How do you know if you are making money? Really. Is it because you keep your bills paid and there is money left at the end of the month? Is it because you are still in business? Or is it because you know what each job costs to produce, what your overhead is and what your profit margin should be?
There are many ways to answer those questions. From the “weighting the plans” estimating approach to the detailed take off and formulaic calculations method and everything in between. Some contractors do not know how to estimate and make up for that lack by using block figures to represent different phases of a project to which they assign numbers that ostensibly represent the costs, overhead and profit for each phase. For example, a plumber who works on new custom homes might pre-print his estimating sheets thusly:
Sanitary soil — by the foot @ =
Drain waste vent (DWV) top out — by the foot and fixture @ =
Underground water — by the foot @ =
Water top out — by the foot and fixture @ =
Gas – by the foot @=
Wash closet # @ =
Lav # @ =
Tub/roman # @ =
Tub/shower # @ =
Shower valves # @ =
Kitchen sink # @ =
Laundry sink # @ =
Washer connection # @ =
Hose bibbs # @ =
Backflow preventer # @ =
Steam generator # @ =
R/O System# @ =
By applying dollar values to each of these categories (such values determined by the contractor using past experience and/or current costs), the contractor arrives at an estimated cost to the general contractor (or homeowner) to perform the plumbing portion of the project. There is wiggle room for unexpected occurrences such as hard dig or other unforeseen circumstances, and the fixture schedule can be adjusted for high-end to low end products accordingly. Generally, though, the numbers are tweaked and streamlined to approximate a profitable project for the plumbing contractor and to keep competitive with other contractors who might be bidding on the same project.
This method of job costing is woefully inadequate for long term success and for understanding just exactly how much you are making from each job. It might be true that you are making money. It might also be true that you aren't. The only way you'll ever know is to actually look at what your jobs are costing you to produce. The preceding example, or variations of it, are actually more common than you'd think. Trying to save time or cut corners when job costing is not a good road to take.
If you want to be in business for the long haul, you need to learn how to job cost. It's not rocket science. It takes a little time and effort, but the rewards are well worth it. As I've written before, start with a good, accurate take-off and have your supplier give you current pricing on the material.
For labor figures, use what information is local to you or base those figures on your own crew (or you, if you are a one or two man show). Take the time to learn what it is costing you to be in business; that is your truck, office rent, tax burden, labor burden, insurance premiums, electric bill, fuel costs, interest on loans, etc. In short, anything that is not making you money is overhead. Divide those costs by the hours you expect to be on the job, or by the day, week, or month (it's up to you), create a percentage, and add that number to your material and labor estimate. If you figure to be on a project for six months, calculate your total overhead for those six months and apply it as a line item to your costs, because that's what you'll be paying to keep the lights on while you're on that job.
By this time you should have a hard fix on your material costs (if you've done a detailed estimate), labor costs, sub-subcontract costs (if any), one time or specialty costs (certifications, special licenses and the like) and your overhead. Now you know what doing that job is going to “cost” you to produce. The next part of job costing is easy; what do you want to make as a gross profit? You'll need to be careful here because, if you are in a bidding situation, you'll need to consider your competition as well as negotiating room with the general, should you be the successful bidder. Add the numbers and you've got a complete job cost.
Now that you've got all of your costs and expected profit laid out in front of you, you can dissect the project into pieces for either monthly billing or phase (draw) payments. By having all of your costs known from the beginning, you can determine whether or not you are making money on any particular part of the job, all of it or none of it. It's also easy to see if your labor estimates match up with your actual production. This is valuable information moving forward, because you can either adjust your labor estimates to match your actual labor costs, or you can do something to change your labor force.
In any case, by job costing this way, you have a hold of the reins of your company and not vice-versa. It is easy to see where you are off, where you are on and what you need to do looking ahead to make yourself more competitive.
The Brooklyn, N.Y.-born author is a retired third generation master plumber. He founded Sunflower Plumbing & Heating in Shirley, N.Y., in 1975 and A Professional Commercial Plumbing Inc. in Phoenix in 1980. He holds residential, commercial, industrial and solar plumbing licenses and is certified in welding, clean rooms, polypropylene gas fusion and medical gas piping. He can be reached at [email protected].