COMPETITION IS AS tough as it has ever been. Since the mid-1960s the domestic construction market has not grown by any measure. In constant dollars (inflation adjusted), we have the same size construction market today that we did back then.
This is significant since we have three times as many contractors. Our industry is crowded with more construction firms eating from the same sized pie. Statistically and anecdotally, there is no mistaking that the fight to win the next job is greater.
We need every edge. Contractors must consistently price work accurately. There cannot be any air in our pricing to the client if we expect to be a consistent winner of good projects. Using a project sizing process is one way to right-size project bids and thus leave less money on the table.
All seasoned contractors understand that larger projects have economies of scale. Material can be purchased in large quantities and, therefore, suppliers can offer lower unit prices. Equipment will be rented for longer periods so the rates will be lower from the rental yards.
With this in mind, the cost of office support or overhead on a job should also have an economy of scale. For large projects, payroll, once it is set up, becomes easier and faster to administer. People mostly stay the same (along with their pay rates), cost codes become more familiar and clerical errors are less likely. Pre-job planning costs are spread over a greater volume. Add to that, executive supervision becomes more efficient with time.
Smaller projects are almost over by the time they are set up. The momentum that builds on a large project never has time to form on a small one. They are more costly on overhead as a percentage of direct cost.
Therefore, some sizing of overhead makes sense to execute in our estimating process. It is a simple process of:
- Adding overhead costs to a smaller than "average job" or
- Subtracting overhead costs on a larger than average job.
Calculating your average job size is simple math. You got to do it, however, and once done it must be input as part of this process of project sizing.
Job sizing is not a huge adjustment to the costs of a job. Your bid amounts will not wildly fluctuate. Bids with accurate breakeven costs, however, provide you with a greater chance to win a good project. To give you an idea of the range of possible values, you might find that you can apply as little as 80% of your average overhead costs on a long-term job and as much as 300% on a small project.
This is just one process in dozens that a contractor must use to keep his estimating tight. There is not a silver bullet in construction. It is the consistent use of many best practices that drive the contractor's business to a better financial place.
Job sizing makes a lot of sense if we consider the thousands of projects a contractor might bid over a career. Just as in baseball, one more hit a week makes a .250 hitter a .300 one. Then, too, one more job a month can make a contractor a highly profitable one.
Matt Stevens is president of Stevens Construction Institute, a management-consulting firm that works only with construction contractors. It performs training and process improvement work. Stevens can be reached at [email protected] or on the Web at stevensci.com