Chapter 15 – Estimating and Other Nitty Gritty

This book covers the basic actions necessary to succeed as a small contractor. There are, however, other more complex aspects of contracting that you should be familiar with as well — estimating, income tax, getting credit, and what to do if your business is going under. Fully dealing with these subjects is beyond the scope of this book. As a matter of fact, lots of books have already been written on them.

Even though these subjects are somewhat complex and can take a lot of time to fully understand, you can learn at least half of everything you will ever need to know about them in the next few pages.

I’m going to go over each of these subjects briefly and another as well — a pay plan for employees which increases production. So, if you fully learn what is in this chapter, you will have the beginnings of a good working understanding of these aspects of contracting. Then, at your convenience, you can add to your basic understanding by reading other books, attending seminars, or simply gaining experience as you expand your own business.

ESTIMATING

I have seen entire books on estimating that actually never covered its basic concepts. Estimating the cost of a job can become really complex, but it doesn’t need to. Here are some rules to keep it simple:

1. DON’T WASTE YOUR TIME ON CUSTOMERS WHO DON’T GIVE YOU WORK

If you spend hours and hours bidding one job and you don’t get it, that’s a lot of time wasted. If you have bid three jobs for a customer without getting one, don’t bid any more jobs for him no matter what he says. This customer has reasons for asking you to bid jobs that don’t seem to include an interest in your doing the work.

2. FIND A FAST WAY TO DETERMINE THE COST OF A JOB

This is important. There is more than one way to accurately figure out how much a job costs. What you need to do is find the fastest and easiest way to accurately determine the cost of a job.

Generally speaking, if the job is small enough, you can simply estimate the time that it will take you or your employees to do the job (four hours, two days, etc.) and add on the cost of material and/or any other job expenses.

For larger jobs, assign unit prices to the various tasks that you frequently do and then add up the number of these tasks necessary to do the job.

3. THE BIGGER THE JOB, THE SMALLER THE PERCENTAGE OF PROFIT

This is almost always true. You can make money on small jobs and on big jobs. But, the smaller the job, the easier it is to add in extra money as insurance against unforeseen difficulties and still bid competitively. If you add ten percent as a cushion to a hundred dollar job, it is only a ten dollar increase. If you add ten percent to a one hundred thousand dollar job, it is a ten thousand dollar increase and may stand in the way of your bid being accepted.

The bigger the job, the more profit you can make. But also, the lower your percentage of error in bidding must be, and the more money you are likely to loose if you have made a bidding error.

4. THE BIGGER THE JOB, THE MORE ACCURATE YOUR PRICE MUST BE

See #3 above.

5. IF YOU HAVEN’T DONE IT BEFORE, DOUBLE YOUR ESTIMATE

If you don’t have personal experience in doing a certain type of job or part of a job, you are almost always going to underestimate the amount of time that it will take. The average time to do the job will turn out to be about double what you originally thought.

The solution is simply to double your estimate, including the price of materials. This seems so simple because it is simple, but it is still true.

As a contractor, no matter how much experience you have, you are going to run into things that you are unfamiliar with. If you apply this rule, you are going to save thousand and thousands of dollars. I know this for a fact, because before I learned this rule, I lost thousands and thousands of dollars by underbidding work that was unfamiliar to me. After I started applying this rule I stopped loosing money.

INCOME TAX

If your company makes a profit, it will owe income tax. This is a subject that you should take up with a good accountant, but there is a general principle that I can tell you about.

SPEND ALL YOUR MONEY BEFORE THE END OF THE TAX YEAR

If your company has collected one hundred thousand dollars during the year and has paid out only ninety thousand dollars in expenses, it has made a profit of ten thousand dollars. It is going to owe income tax on that ten thousand dollars profit.

BUT, if your company can pay ten thousand dollars of bills early, then it will not have made a profit and it will not owe any income tax. For example, if your company has taken out material from a wholesale house and the bill is not due for another month, you can always pay that bill earlier than the due date and reduce your profit for the year.

This particular idea has saved me thousands of dollars in income tax over the years. As I have stated throughout this book, you should always be honest and operate completely within the law. This advice holds true in the area of income tax as well. But, if you can legally minimize your company’s income tax, you would be foolish not to.

If you are making a healthy profit, you would do well to consult a good accountant or tax attorney before the end of your company’s tax year to help in Tax Planning.

CREDIT

Basically, the way you get credit is you demonstrate that you are trustworthy.

Find a wholesale house that you do a lot of business with and ask it to open up a small credit account with you. Then keep your pay agreements with it.

Once you have gotten credit with one company and have kept your pay agreements for a while, you will be able to use that company as a reference for other companies that you want to get credit from. Really, it’s as simple as that. As long as you keep your pay agreements.

If you already have bad credit, it can get more complicated. You will have to prove to the person giving you credit that even though you were once a bad credit risk, you are now going to be a good credit risk. This leads us into the next subject, which is….

WHAT TO DO IF YOU ARE ALREADY IN TROUBLE

If you are already in a situation where you owe more money than you can pay, if you are taking any work you can get because you desperately need the money, if you spend hours and hours trying to collect money, and if other people spend hours and hours trying to collect money from you, you are already in trouble.

It takes a LOT more skill to salvage a failing business than it does to start and build a new business. This subject warrants a whole book, and I may someday write one. But, for now, I hope that in reading this book you have figured out some of the things that you can do to dig yourself out.

The key is to start making a 20 percent profit — or you will only be getting in even deeper trouble. If you can restructure your company so that it is making a profit and you can make some new agreements with the people that you already owe money to, you CAN turn your business around.

PAY BY PRODUCTION

In the contracting business, there are many ways you can pay the people that work for you. General contractors almost always pay their subcontractors by production. In other words, they have agreed in advance on how much the job is worth, and they pay their subcontractor that amount. Usually employees are paid by time — by the hour, the day, or the week.

Probably the single most important thing that I figured out as an employer was how to pay my employees for their production rather than for the time worked. After I started using this PAY BY PRODUCTION system, I had the following results:

1. My company made more profit.

2. My employees made more money.

3. My prices were more competitive.

I have never seen a book written about this subject and because I have found this system to be so effective in my company as well as other companies that I have consulted to, I may write a book on it myself.

For now, I encourage you to think about how you might reward your employees for the production that they do instead of the time that they spend.

Of course, you must make sure that what you do is legal and observes all the laws regarding employees. But it can be done and everyone involved can benefit.