Look out for the next part in this series a month from now, and please share with your colleagues.

This content is extracted from Mike Holt's Guide to Electrical Estimating textbook.
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