Creating job estimates is one of the toughest parts of every home professional’s job, but it’s also one of the most important. Accurate job estimates earn the trust, repeat business and referrals of your customers. And they can also help you better manage your finances and increase your bottom line.
To help you up your estimating game, we asked Michael Stone, contractor consultant and owner of MarkupAndProfit.com to share some of his estimating expertise. Here’s his advice for creating consistently reliable project estimates:
1. Establish a standard markup: Before you can provide an accurate estimate, you must first determine your company's markup — the number required to cover your overhead costs and ensure a reasonable profit. Generally speaking, this number is generated at the beginning of the year and revisited on an annual or quarterly basis. "This is the number that you use in all of your estimates," says Stone. "It may change as necessary, but it won’t fluctuate on a job-to-job basis."
According to Stone, a profit margin of 8-10 percent is typical. And overhead expenses will typically range from 25 percent to 54 percent of a remodeling contractor’s revenue. Any cost contingencies (i.e., wiggle room) based on risk, materials and other factors should be considered on a case-by-case basis and explicitly included in each individual job estimate. Cost contingencies should not be included in your markup.
2. Eliminate distractions: Eliminating distractions is critical in developing accurate estimates, says Stone. Every error on an estimate reduces job profitability, and even answering a simple phone call while you’re creating an estimate can result in a $5,000+ mistake. "Make sure that you’re not hungry, make sure that you’ve gone to the bathroom, and make sure that you’ve turned landline and cell phones off completely," he says. "Then shut the door. Now you’re ready to develop your estimate."
3. Rely on your own cost data: There are lots of helpful tools available to help you develop estimates and manage the administrative aspects of your business — and many claim to provide updated cost data for project materials. But there’s simply no substitute for actual cost data, says Stone. He suggests keeping a database to record what you’re actually paying for materials on projects — and updating that database once a week. "Don’t rely on estimating companies to update material prices," says Stone. "They’ll just provide a best guess. You’re far better off relying on your own cost data based on your own actual invoices."
4. Make job costing a habit: The best way to dial in your project estimates, says Stone, is to make a habit of job costing — or comparing estimated costs with actual costs at the completion of every project. Very few professionals do job costing, says Stone, and those who do it could do it better than they do. But job costing will help to uncover your error factors and improve your margins. "Job costing shows you what you’re doing — good and bad," says Stone. "And over time it helps you refine your estimates and increase your profits."
Unfortunately, there’s no magic bullet when it comes to creating accurate job estimates, Stone says. In fact, it takes a lot of time and effort. But when you do a good job estimating, you can reduce your error margins — and increase both your credibility and your profitability — significantly.