Let’s start with a review of grammar. In reality, the numbers we supply to the prospect relating to the project in which they have indicated interest have no resemblance to what Funk and Wagnalls Standard Desk Dictionary defines as an estimate:
estimate-n, 1) a rough calculation based on incomplete data. 2) a preliminary statement of the approximate cost for certain work. 3) a judgment or opinion.
Contractors generally provide a firm price for their work, unless they are among those who work on a time and material or cost plus basis. Otherwise, labeling proposed price figures as an estimate establishes it’s stature among other oxymoronic terms which have crept into our language; tight slacks, clearly misunderstood, plastic glasses, almost exactly, silent scream, good grief, alone together, soft rock… Such terms are carried to further extremes when we enhance the word estimate with such adjectives as “exact” or “firm.” On this solid grammatical foundation we begin the process of determining the very numbers by which we will live and die in our businesses. Perhaps it is because of this faulty foundation that estimating is sometimes misunderstood.
The culmination of the estimating process is the determination of the price which we present to the customer in hopes of convincing them to exchange their dollars for our products and services. In order to arrive at a price, savvy contractors realize that they must know more than the cost of the sticks and bricks, labor and subcontract of which the project is built. To determine the proper price at which to propose the job to the client, contractors recognize that they must be able to identify two types of costs, job cost and overhead, associated with their particular business and each project undertaken. These two costs are then enhanced by the addition of another factor known as profit.
The first of these, Job Cost is the sticks, bricks, etc., included in a particular project. Job Cost represents the sum total of several broad categories of expenses which are: materials, labor, subcontractors, plans and permits, and clean-up, which can be directly related to each individual project. Job Costs are bills which can usually be identified by the fact that they include a Job Address. For example, the weekly time card of an employee who spends his time in the field will indicate how many of the total hours worked during a particular week were dedicated to an individual job address. Additionally, the plumber’s draw for roughing in the plumbing in a room addition will be identified by the job address. The lumber yard provides material for a job, whether the materials are delivered or not the bill for materials generally includes the job address as a way of identifying where the materials were used. When we speak of estimating, we are referring to the act of projecting in advance the Job Costs associated with a proposed project so that these costs can be combined with other factors to formulate a price.
The second factor, Overhead, is the sum total of the on-going costs associated with being in business, these are items which typically are not directly related to any particular job. Overhead could include such items as the phone bill, rent, advertising, tools and trucks or equipment items which are not generally consumed during production of a particular job, but are used in the production of a number of different jobs. Sawz-all blades may be consumed on a particular job, for instance, while the saw itself would be used on a number of jobs. The salaries of office staff and the owner’s salary are often difficult or impossible to apportion to individual jobs, thus are more accurately included in overhead. This overhead calculation is not the result of an estimate, but is the result of a compilation of historical information obtained from last year’s check book, except in the case of the contractor who is 1) just starting out or 2) experiencing rapid change in volume.
Before we present our to the proposal to the customer for consideration, we must add to this total of job cost and overhead the final factor, profit, to arrive at the price we seek from the customer. Profit is the just reward for the effort and risk the contractor undertakes to produce the job. It is only in this total form, with the factors of job cost, overhead and profit included that the evolution of our estimate is complete. It is at this point that we consider our numbers to be a proposal to the customer. In it’s final form the price has evolved far from an estimate, having been enhanced by all of the factors which allow us to propose a solid dollar figure for which we will provide the services and products required of the project.
The ability to estimate job costs accurately is one of many indicators of the level of professionalism a contractor has achieved. A further qualification is the amount of time required to produce the estimate. The ultimate measurement of estimating excellence might be the ability to estimate quickly and accurately in the home, streamlining the entire buying process for the client and saving the contractor countless hours which would be best invested elsewhere.