Dennis A. Dixon, owner of Dixon Ventures, in Flagstaff, Arizona, is an author, speaker and general contractor, mainly focusing on combining craftsmanship with profitability in custom home building. Dennis has more than 25 years in construction, plus he is the author of Finding Hidden Profits: A Guide for Custom Builders and a columnist for Custom Home magazine. dixven@aol.com
- Posted by Dennis Dixon on August 16, 2010
For those of us who have worked with insurance companies on claims repairs, the first Rule of Thumb is that any price estimate, submittal or contract must be in a format that outlines costs with the last two baselines as a 10% overhead charge, coupled with a final line calculation of a 10% profit. Mind you, those percentages are maximum submittal percentages. This actually results in a 21% netback for contractors, remodelers and renovators (Costs x 10%, then multiply that total by 10% again = 21% not 20%).
In northern Arizona, the winter of 2009/2010 was record setting. In the metro Flagstaff area there was as much as 13 ft. of snow recorded from November 2009 through April 2010, by official weather recording stations. That record snowfall was exacerbated by drifting, ice accumulation and dramatic temperature fluctuations that caused numerous freeze thaw cycles, generating atypical snow packs and dramatically thick ice dams.
In summary, there was considerable snow and ice damage to numerous residential and commercial structures during that period. Quite a few, flat (1 to 2% minimal sloped)commercial roofs collapsed due to frozen roof drains, which generated, and accumulated weight due to ice build-up. One 20,000 Sq. ft. bookstore began sagging, and then collapsed during weekday business hours, and luckily no one was hurt!
Lots of ice dams, water damage, roof collapses, roof sags, deck implosions, concrete heaving, spalling, foundation heaves, etc. Imagine the damage and results of ice 4 ft. thick on the shady side of a roof for several months? A 50 lb. roof load (by Code) becomes inconsequential. Just a sidebar comment here: I've been installing roof and floor trusses speced at 24" on-center, at 16" to boost strength at a minimal cost, for over 20 years now, just for some un-anticipated circumstance. I also use this as a sales tool to differentiate my company vs. the competition.
The Conflict: My company examined, estimated and performed over twenty remodeling repair projects during the May through July 2010 time period. Those projects were initiated through my company being contacted by a variety of sources, including realtors, neighbors, owners and even some insurance settlement estimators.
The estimating involved, and subsequent "game" involved here, is the basis of this JLC Blog.
In every circumstance, our directives for repairs were provided by the property owners (the insured). In every case, the owners wanted the work done ASAP. "Just get it done, we'll worry about the costs later" was a common mantra of the property owners. Coupled with: "Don't worry about the insurance company, paperwork and the costs - my agent has said they will stand behind me in getting the work done". Due to my experience, I knew that the insured and the insurance company had differing motives, standards and priorities.
Assumptions: 90% of the homeowners assumed that the repair work would all be paid for and paid through the insurance company. Most thought all they had to do was contact a contractor, contact their insurance agent, and then sit back and wait for the repairs to initiate and be completed on a 24x7 schedule. Time is money and does involve inconvenience!
Wrong on all counts. Now a bullet point summary of the realities:
1. Work won't be paid for, by either owner or insurance company unless a written contract exists.
2. That written contract must completely define everything that will be done, e.g., detailed specifications: Plans, names, numbers, brands, permits, inspections, a payment schedule, code compliance,etc. "The whole shootin' match" as one of my former superintendents would say.
3. Your contract should specify the actual, party responsible for payment. This is of extreme importance. Make sure it is written out as to how, when,and where, you will receive payment. The tidbits about reimbursements, etc. is none of your concern.
4. The Estimate: In ALL cases, my repair estimate and the settlement amount named by the insurance company, were as different as night and day. One of the most extreme examples was an $1,800 repair settlement amount against a $28,342.00 worth of repair work.
5. In a majority of the projects, the owners always fell back to a negotiation to my company from the standpoint of, "Well, we're only going to pay what the insurance company approves". Don't allow this historical negotiation ploy to cause you to cave on your estimate, profit and estimated overhead. Should you be reasonable and business-like? Of course, but don't adjust your price because some pencil pushing, gets a percentage of the settlement savings. Don't adjust and let the actuary brow beat you or let the homeowner reduce you to accepting peanuts for steak.
6. In ALL cases, the owner had to push, nudge or badger their insurance agent to stand up for their rights and benefits with the parent company. This generated results in the amount of realistic repair costs in 99% of the proposed projects.
