I travel around the country speaking to different groups about the importance of organizing their businesses on paper before they try to build them in real life. Year after year, I am amazed at how many smart people I meet that have no idea whether their business is making money or not.

These people draw a paycheck each week; they make bank deposits when they receive their customer’s checks. But are they really making money—or are they just riding a wave that will eventually crash onto the shore and leave them high and dry?
Getting a business license, setting up a legal operating structure, and convincing someone to give you a project is the easy part. (Well, perhaps maybe not as easy as it once was.)
If your business is not operating under the shelter of a corporate structure in this economy, then stop reading this article and go establish your company as a legal entity and not just a sole proprietorship. The reasons are too vast to list here, but do your research and get yourself some protection immediately.

After getting your business some liability protection, get busy researching the various accounting and estimating software that’s available. Whether it’s an off-the-shelf or something custom tailored to you, in this gloomy economy you can’t afford to fly by the seat of your pants any longer. For a successful contractor, the days of doing your plans and estimates on the back of a napkin are gone.

Once you have established your construction business, you need to learn how to make a profit. As I have discussed in previous articles, you need to be able to market your business, getting the projects that offer you the opportunity to make a profit and not just work to keep the doors open.

By now you have hopefully written a business plan for the growth of your company as well as your personal growth plan for yourself. Now you need to make sure that you can estimate the project accurately and then complete the job on time and on budget.
The only way to achieve success and make a profit is by accurately estimating your costs, and then using those figures as a benchmark as you track your progress and profitability. You also have to be able to calculate your markup and margins and know what your breakeven point is.

If you are not currently using job cost tracking and automated estimating, don’t feel bad. There are plenty of small contracting firms that aren’t either. But take this as a warning, if you aren’t, the probability is very high that financial difficulties await you. It’s not a question of if financial strain will come, but how soon will it be.

With the economy and new business environment that we are working in today, if you have managed to survived the past two years consider yourself fortunate. The newspapers and internet news sites are full of business failures and foreclosures every day. You can avoid or at least minimize that possibility by organizing your project financing and accounting.
The tendency for most small contracting firms is to bid the job at what they think they can get the work done for and what they think the client is willing to pay. This method ignores sound historic information, and the contractor often leaves money on the table on every job.
I continuously meet contractors that can’t tell me the difference between margin and markup. Moreover, they have no idea of what their actual overhead is costing them. Without a clear overhead picture, there is no way to accurately markup your cost in order to make a profit.

If you are one of these individuals, Margin is the difference between direct cost and sales price (contract value) divided by the sales price.
Markup is the percentage of money needed to add to the estimated direct construction cost to cover your overhead expense and create a profit.
For a profitable company, markup and margin should be the same percentage. If your margin is less than the required markup, your business is slowly failing!

The example below demonstrates why margin is so important: Let’s say you want to make 30% profit on your bid. The numbers would look like this:
As you can see, in order to make 30% on your project you would need to mark it up 42.8%. There are other factors that need to be considered in this scenario, such as knowing your overhead expenses and the breakeven point at where you begin to make a profit.
I believe all contractors should have set figures used to cover their overhead expenses. After all, in most cases your overhead expense represents your investment in the business. These are costs that are ongoing day after day regardless of whether you have any work or not. Therefore, you are entitled to a return on the investment of your overhead, or in accounting terms, ROOH. I recommend that you use 20%. You may wish to use a higher amount or a lower amount. That’s up to you; I just think 20% is a good middle-of-the-road return.

In order to incorporate this process you must have an accurate estimating process that allows you to develop bids. These bids should be based on historical data such as what products and services cost you on the last job, or on projects currently underway. If you’re lucky, you may be able to get committed bids from subcontractors and vendors prior to submitting your bid.

Without accurate job costing, you can’t possibly have accurate estimating. For example, if you have to supply two laborers to assist in unloading the forms from the truck when it arrives and it takes them one hour, you now have two man hours of expense to add to the cost of your forms. While this example doesn’t represent a huge amount of money, multiplied over several jobs and the course of a year, it could be tremendous.
Job costing also allows you to find out at any given time exactly where you are on a project, whether you’re on budget or not. If you’re off budget, you can see immediately where you missed the estimate or perhaps where there was a variance in the budget.
Armed with this information you can look ahead to other phases in the project to where you might be able to make up the variance. Perhaps it may be due to a change in the scope of the project causing you to expend more labor or materials. Without this information you might very well miss the need to submit a Change Order for the additional work.
Job costing allows you to track all labor associated with a specific task as well as all materials needed to complete the task. You can use item numbers to further break to cost down to provide precise costing. You might price your jobs according to the basics such as material, labor and overhead.

But if you really want to get accurate you might choose to budget the job this way:

Labor – Unloading and staging materials • Mobilizing equipment to site • Digging footings • Cutting, bending and tying steel • Installing forms • Placing concrete • Tear down and clean up

Materials – ICF Forms (Straights, Corners, Specials) • Form steel • Footing dowel pins • Dowel pin epoxy • Form adhesive foam • Screws • Window buck material • Shoring and bracing material

The list of items could be even more extensive than this if you choose. This is just representative of the type of detail available to you with a good job costing and estimating system. Not only is job costing a great way to track historic cost, but it also becomes a benchmark as to how you improve your estimating skills from one job to the next.
While this article is a general overview explaining the process of job costing and estimating, there are numerous resources available today in your local bookstore, your association offices and on the Internet to help you learn more about the topics I’ve discussed above. I recommend that you take this article as a prompt to dig deeper in your operation and reveal the hidden data that will allow you to earn more money on each job. Develop your full potential and learn to use the information you can get from your current processes to help you correct deficiencies in your system and improve on others.

If you have a business question that you would like answered, feel free to email me @ sustainablebuildingstrategies@gmail.com. Randy Wilkerson is a principal with Sustainable Building Strategies, LLC and Concrete Building Systems, LLC. If you need assistance planning your next sustainable project or in growing your ICF business, contact him at 865-567-8505 or by email at sustainablebuildingstrategies@gmail.com.