The Real Project Cost

How many of us have landed in this scenario? We have a crew, maybe our only crew. They have been with us for a while, and we are comfortable letting them handle projects without much supervision. You decide that you are going for broke this year. You bid a ton of work based on your current crew rate and decide to shoot for 20% markups to kill it and add another crew. Everything goes great. You land a pile of work, get contracts signed, and know this is your year. Then something happens. Your lead and best helper quit.

What comes next is one of the hardest pills to swallow, and it is a lesson that takes many companies down with it.

You know you need to hire a new lead and helper. You post a job based on the current wages you were paying them, and crickets. Not one application. After some research, you realize your old lead was making about 30% less than other leads, and the only way to find a lead is to forfeit the profits on all the signed contracts you have.

The lesson we are talking about is using accrued costs instead of replacement costs for bidding. This lesson doesn’t just apply to labor costs. It can fall into any category or cost code. The worst part is that we, as owners, let it.

My first encounter with this bad principle occurred while I was fresh into the industry. We had struck a deal on some materials, and it was great. We used our paid cost to bid on a few jobs hoping that by having a lower material cost, we could land more jobs. Well, we did, but at a cost.

After sending out about 10 bids for projects utilizing this great deal on materials, we got them all. The deal was pretty good, but we ran out of the too-good-to-be-true materials before we were done with eight of them. This snafu cost us just shy of 50% more on all materials for Job #8, #9, and #10. All of those perceived profits on the first seven were given back on the last three. This great deal we received gained us nothing.

The lesson was that just because we secured a great deal on materials, we didn’t have to pass it along in our bids. We would have been further ahead in bidding at replacement cost and only winning four projects.

We also see this a lot with equipment. A contractor finds a deal on a piece of equipment and decides to charge only a fraction of the real cost of a project.

The problem with any of these situations is that when those materials run out, equipment goes down, or our lead guy decides to bolt, we are left holding the bag—often without the funds, means, or ability to replace them. Depending on the severity of this deficit, it can bankrupt us.

There is a common misconception in our industry. Many contractors look for ways to lower direct job costs in order to win more projects. Yes, there are ways to increase production, become more efficient, and lower labor costs; however, for the most part, the direct cost of a project is fixed across all bidders. It takes the same amount of brick, mortar, and sand. Every company needs the same equipment to produce. Production rates can vary some, but most are limited by job conditions. It isn’t the large disparity that one would think.

Where you can really win a project is by lowering overhead, project management, and other general conditions. This takes systems, training, and quality people in the right places.

I say the above not to get sidetracked but to drive home the original point. There is no need to give a discount on direct job costs. It doesn’t matter what you paid; it matters what it costs to REPLACE. If a field lead costs $40/hr in your market, charge for it. If you get a deal on materials or equipment, keep the savings. Have enough money in the budget to cover the expenses at total cost. You never know when a deal can disappear, equipment can go down, or you need to replace your labor force. The cost of replacing these things is the real cost of doing the job.