7. Tip: I implemented a $300 fee for all repair estimates to avoid being "used" to analyze a project and not receive the job. The $300 was credited against the repair cps's when the contract was signed. Oh, and a P.S. (post script on this subject): our down payment was 20% of the Contract amount to get started, prepare the plans and specs and permitting process.
8. Know Your Numbers: I know how to make money due to my estimating skills and expertise. I also know how to play the game. I can use my standard remodeling markup of 1.65 x costs and prepare my proposal to reflect 10 and 10!
One thing that you should know, when you pay an insurance policy invoice, 30 to 50% of that amount is paid to the agent as a sales fee and/or commission. Do they work on a 10 and 10 basis? Yeah, sure they do!
Dennis A. Dixon, owner of Dixon Ventures, in Flagstaff, Arizona, is an author, speaker and general contractor, mainly focusing on combining craftsmanship with profitability in custom home building. Dennis has more than 25 years in construction, plus he is the author of Finding Hidden Profits: A Guide for Custom Builders and a columnist for Custom Home magazine. dixven@aol.com
- Posted by Dennis Dixon on July 12, 2010
No matter the size, locale or specialty services offered by your company, one central reality has invaded every professional since the beginning of construction. It's the myth of 10% profit and that you can continually run, operate and maintain the financial health of any business through the business directive of charging ten percent over your costs. "Better not make any mistakes" as my old 3rd grade teacher would say.
I'm not sure how and when it officially started, but it has been lingering around for many years. Twenty six years ago when I was a newly licensed, bright eyed and ambitious general contractor, I met a fellow builder on a plane flight who told me about the "myth". He was about 75 years of age and had been retired for over ten years.
"I used to be able to build a magnificent 4,000 SqFt custom home in Paradise Valley for under $20,000", he said. "And guess what I charged the clients, who were glad to pay? They saw value in the home!"
"So how much was the finished price to the buyer", I quizzed. "At least $40, maybe 45 thousand". he replied. "I knew my costs, knew how to estimate and made sure my subs made money, but did not over charge me for their services." I thought to myself, "Who knew?".
"Don't ever get sucked into working for peanuts", he said."No matter what your price, there's always someone there to criticize it and vow to produce the same work or end product for a lower cost". The construction business is filled with guys that don't understand their costs. Most fellas don't fully comprehend what it costs them to produce something by the hour, day, week or month". He went on. "Contractor's are their own worst enemy because they have poor business skills coupled with haphazard sales and negotiating methods".
"So what's the answer?" I asked. "Know your costs. Know what it costs to operate your company,before you lift a finger to do some work - by the hour, day, week and month". Then he turned the tables. "Would you wash my car for $100?", he quipped. "Uh, sure, I guess so, but I'm not really a person that specializes in washing cars. I could probably spend the same amount of time and effort invested in my building skills and make more than $100 for the same amount of energy expended", I winced. "You got it, kid", he mumbled as he lightly slugged my arm.
Now I'm turning the tables on my JLC LIVE blog readers: Do you know how much money it will cost you (and your company) to talk to a potential customer over the phone, agree to a house visit and then remove and repair the screen door, dropping it off at your glass subcontractor to re-screen it and then drive back out to the house and re-install the door. Total time expended 3.75 hrs. How much can you charge? How much will it cost you just to break even? Should you or can you charge $375? If you make $50 after you pay all of the costs, have you really profited?
Let me know. Think, review, share, expand and offer suggestions and opinions about the circumstance described. Do you want to do this for 10% over cash costs? ...Plus,write up the bill with all costs delineated and accompanied by receipts?
Dennis A. Dixon, owner of Dixon Ventures, in Flagstaff, Arizona, is an author, speaker and general contractor, mainly focusing on combining craftsmanship with profitability in custom home building. Dennis has more than 25 years in construction, plus he is the author of Finding Hidden Profits: A Guide for Custom Builders and a columnist for Custom Home magazine. dixven@aol.com
- Posted by Dennis Dixon on June 1, 2010
Every estimator, regardless of experience level, intuitively understands that the assembled summary cost of any and all construction activities (Cost Category Line Item Costs) are sourced in labor and materials. There might be other contributors to the assembled cost, but labor and materials are always part of the cost summary that makes up a single Cost Category, even if it's a subcontractor quote or just a material price. You're paying for the lumber, but the lumberyard has already included their cash cost labor expense to order, stock, store, load, deliver and manage that "material" order.
