"X Factor" Estimating and Why Not
Here's the problem. Estimates generated on material costs only times a multiplier (which appears to be a normal method of estimating for cabinetmakers) is - in my opinion - a very inaccurate way of costing out work.
This is especially true when a shop produces several different types of cabinets, e.g. residential with wood fronts and melamine interiors vs. commercial with plastic laminate doors and drawer faces and melamine interiors. Not only do the material costs vary significantly, but so do the types of cabinet construction. A medical office has a lot of file drawer banks of three to five drawers with two finished ends. None of those in a house, eh? In addition, residential wood front cabinets require finishing. Wood drawers and doors also cost more in terms of both materials and labor compared to laminate. So, a common materials multiplier is a very inaccurate way of costing out work.
Hardware is another matter. A Hafele brushed chrome wire pull (500 ea.) costs $0.50 wholesale, an aluminum one costs $1.60 and a stainless costs about $3.00. Using a multiplier of 4 (just an example) times material costs would make those pulls sell for $2.00, $3.20 and $12.00 in an estimate. Makes no sense. That kind of markup makes the price for a project with lots of expensive hardware way out of line.
Likewise, say a drawer lock costs $6. If you use a material multiplier of 4, that means you are charging $18 for labor installation, overhead and profit. If it took 30 minutes to install a lock (sounds thin to me) and you needed $60 an hour for your labor selling rate, you would need to charge $30 to install that lock. So, your minimum cost would be $36, not $24, and you lose twelve bucks on every lock you install.
I believe that estimates need to account for all items accurately, including labor hours, wood products, hardware, etc. Then, based on a company's overhead structure, meaningful methods of overhead and profit recovery should be used to generate an accurate bid.
Now, I hope - in time - that I can assign labor rates to each item produced and become a very professional cabinet estimator. Until then, your professional advice and help in any way would be greatly appreciated.
Of course, that is if you were being asked to. My advice: stick to estimating and use the formula the company asks you to. If you want to make suggestions, fine. Most business owners I have met are willing to listen to any plan that makes them money. You might want to think about these two things before making suggestions: What's in it for you and are you proficient at the job they hired you for?
From contributor B:
I applaud you on your thought process and your ability to articulate it. I agree 100%, and have never used a material multiplier because of the obvious flawed conclusions (inaccurate estimates). Your surface hardware illustration is a perfect example of the fact that the cost of the hardware itself has absolutely no relationship to the labor required to install it.
I disagree with the above suggestion to leave well enough alone. I and I think any other owner of a manufacturing company would welcome criticism when it is researched well, and then articulated well. The key is to identify the weaknesses in the current estimating system (the part you have apparently done extremely well), and then present a solution to the problem (the part you are attempting to do now).
I think that all good estimating is the reverse of the unit of measure used to define success (meeting one’s objectives). Most reasonable people would agree that a financial statement is the standard unit of measure, and if we simply reverse the process, we can produce accurate estimates that will produce consistent results (consistent profits on varied projects with inconsistent construction methods and material costs). So to take all material and labor (shop and field) content and mark these two components up by percentages that represent your company’s other costs and desired profit (i.e. sales, design, engineering, overhead and profit), and then add to that all costs associated with load, delivery and unload, this should produce the desired result (these components should also carry the markups).
If done well, this not only makes each and every project equally profitable, but it also makes each and every component of each project equally profitable. The hard part is to identify the material and labor content, which in the absence of a predefined product can be very difficult indeed.
From contributor J:
Glad to see that this thought has crossed other minds as well. If you are new to the scene, use a little tact before criticizing an already established method in use by a "very reputable cabinet company," otherwise you may find yourself burning bridges.
As for using a factor to estimate a project, that is a very normal way of estimating, albeit not a very accurate way. I would find out how often they evaluate that factor and if they have ever considered using multiple factors. The idea was to normalize and streamline estimating.
On a personal note, we are a small shop, and we are very aware of our overhead and skill levels so that we can bid more accurately. Looking at your lock example, it sounds as if your factor is way off. This might be the example to use to make a change.
