The goal of estimating is to provide a quality estimate with a price that will allow the company to make a profit. Contractors should be in business to make a profit, not to win bids. When an estimator provides a quality successful low bid, the office atmosphere is filled with excitement. Now it’s time for management, the project manager, and the foreman to focus on making a profit.
As a contractor, you have several ways to increase profit on a project:
- Purchase basic materials for less than the amount in the estimate.
- Negotiate the best price for vendor equipment packages.
- Share equipment rental costs with other trades (i.e., lifts and cranes).
- Manage labor productivity.
Money can be made by smart buying and eliminating unneeded overhead costs, but concentrating too much attention on these items will take your eye off the real prize.
The best way to increase profit is by managing labor productivity. Too often, project managers, foremen, and owners focus on material and package buyouts, squeezing subcontractors and cutting back on overhead to increase profits. These actions pale in comparison to what can be accomplished by having a highly productive labor force.
Let’s look at a typical breakdown of a project’s estimate components. Table 1 shows a typical estimate component breakdown for a $2 million project. Note: Depending on the type of project, these percentages will vary.
Material and subcontractor savings
Most contractors expect to add to profits when they buyout the quoted packages and subcontractors. Ethics should be involved when awarding purchase orders to the vendors that helped you secure the project. Issuing purchase orders to vendors that did not provide a quotation on bid day is unethical. The vendors who helped you become the successful low bidder should be likewise rewarded.
Buying better is always a good thing. Winning several large projects at the same time will give the contractor quantity buying power. Grouping the lighting packages with the same vendor, for example, should decrease your pricing and increase your profits. This helps the bottom line.
Smart buying is always good. Contractors should seek to purchase the necessary materials at the best price. The best vendors are those who provide quality customer service after the sale. Therefore, having a good relationship with your vendors is vital to success.
Vendors who are the apparent low bidder are unwilling and unable to reduce their price by another 5%, let alone 10%. If the vendor is lowering the price more than 10% after the bid is awarded, you probably are not getting the right price on bid day. If the vendor is inflating his price, it’s because he knows the contractor is going to ask for an additional discount. Repeated requests for discounted pricing after bid day will result in higher prices from vendors on bid day.
In today’s highly competitive market, estimating departments are squeezing every ounce of savings from vendors just to win the project. Even if you could achieve 5% savings from your vendors in our sample project, the total savings would amount to $37,500. Profit goes from $60,000 to $97,500 — thus increasing the profit from 3% to 5%. This only increases the profit number by 62%.
Increasing labor productivity
Studies have shown that on most construction sites, productive labor stands at about 50% to 65%. Productive labor is defined as actual installation time versus the non-productive labor (i.e., material handling, supervision, layout, etc.).
Management’s energy will be best spent on increasing labor productivity. Labor savings of 5% to 10% are very realistic, and 15% is possible. Table 2 shows how various labor-saving percentages would increase profits on this $2 million project.
As you can see, there is greater potential for increased profits by focusing on labor savings in lieu of material and subcontractor buyouts.
Improving productivity
Consider implementing as many of the following as possible:
Staging materials differently. Staging materials closer to your work area will reduce man-hours. Using wheeled carts to organize materials allows for quick and easy movement throughout the project.
Efficient material deliveries. Identify the best times and locations to deliver materials. A less busy entrance to a project can speed up delivery times.
Preplanning the work. The project foreman should concentrate on installing the work. Having to spend time combining circuits, identifying work that can be installed in a concrete slab, will distract a foreman from his main task, which is supervising the labor crew. Using an office employee to preplan sections of the project will allow the foreman to focus on organizing labor and materials for installation.
Prefabrication of materials. Fixture whip assemblies, conduit nipples, site lighting conduits for cast-in-place bases, and other assemblies can be assembled in your shop, then sent to the project site.
Providing better and sufficient tools. Quality proper working tools save labor. Broken and worn out tools should be discarded. Accidents and injuries are minimized with quality tools, therefore reducing installation time.
Only working in areas where you can be productive. Not having the necessary information, tools, and materials increases labor. Having to move employees back and forth from one area to another is counterproductive and costly.
Better coordination with other trades. The adage “what goes around comes around” is applicable. The better your employees work and coordinate with the other trades, the better they should work with your employees. Strife between trades is detrimental to a productive labor force.
Reduction in crew size. If a task would take an employee 8 hours to complete, having two employees work on it does not mean that it will be completed in 4 hours. The larger the work crew, the greater the loss of labor productivity.
Regular site visits by the management and / or owner(s). Regular site visits from management will minimize slow starting times, extended lunch periods, and early knock-off times. When workers realize that management never visits a project, some employees will arrive late, leave early, and take longer lunch times.
The big picture
Each project and company have specific needs that are different, so implementation will vary. The first thing you need to do is ensure you are measuring your productivity. Having detailed weekly labor reporting from the field is paramount. Knowing how much labor has been used in relationship to how much has been completed is vital. Labor is best tracked by categories, the most common of which include: demolition, conduit, boxes, and hangers, wire pulling, cable tray, fixtures, and devices. Most projects will have similar categories, although some will vary.
Don’t wait until the project is 75% complete to make labor improvements. The earlier you begin, the greater potential for greater profits you will reap later. Following are some important factors to consider when analyzing labor productivity.
- Know what is taking place in the field and why.
- Tracking labor by systems, areas, etc., will give you greater insight to best manage your work. Numeric measurements are a good thing.
- Saving labor hours will reduce the number of workers and amount of work days. This will hopefully mean safer projects, fewer accidents, and less stress.
- Those who manage labor need to be thinking about ways to increase productivity.
Remember: Major on the majors and minor on the minors. If you manage the labor productivity wisely, you can improve profits by 100% or more — a reality that will make your estimate and your estimator look a whole lot better.
Kiper is an independent electrical estimating consultant and trainer based in Niagara Falls, N.Y. He can be reached at [email protected].