Our last newsletter triggered a note from a long-time reader and friend. I’ll share it with you because he raised some valid points about estimating labor.
Michael,
Thank you for another helpful newsletter today – labor estimating is a struggle and your thoughts were helpful.
I recall in your class that you said the guys will never work as efficiently than when I (the boss) am with them. I can verify that! You also say, “Put your tools away and run your business”. For the last few years, I have really put my tools away and am only on jobs to check in regularly and, occasionally to work with them
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I’m going to stop here for a minute. It’s true that your crew works most efficiently when you’re working with them. Even then, they probably won’t work at your pace if you’re the most experienced of the crew. That’s why you shouldn’t estimate labor based on how long it would take you to do the work, it needs to be how long it will take your crew to do it.
I appreciate that this contractor is committed to building a stronger, more profitable company, and has put his tools away so he can spend his time running his business instead of building jobs. When you put the tools away, you can keep your focus on running your business and keeping jobs coming in the door. You can have more jobs running at the same time because you’ve developed either a crew of employees or subcontractors that you trust to get the jobs built. You don’t have to be on the job because you trust them to get it done.
I’ll go back to his note:
Your letter says to focus on better estimating and not assume that labor overages are a production issue. My question: is it reasonable to give your crew leader some knowledge of your labor budget for a particular job or task? For example, “On the estimate I allowed two men three days to finish the tile floor”.
As always, thank you!
Yes, you should involve someone from the production side of your company after you estimate the job, before you present a price to the client. Always get that second opinion to make sure you haven’t missed or underestimated anything. Assuming that the person you ask to review your estimate has seen the job site and knows what’s needed, if they disagree with your estimate, change your number to match theirs. They’re the ones who will build the job. This eliminates finger pointing during the job if labor runs over because they helped or approved the labor estimate. It will also reduce your estimating errors.
Estimating labor correctly is the most difficult part of the estimating process. That’s why you also need to look at past jobs and calculate how close your estimated time was to the actual time. The difference between the two is your error factor, and that error factor needs to be included on all future estimates.
You do that by multiplying the total labor estimate for the job by your error factor. For example, let’s say that for the last five jobs, the actual labor was on average six percent higher than your estimated labor. Your error factor is six percent. On the next estimate you create, if you project 24 hours at $35 per hour fully burdened, that’s $840. Add six percent to that ($840 x 1.06) and use $890 as the estimated labor for this job.
Continue to track how closely the actual labor on completed jobs comes to your estimated labor and adjust your error factor accordingly. Over time, as you get more experience in estimating and in how your crew works, your error factor should decrease.
Make the extra effort to get it right. When your estimate is right, the job you sell can be profitable. And being profitable is why you’re in business.
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses and their lives. He is the author of the books Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations.
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