From the original questioner:
I have been estimating cabinetry for a mere five weeks. I have a tremendous amount to learn about labor productivity rates for architectural woodwork. My boss is twenty years my junior (I'm 54) and is a very astute businessman for his age. I've known Joe since high school, when he worked summers installing cabinets. He is running the business his father started in 1973. I've known his Dad since 1975.
How good am I? Proficiencies: ASPE Certified Professional Estimator - had to pass a four hour exam on estimating proficiency. CSI Certified Documents Technologist - had to pass two hour exam on AIA documents and CSI Masterformat. Served on national Cost and Estimating Committee of Painting and Decorating Contractors of America for seven years. Published 60+ articles on painting estimating. Still publishing. Next column is 10th anniversary of writing. Teach Blueprint Reading at Pima Community College. May starting teaching Technical Mathematics this fall.
Suffice it to say, I left painting estimating for a very good reason.
Joe left town for a week, told me to bid work using his material markup factor. While he was gone I bid a $150,000 job. I'd say the trust is there. In five weeks, I've estimated 20 condos ($204,000), three fire stations, two schools. I acquired two fire stations (identical) because I took the architect's crappy design and using Cabinetware, designed a much better locker cabinet for the fireman's dorm rooms. That's about $80,000 worth of profitable work acquired within 30 days of starting.
Present plan on my desk is seven medical suites. Laminate and wood cost is $14,000; hardware cost is $10,000. I bid the job Thursday on a preliminary basis. Addenda due to lots of architectural mistakes in drawing cabinet elevations will require resubmitting a revised bid based on revised documents. I'm sure Joe will break down CNC and labor assembly time, evaluate materials cost, overhead and profit and generate a much better number than I did using the "materials times x" factor.
To me, any estimate that does not account for labor is marginal in its methodology.
In the hardware-heavy medical suites, using that "x" value will put forth a number shooting for the moon. I don't need to estimate for practice. On the flip side, using "materials times x" pricing may work most of the time, but it could also leave you hanging with a lot of unprofitable jobs. Labor is a direct and measurable cost, and just like materials, has to be measured reliably to produce a viable estimate.
Are there any good labor productivity (estimating) guides on the market for the cabinet and woodworking industry?
From contributor M:
Welcome to the cabinet business. I wanted to chime in on the response contributor B posted. What he graciously left out is that his company, True32 (.com), produced and sells a product called Business Partner designed to produce fast and accurate estimates. Given your background, especially, it seems to me you would have a field day using it. Not that that this kind of background is needed to be able to benefit from it. I just recently got the trial version. You can learn more about it from the products section of their web site.
From contributor R:
I have been estimating cabinets and architectural woodwork for almost 20 years. The materials multiplier method never worked for me and although I know that there are some shops that use it and have had business success, I can't understand how. I have developed a spreadsheet estimating program that calculates materials and hardware automatically for the products we make over and over, along with labor times for each process, based on the AWI cost book and our shop history. It also has blank modules for new or completely custom items, so that I can estimate new items on the fly with the same labor rates and times for the basic processes, i.e. cutting, boring, banding, and I can add labor for specialty assembly, again based on AWI costbook and/or company history. If it's something I'm likely to make again, I save the module and add it to the basic estimating program.
If you are already calculating materials, you are halfway there. There are programs, including Business Partner and several others like Takeoff or Keytrix, that can automate this and the labor estimating process. For me, the key is not only accuracy, but repeatability, teachability or flexibility, all of which are critical. The other element that my system generates, and which any good system should generate, are shop hour and materials quantity reports that can be used for scheduling and also for holding individuals accountable at every level of the company, and from which feedback can be generated to constantly fine tune the estimating process, closing the circle.
From contributor C:
I am curious about your shop's job history. It would be interesting to examine past jobs to see how accurate this multiplier system has really been. Even though it would be too late to correct a low estimate, you may be able to back out material cost and get a handle on labor times for different types of projects. If you have looked over some of the recent topics, bidding and job costing is a hot one.
