# How to Make Construction Job Estimates Accurate and Profitable

In Part 2 of George Hedley's Business Toolbox Series, he shows why the first step to making money is with a job bid.

As we explored in part 1 of this article, making money starts with knowing your annual overhead costs and break-even sales required to hit your goals. Next we will explore how to make a profit and calculate an accurate and profitable job estimate.

The profit you want to earn is just that. It is the amount of money you want to make at the end of the year based on the risk you take and the return you want for being a business owner. I recommend contractors have an annual minimum net profit target return of 20 percent on their annual overhead (ROOH). Determine your annual overhead expenses and then multiply by 20 percent to determine your annual minimum net profit goal (pre-tax). Then for the hard part. Try your best to again estimate your annual sales you’ll generate over the next year as shown in example #1.

Minimum Profit (Example #1)

 Estimated Annual Sales \$1,000,000 \$2,000,000 \$3,000,000 Annual Overhead \$500,000 \$500,000 \$500,000 Annual Profit Target 20% ROOH \$100,000 \$100,000 \$100,000 Total Overhead & Profit \$600,000 \$600,000 \$600,000 Overhead & Profit Margin 60% 30% 20% Annual Job Costs \$400,000 \$1,400,000 \$2,400,000 Margin Conversion Rate MCR= 1.0 - Margin% 0.40 0.70 0.80

In example #1 above, to calculate your final selling price on jobs to earn a minimum of \$100,000 for the year, divide your estimated job costs by the MCR to determine your final selling prices.

Job Bid - Overhead Plus Minimum Profit (Example #2)

Direct Job Cost                                \$     1,000       \$   1,000         \$     1,000

Margin Conversion Rate

MCR = 1.0 - Margin%                      .40               .70                    .80

Job Sales Price   (Cost / MCR)       \$     2,500       \$   1,428         \$     1,250

Set higher profit goals

An annual net profit return on overhead goal (ROOH) of 20 percent is too low for the risk most contractors take. I recommend you consider a higher profit target of at least 40 percent return on your annual overhead. Again, first determine your annual overhead expenses and then estimate your annual sales projected. Next multiply your annual overhead by 40 percent to determine a higher net profit goal for the year as shown in example #3.

Higher Profit (Example #3)

Estimated Annual Sales                    \$1,000,000      \$2,000,000      \$3,000,000

Annual Overhead                              \$   500,000      \$   500,000      \$   500,000

Annual Profit Target 40% ROOH  \$  200,000      \$   200,000      \$   200,000

Total Overhead & Profit                   \$   700,000      \$  700,000      \$   700,000

Overhead & Profit Margin                     70%                  35%                 23%

Annual Job Costs                              \$   300,000      \$1,400,000      \$2,400,000

Margin Conversion Rate

MCR= 1.0 - Margin%                       .30                   .65                   .77

In the example above, to calculate your final selling price so you will earn a minimum of \$200,000 overhead and profit for the year, divide your total estimated job costs by the MCR to determine your final selling prices as shown in example #4 below.

Job Bid - Overhead Plus Higher Profit (Example #4)

Direct Job Cost                           \$     1,000       \$   1,000         \$     1,000

Margin Conversion Rate

MCR = 1.0 - Margin%                      .30                .65                    .23

Sales Price (Cost / MCR)           \$     3,333       \$   1,538         \$     4,347

Estimating jobs to make a profit

To determine you final selling price on jobs you bid, use a job estimating template to determine your breakeven sales price, your minimum profit sales price, and your higher sales price.

Job Estimating Template (Example #5)

Projected Annual Budget

Annual Estimated Sales                      \$2,000,000

Break-Even MCR      (example 4)                .75

Minimum Profit MCR (example 5)                 .70

Higher Profit MCR     (example 7)               .65

Bid RECAP                                  1,000 Square Feet

Labor                                                   \$ 2,000

Equipment                                           \$   400

Materials                                             \$ 2,000

Subcontractors                                    \$   200

General Conditions                             \$   400

Total Job Cost                                     \$ 5,000

Final Sales Price                     MCR Sales Price        Cost / SF

@ Break-Even MCR              .75       \$ 6,666            \$ 6.66 / SF

@ Minimum Profit MCR        .70       \$ 7,142            \$ 7.14 / SF

@ Higher Profit MCR                        .65       \$ 7,692            \$ 7.69 / SF

Converting annual targets to weekly goals

Next, it would be great to know how much work you need to perform every week to hit your annual goals. Using example #5 above, you need to cover at least \$500,000 of annual overhead to break-even. If you can work productively for 50 weeks per year, you need to make at least \$10,000 more than your job costs a week to pay for your annual overhead. In most parts of the country, an average of only forty productive weeks per year is the average for contractors. If you only can work for 40 weeks a year, you need to make at least \$12,500 more than your job costs a week to pay for your annual overhead.

Convert Targets To Weekly & Daily Goals (Example # 6)

Break-Even Overhead          = \$500,000 / Year

Productive Weeks                   X          40 Weeks

Overhead Recovery Needed  = \$ 12,500 / Week

Break-Even Overhead                        = \$   2,500 / Day

Minimum Profit Goal           = \$100,000 / Year

Annual Overhead & Profit     = \$600,000 / Year

Productive Weeks                   X          40 Weeks

Overhead & Profit Needed    = \$ 15,000 / Week

Minimum OH & P                  = \$   3,000 / Day

Higher Profit Goal                = \$200,000 / Year

Annual Overhead & Profit     = \$700,000 / Year

Productive Weeks                   X          40 Weeks

Overhead & Profit Needed    = \$ 17,500 / Week

Higher OH & P                       = \$   3,500 / Day

Taking overhead and profit to the crew level

Let’s say your company has three regular crews each comprised of five men with trucks. Your crew cost might look like this:

Typical Crew Cost – 40 Weeks / Year (Example #7)

Labor – 5 Men @ \$30/Hour   \$   150 / Hour

Down Time @ 10%                \$     15 / Hour

Truck                                       \$     15 / Hour

Small Tools & Equipment       \$     10 / Hour

Miscellaneous Supplies           \$     10 / Hour

Total Crew Cost                      \$   200 / Hour

3 Crews                                   x     3

Total 3 Crews Cost                 \$   600 / Hour

Total 3 Crews Cost                 \$4,800 / Day

To determine how much you need to bill each day, 40 weeks per year, add the following costs to your crew daily rates shown above in example #7:

Break-Even Overhead                        \$2,500 / Day   (\$104 / Hour / Crew)

Minimum Overhead & Profit  \$3,000 / Day   (\$125/ Hour / Crew)

Higher Overhead & Profit      \$3,500 / Day   (\$145/ Hour / Crew)

To break even in the example above, each of the three crews will have to be billed out \$200 / hour to cover their cost plus \$104 / hour to cover your company overhead = \$304 / hour, plus what you want to earn for profit. If you want to make the higher profit amount, your crew billing rate is \$200 + \$145 = \$345 / hour.

Understanding what it takes to make the money you want is not a simple task. It takes time and concentration to figure out your numbers. And then it takes discipline to actually ask and get the proper amounts you need to make a profit at the end of the year. Take the time to get to know how to make a profit, and then you might actually make it become a reality!

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