An experienced estimator knows that there are always things that are going to be overlooked, unknown and that there will be some unexpected costs that must be bourne by the contractor or remodeler. Estimating success is generated by the simple fact that cost overruns are always outweighed by the overall project revenue that compensates for those oversights, misunderstandings and cost assaults by Murphy's Law. (What can go wrong, will go wrong). Another reason I am not fond of Cost Plus. Does the owner have to pay for the contractors mistakes or oversights or lack of estimating knowledge? ...I digressed: Sorry!
A very common and ever-present estimator mistake is assuming and assigning work by others to be completed by their in-house labor, to save money, and entered at some silly cost for craftsman rated work at an unrealistic cost such as $10 per hour. Who are you kidding? Prudence is good, but learn something from the medical profession...in a surgical operation they have a surgeon, an anesthesiologist, nurses and even a surgical backup. Delegation can be a good thing! No one cuts out a portion of the surgical team to save money!
Let's conduct an estimating cost category assembly self test: Truth or Dare. But, before I ask you to analyze the components that will contribute to the actual, real world, Line Item Cost, I want to prep you a little bit about what to consider, what to anticipate and that I want you to let your imagination run wild. Think like an insurance actuary.
The three biggest contributors to poor cost estimating, whether it be for remodeling or new construction projects are: superficial plans, optimism and naivete. The Estimator is always in control of an estimates' quality, accuracy, facts, figures, historical cost performance and common sense. Those human behaviors are what ultimately make an overall estimate a success or failure.
So here's the self test. You're bidding a set of Plans that contain an ADA, federal government rated, 2,100 lb. capacity elevator, that will service project floor levels 1, 2 & 3.
1. You solicit bids from several elevator companies and each provides a bid.
2. All bids contain several pages of "things" not provided by them, aka "provided by others".
3. Can you safely assume that everything needed is detailed in the Plans? Are the plans fully specific, fact filled, accurate and sufficiently detailed to fully price out what needs to be done under the Cost Category of "Elevator"?
Hint 1: I chose an Elevator Project Detail because it is unusual, it involves numerous subs, activities, inspections and things that only previous elevator experience will each you.
Hint 2: The state elevator inspection list will include 50 to 100 line items that will be examined, tested and checked.
Your self test is to write out a task list (every expense, labor, materials, subcontractor involvement, inspection engineering, etc., that will be part of the total cash cost to be paid out by the responsible party, the contractor or remodeler. That list should included everything you can imagine and verify on the Plans that should be included to assemble a total Line Item Cost. You can even use several Elevator Line Items to help track how this assignment is explored and tabulated.
Stop reading now and prepare your list (Note everything that will cost the contractor money involved with the elevator).
Once your estimating list is completed, feel free to check it against the one I have listed here.
1. Elevator Subcontractor: Otis, Krup, Thyssen or Dover?
2. Elevator Concrete Pit Excavation.
3. Elevator Pit Concrete Walls, Floor, Rebar Reinforcement. (Conc Sub?)
4. Sump Pump Pit, Plumbing, Trenching and Connection to Sewer Line.
5. Elev Shaft Construction (1 hr. 2 hr.).
6. Hoist Beam to be provided.
7. Electrical Subcontractor.
8. Elec 3 -Phase Service.
9. Elec AMPS' Service needed?
10. Assembly of elev Hydraulic Pump and Mech Room.
11. HVAC System for Shaft and Elev Hydraulic Eqpt Room.
12. Fire Sprinklers, Fire Doors, other Fire Assemblies required?
13. Dedicated Phone Line to Elev with monthly 24-7x365 monitoring service.
14. Delivery and Storage of Elev Eqpt and Components.
15. labor to assist elev Sub Assembly Labor.
16. Disposal of Elev debris, shipping containers and misc.
17. Environmental disposal of excess hydraulic oil.
18. Elec work in Shaft, Elev Rm, Elec Service, Disconnects, etc.
19. Plumbing sub work with Elev Pit Pump and drain, test.
20. Elev Floor Covering.
21. Add'l Cost for Liability Coverage (Now and for the future?)
For brevity's sake, I have not listed EVERY line item I would use in such a Cost Assembly, but I will tell you there are at least 50 line items in my elevator assembly, full realm, cash cost, assembly estimates. I will also divulge that in my experience, a completed Elevator will end up costing at least 100% over and above the cost of the elevator subcontractor and equipment package. Elevator subcontractors do not and will not conduct all of the misc., numerous, cumbersome and tedium included with all of the support work to construct, assemble and complete an ADA, US government compliant and acceptable elevator assembly.