One thing I have noticed is that a lot of newcomers don't realize the importance of accurate estimating. Not only does a low estimate hurt the shop submitting it, the customer will be expecting a low price on the next job.
From contributor K:
"That kind of markup makes the price for a project with lots of expensive hardware way out of line."
What is your definition of "out of line" regarding pricing? You might find that what you consider to be appropriate is out of line to the next guy... Not a criticism, just an observation.
We also have a very detailed spreadsheet for estimating. It measures material levels (based on quantity of materials ordered - different pricing/cost level for quantity, specialty materials, etc.), labor levels (not all of our workmen are paid the same), variable costs (like increased gas prices, insurance, plywood shooting through the roof, etc.) shop rate, administration, sales costs, etc.
The more detailed, the better, but one of the keys is repeatability. If you are consistently producing the same products on a regular basis, it is a much more accurate measure of your costs and profitability. Go beyond your standards, and it's appropriate to charge for it (i.e. - one-of-a-kind pieces, exotic materials, etc.), which a lot in our industry do not charge for, but also where you have to get much more detailed in your estimating.
In my opinion, the most accurate way of estimating is real-time costing where you take your current cost levels and work them into your project estimate, and every estimate is different than the last. As an example, if I ordered 200 sheets of ply six months ago, the material cost level would be much less than if I ordered the same quantity today, so if I were using a standardized (i.e. - lf, sf, cf, etc.) pricing method, I would be cutting into the profitability of the job. After all, someone has to pay for it. Or then, taking into account real-time costing, our pricing levels would increase to account for the increase in ply cost. But what if I am using the ply ordered six months previously with the current real-time costing? Would that be out of line, being that I paid less for that order versus the current one which cost us more?
Although our methods of estimating are very detailed, we sometimes convert our method to provide estimates to the customers in the language they are used to hearing (i.e. lineal foot pricing). A confused customer tends to get brain-locked when it comes to decision time.
I am not aware of any estimating method, other than backcharging, that can get you complete parity.
From contributor G:
Before you jump to conclusions and everyone starts hailing this as a major discovery, you need to think of the soft variables involved in this method.
We all know this method stinks, but just think for a minute… Say someone threw you a job where you had to put on 500 locks. You had a CNC machine or a $500 dollar drill press sitting there. You'd come up with a way for $9,000 (500 locks times 18 labor each) to put them on profitably, which would far exceed some guy with a combination square, pencil and spade bit.
Your problem is not in your estimation skills or math, it's in knowing the shop's capability. I'd think twice before I started rocking the boat at this point.
Situations like this are great times to look at shop operations and figure out that if you can't make money on something with a 3-4 time markup, you have something not jiving in the shop… as in 200 sheets of laminate to cut on a beam saw, but no laminating line and 12 guys doing it with rollers and contact. It's a good time to find the bottleneck and see how a hand done vs. machine done vs. buy out scenario might work, then go to the boss.
Don't ever bring a boss a problem without a solution.
From contributor W:
You have figured out in a short time what takes many in our business years to figure out (if ever). Many of us have been frustrated by the threads on this website asking "what do you charge per foot?"
I developed an estimating system with Excel spreadsheets similar to contributor R. It starts with a takeoff of items on the project, broken down by type (doors, standing/running trim, plastic laminate casework, wood casework, paneling, etc.).
Each item on the takeoff is then individually cost out, breaking down the cost of material, buyouts, lumber and panel stock, hardware, and finishing materials. It also breaks down the labor side into machining, assembly, handling/delivery, drafting/project management, finishing, installation and touchup.
The individual item information is then consolidated into a final job cost sheet that assigns material markups, labor rates, taxes, etc.
The most difficult part, in my opinion, of bidding custom work is the estimation of the labor. Often, we are estimating products we have never built before. They may be similar, and we can use other products as a template, but often the "custom" part of each project makes the labor a pure educated guess.
