Travels with Jim follows Jim Huston around the country as he visits with landscapers and helps them understand their numbers to make smarter decisions.
Modern military snipers like Chris Kyle have taken their trade to a whole new level. Placing all shots within a 5-inch group at 1,000 yards is common practice today. This kind of accuracy was unheard of just a few years ago.
The improvement in accuracy is due to many factors, such as improved optics, more consistent metals for rifle barrels, projectiles and brass casings, and, most of all, better training. This constant pursuit of perfection resulting in improved accuracy greatly expands the shooters’ opportunities and effectiveness.
The modern estimator.
The modern estimator, like the modern sniper, should also be constantly improving his accuracy. Modern tools such as digitizers, planimeters and computers allow today’s estimator to be extremely fast and much more accurate doing takeoffs. However, it’s all for naught if the estimator puts all of this takeoff data into software containing faulty mathematical algorithms when adding margins and markups to costs for plants, pavers, irrigation materials and so forth.
Factoring is basically the mathematical process of multiplication such as 2 x 3 = 6. The 2 and 3 are factors and 6 is the product. Some estimators use a materials factor to arrive at a price for installed products. For instance, in the equation of materials cost x 3 = price, the 3 factor is supposed to cover costs for equipment, labor and burden, general and administrative (G&A) overhead, general conditions and a net profit margin. Really? It’s almost laughable how inaccurate this method, while commonly used, is.
How it works in the field.
Phil had a growing landscape installation company in the northwest U.S. He installed both residential and commercial projects. Early in his career, his local supplier told him to multiply material costs for a residential job by 3 and costs for a commercial one by 2.6 to arrive at a price. The supplier had no idea how to validate such factors, but they seemed to work. Phil soon determined that his supplier was doing him no service by “helping” him with his pricing.
Phil was pretty good at arithmetic and he was constantly attempting to improve his business skills. After much head scratching he came up with the following formula for pricing his installation jobs, which he hoped would give him a 20 percent net profit margin (NPM):
- Residential jobs: Multiply all direct costs (materials, labor with burden and equipment) by 1.67.
- Commercial jobs: Multiply all direct costs by 1.35.
Phil hired me to review his business and estimating methods. After reviewing his bidding technique, I informed him that he was making a false mathematical assumption by multiplying his direct costs by percentages for the purpose of calculating G&A overhead costs and NPM. Whether you multiply all direct costs by a single percentage, two percentages (one for materials and one for labor) or four percentages (one each for materials, labor, equipment and subcontractors), or a whole number like 2 or 3, you’re still factoring. When you multiply your direct costs by a factor, you’re always making a false mathematical assumption that could cost you jobs and money.
Three points regarding G&A overhead costs.
- These costs vary insignificantly from month to month.
- Almost 90 percent of such costs (rent, office salaries, utilities, etc.) are paid monthly and/or are based on time.
- Field trucks and equipment should not be included in these costs.
Phil’s G&A overhead costs were $10,000 per month and his entire field labor costs to include labor burden were $13,000 per month. His field trucks and equipment costs were about $5,000 per month.*
Phil’s 1.67 factor was extremely inaccurate. He could have lowered the price for Job A by almost $12,000 (12 percent) and still have achieved his 20 percent NPM goal. In a competitive market, he might price himself out of this job. The 1.67 factor caused Phil to underprice Job B by $16,000. Lessons learned:
- Factoring direct costs will almost always cause your bids to be too high or too low.
- A competitive market will give you the jobs you underprice and not the ones you overprice.
Modern estimators, like today’s long-distance snipers, should constantly strive to improve their accuracy. Too often they take their best shot using a shotgun approach instead of using modern bidding technology. The estimator who uses factors to price his work usually ends up shooting himself in the foot and not the intended (profitability) target. And that can be a painful experience in the pocket as well as in the foot.