Calculating Wages and Project Costs
From time to time we are asked how we arrive at our prices. In generally there are two good ways to price construction work. They are:
1. Most experienced contractors keep job costing records. This is historical data on how long it takes for his firms crew to perform certain types of tasks. With this information and updated materials and labor costs plugged in fairly accurate square foot and lineal foot pricing can be done. Such a method of pricing is much quicker than stick pricing and can be done by specialized computer software packages. Additionally there are also national averages for these tasks. They can be found in both books and software packages. They are usually updated annually and are often specific to regions of the county.
2. Stick pricing is literally taking the materials and labor off element by element. This is a much slower but more accurate method of estimating a project. In remodeling so many of the conditions are novel. Thus it is hard to apply historical job costing data to many projects and the good remodeler is often forced to abandon software programs and square foot pricing at least for some portion of the project.
3. A third method used by the unprofessional or very busy is the S.W.A.G. (stupid wild @#! guess). You are getting a SWAG if the quote comes during the contractors first visit to the potential job. You will also get a SWAG if you put the contractor on the spot at the first meeting and press him for his "best guess".
Often certain elements of the work are sub-contracted out to a specialty contractor. They provide a firm bid to the contractor. Those bids are lower than they would be if given to the customer directly. These are incorporated into the bid provided to the customer.
Sub-contractors are directly responsible to the contractor. This is why the contractor is often referred to as the general contractor.
O.H.P. stands for Overhead and Profit. Overhead pays for gasoline, truck insurance, telephone bills, advertising, tool repair and replacement, saw blade sharpening, office and warehouse rent, accountant fees, business taxes, fax paper, electricity and the 101 other items required to run a business. Profit is what is hopefully left to be used to buy new equipment, hire new employees, expand the business, and justify to the owner why he or she is not working for someone else.
O.H.P. is the percentage that a business marks up its actual product and labor costs so that it can stay in business. I have been in several seminars where the speaker stated that remodelers who did not at least double their labor and material costs to arrive at their bid should not be in business. At one such seminar I raised my hand and asked the speaker where they lived and suggested he did not have enough competition and that I wanted to move to his town.
There is no standard mark-up; for each company it is different. It depends on debt load, total volume, business plan, and the economy. Only the inexperienced or desperate use a mark-up that does not at least cover their overhead.
A few rules of thumb are:
Two Old Tricks
There are two old tricks that are used in the industry to "buy" a job with a low number.
The first trick is to advertise that estimates are free and then to give only an estimate and not a bid. A bid is a firm price unless otherwise stated. An estimate is a good guess. This usually happens where there are no good plans and specifications. It often happens in residential work. In such cases, as the project is clarified, the cost goes up. A variation of this is to offer allowances for items not yet decided upon such as flooring, trim or cabinets. By giving low allowances an estimate can be "adjusted" down.
The second trick is seen more often on commercial projects that are bid competitively. Owners often do not pay architects enough funds to provide a full set of drawings and sometimes architects miss things even with a full set of drawings. This is especially true on remodeling and additions. Often contractors will notice these problems during the bid preparation stage especially during a site visit. However if they decide not to acknowledge seeing the problems and bid the project as the plans show it rather than as they know it will have to be done their bid will naturally be lower. Such contractors make their living from buying projects with low bids and making their O.H.P. on the "extras".
Wage rates are figured differently by different firms. Some carry all wage related items in the hourly rate and others carry some or all of it in Overhead. Elements of wage rates can include:
Actual wages paid in the various construction trades may vary. However a general feel for hourly wage rates can be obtained from the Prevailing Wage Rate chart for Champaign County. These are an average of wages paid in Champaign County. They tend to be weighted to the hourly wages paid by larger firms and Unionized firms. They also reflect more a commercial rate than a residential rate. Often union firms are allowed to reduce these rates by 5% to 15% when working on residential projects.
Even with these caveats the following chart will provide the average Champaign County consumer with a good benchmark of costs. Remember that upwards of another 50% needs to be added to include all of the checked items above. On to this will need to be added O.H.P.
The data for the chart is collected, developed, and summarized by the Illinois Department of Labor. It reflects the officially established rates as of December 1, 1997. The Department does this to set the official rates of pay for all construction projects that have taxpayer monies involved.
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