Concentrate your efforts on understanding this labor variable. Your estimating in the painting field seems to have helped you tremendously in the technical side of the process of estimating. But your lack of experience in the woodworking field may present a problem when determining labor hours. Please don't take that the wrong way - it's just an observation from what you've said so far (unless I missed something). Your company may have developed some historical data on labor to assist with this.
One other thought - typically, labor is a much larger portion of the project than materials. It is important to get them both right, but spending time getting quotes on a hardware that you know costs around 50 cents may be better spent on estimating the labor side of the project. We keep standard amounts for certain common hardware items, and check them periodically to make sure they are not way out of whack. Specialty handles or hardware is a different thing, especially if you haven't used them before.
As far as what to do concerning rocking the boat, I would certainly discuss your thoughts with the boss. If done in a non-confrontational way, any reasonable person would value your suggestions and discuss the ideas you have. If you don't say anything, there may be bad feelings when you are asked to explain a project that didn't make money and you used the "material x" way of estimating. Say something before that happens. If your boss doesn't do anything, at least you've voiced your concern.
From the original questioner:
Wow! Thanks, everybody.
Here's where I am now. My spreadsheet has four columns of input:
Your explicit, well-phrased responses have confirmed what I already believe: to be a successful cabinet estimator and produce viable estimates which produce profitable work for my employer, I need to work toward understanding cabinet systems - which I am doing very rapidly. Then I need to acquire good software (e.g., True 32 or Kinetic) or develop a systems-based approach to estimating cabinetry using a legitimate labor costing source such as the AWI Cost Book.
Obviously, I need to learn to crawl before I can walk and I need to learn how to walk before I can run. However, in five weeks of bidding I have learned that some shops here in Tucson have no clue how to estimate cabinetry correctly. How can anyone in their right mind price a specified AWI custom job that has $22,000 worth of materials (wood, plastics, hardware) at $35,000? There really are no secrets in trade estimating, and what I have learned talking to other trades is that, as a rule of thumb, you either take the material or labor and triple it or add the two together and add 50% to arrive at a selling price. As I perform post-bid quotes, that rule of thumb seems to be true with viable quote numbers in cabinetry. The material times "x" factor appears to be 3. The implicit problem with a materials-only approach to estimating cabinets is that it takes material, applies both labor and overhead as a percentage of materials, and derives a selling price.
Back to estimating systems. If I went down to the local pizza place and asked them to make me a cheese pizza without cheese, they would still charge me the price for a cheese pizza. Even if you backed out the direct cost of the cheese, your labor really isn't impacted that much and it still costs so much to heat up the oven and pay your fixed costs (the people who tend the register, clean the floors, wipe the tables). So, even if you did get a credit for the cheese, overhead and labor (5 seconds to sprinkle the cheese) aren't impacted very much.
If the owner were at the counter, he might humor me and say, "Yeah, buddy, sell you a cheese pizza without cheese for $15.89 instead of $15.99." However, if he were a very smart business owner, he might say "A cheese pizza without pizza is a special pizza. I have to give my cook additional instructions and input special pricing into my register. So, if you want a cheese pizza without cheese, the actual design time and register input costs me 20% more to make, which is $19.19. If you really want a cheese pizza without cheese, that's my cost. Want one or not?"
Now, the basic component of any cabinet appears to be an open box. An open box has a back, two sides and a bottom. Stretch it in length or stretch it in height and the box changes dimensions. But the open box has to have a minimum finite time to construct. As it becomes larger, the open box has more dowels, requires more routing, more edge banding, etc., which increases CNC time and labor assembly proportionately. At some time, that box becomes so large that it requires extra handling (e.g., two people to assemble or move.)
Now, basic boxes break the mold when any measurement gets out of kilter, requiring added design time, special labor instructions, unique assembly, or difficulty in installation (a unique corner shelf in a kitchen, a special angled corner box, a corner box with a radiused back, etc.). Or… the price of pizza just went way up!
