Dr. Matt Stevens, the author of McGraw-Hill’s, “The Construction MBA” and “Managing a Construction Firm on Just 24 Hours a Day”, has created an important calculator for adjusting overhead to the size of a project based on construction industry competitive information.
Competition is the greatest it has ever been. Since the mid-1960’s the domestic construction market has not grown by any measure. In constant dollars (inflation adjusted), we have the same size construction market today that we did back then. This is significant since we have three times more contractors in the same time period. Our industry is crowded with more construction firms eating from the same size pie. Statistically and anecdotally, there is no mistaking that the fight to win the next job is greater.
We need every edge. Contractors must consistently price work accurately. There cannot be any air in pricing to the client if we expect to be a consistent winner of good projects. Using a project sizing process is one way to right size project bids and thus “leaving less money on the table”.
All seasoned contractors understand that larger projects have economies of scale. Material can be purchased in large quantities therefore low unit prices are offered by suppliers. Equipment will be rented for longer periods therefore rates will be lower from the rental yards.
With this in mind, the cost of office support or overhead on a job should also have an economy of scale. For large projects, payroll, once it is set up, becomes easier and faster to administer. People mostly stay the same (and pay rates), cost codes become more familiar and clerical errors are less. Pre-job planning costs are spread over a greater volume. Add to that, executive supervision becomes more efficient with time.
Smaller projects once set up are almost over. The momentum that builds on a large project never has time to form on a small one. They are more costly on overhead as a percentage of direct cost.
Therefore, some sizing of overhead does make sense to execute in our estimating process.
It is a simple process of:
1) Adding overhead costs to a smaller than “average job”.
2) Subtracting overhead costs on a larger than “average job”.
The adjustment has to be made with current banking data of the behavior of costs in construction contracting businesses. This is part of the value of this calculator. It is based on highly accurate and current information.
Obviously, calculating your average job size is simple math. However it must be done for each coming year and once done, it must be inputted as part of this process of project sizing. Thus, it needs to be a calculated each and every year.
Job sizing is not a huge adjustment to the costs of a job. Your bid amounts will not wildly fluctuate. However, bids with accurate breakeven costs provide you with a greater chance to win a good project and make money at the same time.
This is just one process in dozens that a contractor must use to keep his estimating “tight”. There is no silver bullet in construction. It is the consistent use of many good operating practices which drive the contractor’s business to better financial place.
Job sizing makes a lot of sense if we consider the thousands of projects a contractor might bid over a career. Just as in baseball, one more hit over a week makes a .250 hitter a .300 one. Then too, does one more job a month make a contractor a highly profitable one.