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Estimating is a skill that can make or break a career or
company. Understanding the estimating and bidding
processes is essential for your business to remain
profitable.
This is newsletter #45 in the series. If you have
missed prior newsletters, and are enjoying the series,
we encourage you to purchase the complete Electrical
Estimating Program. Click on the coupon at the bottom
of this page.
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Profit (it is not a dirty word) |
Net profit is the bottom line. It is a report card against which all business persons are measured. A winning bid includes a reasonable amount for profit.
How Much Profit Is Reasonable?
A reasonable profit margin will be whatever the market will bear without gouging the customer. Some factors to consider include:
- Competition and the Economy
- Management/Organization
- Job Size
- Risk
- Speed of Payment
Competition and the Economy. Consider the number of competitors who are expected to be bidding on the job and their experience in that particular line of work. When the construction market is in a recession or the market is shrinking, a highly competitive market develops and competition for jobs drives the selling price down. If the economy is strong or the market is expanding, prices and profits typically increase. This all happens according to the law of supply-and-demand. Consider increasing your profit margins when you are busy, and lowering them when you are slow; sometimes it is just that simple.
Management/Organization. Profitable contracting demands that the job be sold for more than what it will cost to complete. To meet this goal, you must manage your resources in an efficient and effective manner and keep your costs down. If you do, your prices should be competitive, even with a profit margin exceeding that of your competitors.
Job Size. The generally accepted practice is that smaller jobs are sold with higher profit margins, as compared to larger jobs.
Risk. When doing an unfamiliar job, you might need to increase your profit margin to cover the risk of completing the project within the price of the estimate. However, the risk factor might not be the same for your competitors, thus allowing them to submit a lower bid.
Speed of Payment. Consider how quickly you are likely to be paid. If there is likely to be an extended amount of time involved, then you might need to consider the cost of financing your investment in the job.
For more information on this topic, get a copy of Mike Holt's Electrical Estimating video program and textbook.
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