Back to the basic box… Basic boxes can be open - 1 door, 2 doors, 1 drawer, 2 drawers, false fronts, double false fronts, a combination thereof. 2 more basic boxes might be drawer stacks and pantries. Basic boxes have shelves: 0, 1, 2, 3, etc. Basic boxes have hinges, pulls, and slides. Some basic boxes require additional installation: a blind corner box, a sink base. Basic box add-ons: fillers, end panels, etc.
If any of the above change, you have a special box that needs to be introduced into the estimating system. For example, a file drawer requires special slides, an insert for hanging files, a lock. Boom, boom, boom. Special order material, added labor for the lock, unpack and hang the file insert, possibly added costs for master-keying.
I get it. I am going to start with the basic cheese pizza. Determine how much mushrooms, green peppers, onions, etc. add to the cost of the basic pizza, and someday be able to determine the cost of any custom pizza, even one with custom toppings: Alaskan salmon, shrimp, Hatch green chiles. If a customer orders 10 or even 100 of my custom pizzas, I'll know how to discount it and still make a profit for the company. And, if some silly person asks for a cheese pizza without cheese, I'll know the extra cost for that, too.
The word "thanks" doesn't even begin to say how grateful I am to all of you who responded to my post.
From contributor P:
I was just thinking that so many of these methods of estimating sound good and offer more accuracy than the simple multiplier. But let's remember - anytime a new system is implemented, you must consider who else needs to understand it, like the accountant, the owner, other estimators, sales manager, etc. Maybe that's why I can't ever recall a new system being implemented by an estimator. But I will say this - if an estimator is going to initiate a different system for a company, you sound like the right guy.
From the original questioner:
Just to set something straight, I have no intention of rocking the boat with my employer. I think that the "material times x" factor is entirely legitimate if that's what the owner wants me to do. It's his business, and his money. Joe is exceptionally intelligent and has the street smarts you gain from starting a craft in high school.
However, I am quite sure that when he gets back, he'll look over my estimate on the 7 medical suites, write down some numbers and recalculate the job quickly and accurately to account for CNC time, labor assembly, install time, etc.
Important footnote: We were the only local firm invited to bid this job, because of my involvement in a commercial general contractor's association. The GC is from Phoenix, as are the other two cabinet subs.
I am looking for a long term plan to become a proficient commercial cabinet estimator, a better employee, to work toward a personal goal of self-sufficiency and to expand my employer's business and improve his profits.
I am self-motivated and self-directed. I'm smart. Joe is amazed how fast I'm picking up estimating cabinets. He wants to direct his business, not review every estimate, much less every line item, or fix every little shop problem.
Now, commercial work is competitive. The material times x method seems entirely appropriate on the residential side where overhead and profit markups are very generous. The reputation is there to command healthy pricing.
Consider that having two CNCs idle most of the time (current situation) does not help recover overhead or make any profit. On the flip side, neither does burning up the CNCs with unprofitable work make any sense.
That's why I work at the owner's directive. On the other hand, at least for the moment, I'm like many of you. For the last five weeks, I've worked 80, maybe 100 hour weeks. 4 to 6 hours of sleep a night appears to be the norm right now, as does working 7 days a week.
From the original questioner:
By the way, all labor operations are tracked with Tracktivity. And we have a 31-year-old historical database.
I am on a base salary + commission. I expect to make at least 50% more than I made as a painting estimator, maybe 100% more my first year out.
As for the material factor, if it works and makes a lot of money on the residential side, then let it happen.
As for the commercial, Joe is reviewing my estimates, which include
So, the material times x factor is a starting point for me. But the big ones, Joe reviews.
These are my goals before year's end:
From contributor J:
This has to be one of the most interesting threads that I have read in some time. It seems to me that since material cost can be accurately tracked as long as you remember to add in shipping and handling and that all-important yield, among other things, and since we are discussing the manufacturing of a cabinet, it makes for a reasonable basis to cost other things such as labor, administrative and selling costs.
If you have the historical data from recent similar jobs to help you determine a reasonable x-factor, then you can produce a reasonable estimate of your costs. The absence of this historical data is where the estimates get out of whack. A cost book can help, but not if your particular situation is out of line with the cost book numbers. Relying on another shop's numbers can skew your costs just as much as a cost book. Historical data needs to be reviewed and relevant. Using historical data that is outdated can definitely have drastic effects on your numbers. Probably the most accurate way would be to use time studies, etc.
Of course, we should all probably remember that the birth of these x-factors were a direct result of the computer age. We were all and still are looking for faster, more efficient ways of manufacturing our cabinets. Computer spreadsheets and software helped us do just that. We learned early on that if we plugged a factor into a spreadsheet, it simplified the estimating process. With many software packages available today, you can enter a job, generate a code and let your CNC nest the parts for maximum yield, which in turn cuts cost.
The way I see the problem is that businesses try to relate all of their costs into one factor, say the number 3, without identifying all of the cost drivers that may effect that factor.
From the original questioner:
There are a couple things I'd like answers to…
Determining useable yield. I can sit down with Cabinetware and do that very accurately. Or I can develop a spreadsheet, where each component of an assembly can be defined and allow 1/2" each way for CNC routing. Doing that, a 27 x 30 upper (all 3/4" construction) should theoretically have
How do you account for waste when spreadsheeting compared to using design software?
Is there an easy answer? (Probably not.)
If not, how do I start thinking this through? I'm good at visualizing. Is there a way to do this accurately? Does True 32 Business Partner do this? Cabinetware may do this well, but I don't like the interface.
Also, how do you figure out S&H? The file drawer seems the most obvious answer. But how about on the web? UPS, Fed EX? How do you account for handling?
Related to this, how do you manage inventory for what should be stock items (in our case Blum hinges, Blum slides, PVC edge banding, dowels, etc.)? Anything you use a lot of that can be purchased in bulk... After all, buying on a per job basis increases item cost, shipping costs, handling.
From contributor B:
Waste should be factored onto each material type based on past experience. In the Business Partner, we allow you to factor in the waste as a percentage of material cost for each and every material type. The key is to set the percentage at a realistic number that recovers a little more than the actual waste, but in reality, even if you are off by a small amount, at least you are recovering the majority of your material waste by doing something each and every time you estimate a job, and not having to actually remember to do it.
As for the material mixture, it is simply a matter of having each of those material types listed in your material database. Our commercial users have stated that it is really nice to be able to use the finish process for the laminate. Each laminate cost group is listed as a finish process (laminate is a glued-on finish rather than a sprayed-on finish). But it can be done either way. For example, you could have a sheet material with laminate on one side and cabinet liner on the other with all the costs to lay it up built into the square foot price of the material, and then a percentage added for waste, or you could have a base substrate listed in the material database, and the laminate and cabinet liner listed in the finish database, and choose these items on the material entry page. One of our strong suits is the ability to switch material and/or finish types quickly and run a new estimate.
Regarding shipping and handling, we use mileage, per trip and per box charges in the Business Partner, and all the databases come pre-loaded with my current data for comparisons.
You also asked about managing inventory. I use a purchase report that is the byproduct of having estimated the job in the Business Partner (anything I charged the client is included on the purchase report, along with my cost and the client's cost based on the markup specific to that job). The purchase report includes a checkbox to be checked off once the item has been ordered. The majority of my commodity items that are not job-specific are re-ordered using a KANBAN system.
I do not agree that purchasing some items job specific costs more. We do purchase the items you listed and sheet goods in full box, skid or case quantities that will fulfill our use for the month, but we purchase most edge banding, surface hardware, stains, etc. job specific. We have pretty good agreements with our suppliers for next quantity pricing for loyal and intelligent purchasing (hyper organized purchasing), and there are also costs associated with stocking larger quantities (i.e. storage, damage, loss, insurance, obsolescence).
From contributor R:
I hope the message that this thread carries is that there is no standard- what you charge for your work (what your estimates must generate) is your cost plus overhead and profit. Cost is fact; price is policy. What you charge for profit is what you think you can get and what your market will bear, but what it costs you is hard and non-negotiable. What I don't like about lineal foot or materials x factor is that
1. You risk getting jobs you don't want and missing the ones you do and
2. it's much harder to generate good numbers for your shop
3. and it's more difficult to generate accurate additional estimated costs for such things as building access, shipping, field dimensioning, layout, financing, overtime, Davis Bacon wages, etc.
I am not saying these methods don't work, because obviously they do for some people. I would guess that it depends on your market, how much room there is for error, and how much your shop depends on good data for tracking. If all that matters is what's left after you finish your year, then it might work fine. But I would never have found out some crucial things about the way my business works and the specific areas where we make and lose money without the data generated by an operational method of estimating. My first estimating job was in a shop that was successful for some years using a lineal foot pricing method for straight cabinet work and a materials x factor method for specialty items, but this system fell apart completely when they graduated to a multi-million dollar, multi-project commercial environment. I say do what works and what has worked in the past, but be aware of where you are going, and if you are just starting out, start out right so that you'll grow in the direction you want.
From contributor J:
Contributor R makes a good point about not standardizing total pricing. However, the fundamental problem has nothing to do with what you charge for profit, but whether or not you cover your costs first. Therein lies the problem, because so many shops lose their tail because they are paying more for the job than what they are making. Many of the existing methods are set up for shops or plants that are making a homogenous product with minor changes. An x factor works in an environment like that. But when you make custom cabinets, you have to be able to estimate your costs accurately or you lose.
I've seen other posts where people complain about the guy working part-time out of his garage charging time plus materials. If that guy is your competition, you already have a lot of problems. If you can't find a way to win a job over him, you have already lost the game.
On the other hand, if your material costs are similar to what other shops in your area are paying, then the difference between you and your competition rests in quality and creativity and that cost driver is labor, pure and simple.
Regarding the handling cost, I was referring not to what your supplier charges you for handling and shipping, but what it costs you for handling and shipping. It is rather easy to determine what your supplier charges you, but if you merely pass that cost along to your customer, you lose. What about the cost of receiving those supplies into your plant? Someone has to unload the truck, stack and store the inventory and then sort it out for the job(s) that it was intended for. We could carry this to a further extreme and talk about opportunity costs, too. If you have all of your money tied up in inventory that isn't moving, what is the cost of that? Floor space? Lost interest? The list goes on and on. Guess that is why I'm such a big advocate of JIT ordering. (Grin.)
From contributor K:
Contributor R, are you the same contributor R from OGB I was just reading about in the May 2004 issue of CWB magazine?
From contributor R:
Yes, I'm the same guy.
From contributor K:
Good article. How did you come up with the formula/concept for "we won't bid on any job unless it is under 10 percent of our gross annual sales"? Considering we are talking about estimating, I thought this might be an interesting addition...
I also appreciate the fact that you did not shy away from publicizing the fact that you "are expensive."
From contributor R:
That is an important sidebar to this discussion. I have been doing this work for 25 years, and I purchased my company 4 years ago after working here for 10 years. I got in the habit of closely observing my competition, which has been uniquely easy in my particular market and I have been very involved with National AWI, where I have been able to observe and learn even more about what happens outside my community.
I have seen a lot of people go out of business over this time period, and there are lots of reasons this happens, but the most common one seems to be losing control of the estimating function, which is why I have been very reluctant to let it go here. What I have observed is that owners tend to fall in love with growth for its own sake, and to go after projects that are both too large and/or too complex for their capacities.
Two examples, taken from life and replicated nationwide, over and over: a new firm with 4 employees, 2000 square feet of shop space, and basic equipment. Their first year gross might come to $200,000 at a steady pace, yet they bid public projects upwards of $300,000. So far they have not been low enough to beat the bottom feeders who pursue this kind of work so avidly, but one of these days they will win a big one. So they will have 9 months or a year to get ready for a job that will likely have to be produced and installed over the course of about 3 months. They will have to figure out how to finance this project, which will require a huge jump in their credit capacity. They will have to consider significant indebtedness at the same time to upgrade their machinery or figure out some other way to produce the work at the quality level required in the time frame required. If they opt to buy out the boxes and the tops, they'll need yet more credit, because they'll be on 30 day terms with most suppliers. A good commercial contractor pays in 45 days, but the good ones aren't always low bidder on public work, and even the good ones pay when paid, so payment may come in 60 days, or 70, or 90. I could go on about what goes wrong on commercial projects, but suppose our $300 k firm is low because they made a mistake, the most common reason for being low on a public job? Suppose they made a significant mistake? Small company out of business in under 2 years.
Example 2: an established firm, highly profitable, niche market in negotiated commercial work, $3 million in sales, very well-equipped, decides to grow for any one of a number of reasons, and starts bidding large public jobs with all the above conditions. Hiring a new estimator who can really bring in the work, they go after million dollar plus contracts and land a couple, not noticing that everyone else is at a million and a half. 18 months later, all their resources are completely devoted for 6 months at double overtime to the most difficult and demanding projects they have ever done, all of their negotiated customers have gone elsewhere forever, having been abandoned, and they finish owing one general contractor $250,000, defaulting on the other contract, unable to even make payroll, let alone pay suppliers or the bank, and they stand on the brink of bankruptcy with no work.
These are the kind of reasons I peg my largest projects at 10 per cent of gross. Not a hard and fast number, but a reasonable one. We can manage and finance a $.5 million project while still running a dozen or two smaller jobs, keep the cash flowing and keep our most valuable resources - our negotiated, relationship-based customers - happy and our other most valuable resource, our crew, busy but not burned out. If my big customer is slow to pay, I can keep going with other projects. If I made an estimating mistake and we make no money on the job or lost some, it will hurt but it won't be fatal, and I'll still have good negotiated projects rolling in to help my recovery.
My company is the size it is because I bought it when it was close to this size and it's expanded over 4 years in a steady way, with the financing and management more or less keeping pace. I see no reason to get any bigger, and in fact may grow it smaller as the market changes. The bigger they come, the harder they fall and there is no virtue whatsoever in growth for its own sake. That's a long answer to a short question.
From contributor E:
We need to remember that estimating still is an approximation to the actual costs plus the profit and overhead required to sell the job in our marketplace. Many estimators actually don’t make a distinction between the two, simply because they don't know what it costs to be in business. For these people, the multiplier method is often used out of simplicity.
If our real costs were known, there would be no need for estimating. So an approximation needs to be made which closely resembles how you do business and it also needs to be made in reasonable time because we aren’t yet paid to engineer the project. Before computers, people used linear foot and multiplier methods because they were simple on paper and tape calculators. These were very coarse approximations and can never account for product deviations because the model doesn’t allow for that. Back in the eighties when margins were fat and the probability of being a successful bidder was great, using a coarse approximation didn’t matter. Thus, the margins were fat enough and everyone made money.
Today, when margins are much thinner and many shops run at 20% bid success rates, we need to be much more accurate because there is very little room for error and the wrong multiplier may unknowingly bounce you out of the marketplace. Worse yet, without accurate cost estimates you have no negotiation leverage to know where your bottom line is. You need to know at bid time whether you are still making money or are being asked to this project as a favor.
A viable alternative is unit estimating, which actually does material and labor calculation per individual bid item. In the pencil paper days, this would have been a formidable task and quotes would never be done on time. But now with computers and parametric estimating software, the costing is automated and the estimator can focus on ensuring the spec is read properly, jobs are listed completely and alternatives analyzed, all without doing clerical material labor calculations. Even monumental items can be treated this way because they are simply a sum of assembly items. What these digital methods also allow is doing last minute “what if” calculations and then later supplying cost cutting alternatives while still keeping a handle on what your real costs are.
Accountants always use multipliers as a statistical average of all jobs to allow for yearly comparisons. In fact, for predictable product lines, these multipliers work because catalog-based factories use the multipliers as goal setting values. But these numbers are always in hindsight and never tell you what next year's market is about. They may be used for a reality check, but in commercial millwork where every project is different, you need to know what your costs are before you start negotiating.
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