How does your list compare? Comment to this blog and let me, along with other readers know, even if it's something that I may have overlooked! I dare all of us to hear the Truth!
Dennis A. Dixon, owner of Dixon Ventures, in Flagstaff, Arizona, is an author, speaker and general contractor, mainly focusing on combining craftsmanship with profitability in custom home building. Dennis has more than 25 years in construction, plus he is the author of Finding Hidden Profits: A Guide for Custom Builders and a columnist for Custom Home magazine. dixven@aol.com
- Posted by Dennis Dixon on April 12, 2010
Estimating is an essential task for every builder and remodeler. It requires time, effort and experienced personnel. When your company invests time estimating a project, that time is usually diverted from completing other tasks and other work. Therefore, like everything else in the contracting business, every effort put forth should be generating income for the company. Estimating should be considered a "money making" profit center.
So how do I generate company income from Estimating?
At my company, we follow the rules listed below, which have been modified, edited and adjusted over the years, to accommodate the market conditions, our company needs and the estimating services offered by us. Here are several suggestions for estimating:
1. List some requirements and conditions that must be met before you commit to preparing an estimate or providing a Bid Price.
2. If some conditions are not met, identify how you can bolster the project circumstances to meet your minimum needs.
3. Examine your marketplace: What can you offer in estimating services that your competitors cannot? How can you make things more "user friendly" for your potential customers.
4. Some projects, clients and circumstances will not allow you to prepare an accurate estimate. Know when to say no! This situation often leads to Cost Plus jobs because nothing has been decided but everyone wants to break ground! "We'll decide that later" is one of my signals that there are problems on the horizon. Danger signs that something's "Gotta Give":
*We're not sure what type siding we want. Just price out ...cedar, redwood, shingle, shake, aluminum and stucco. We'll go from there.
*We really don't want to discuss or disclose our budget. Just give us your price!
*Bill & I really appreciate you taking a look at our Powder Bath remodel. You'll be our 10th bidder!
*My brother -in-law is going to do all of the plumbing and we'll pay him directly.
*We need you to prepare 3 bids for every trade and Cost Category as you call them. Sally and I will review those prices and bids and decide who does what.
*And by the way, while you're preparing the pricing, can I get your license number and work comp information so I can go down and apply for the building permit?
Much of what is listed above are circumstances of clients excited about their project and wanting to move it along and help the process. They might not have the previous experience with building or remodeling to understand the proper steps, procedures and decorum.
This is where you step in. Offer your expertise, experience and advice. Negotiate an amount to prepare the Specifications, assist in Selections, Plan Review and Corrections and prepare the estimate. Ask for a retainer of anywhere from $100 to $5,000 depending upon the size, circumstances and girth of the services being sought. Inform the clients that the amount will be applied to the eventual Contract Amount. The potential client will often ask "But what if we select another company to do the job?" Then we keep the retainer for services rendered. And, incidentally, those services can be used by other contractors. You will need accurate Plans, Specifications and Selections to start and complete your project, regardless of the contracting company selected.
Dennis A. Dixon, owner of Dixon Ventures, in Flagstaff, Arizona, is an author, speaker and general contractor, mainly focusing on combining craftsmanship with profitability in custom home building. Dennis has more than 25 years in construction, plus he is the author of Finding Hidden Profits: A Guide for Custom Builders and a columnist for Custom Home magazine. dixven@aol.com
- Posted by Dennis Dixon on March 9, 2010
In today's economic world, the ability of contracting professionals to accurately produce a Cost Estimate is a skill that is more essential now than in previous times. When things were booming in the contracting business, the consumer contract price was often a back burner consideration, behind financing, the interest rate and the market value of the work after completion. Consumer demand for services often exceeded supply in the form of qualified and professional contractors, suppliers and tradesmen. "Time" seemed to be the driving force in our industry.
Market prices were not always directly related to the level of quality.
The demand for contracting and remodeling work has declined since 2008 and is not expected to experience a dramatic growth spurt for quite sometime.
Here in the first quarter of 2010, consumers are demanding facts, figures, services ...and accurate pricing for their projects. It isn't just the consumer, as the financial rules have been and are still being re-written and modified to produce clarity and accuracy - whether it be new construction or remodeling. All eyes are on the money!
One key to success in the current situation of the construction industry is accurate and factual Cost Estimating. Professionals, such as architects, designers, contractors and remodelers need to know their facts, figures and production costs. Ballpark guesses about a projects' costs won't allow you to get past the cattle call audition.
So...How can I tune-up and polish my estimating skills for the 2010 marketplace? Incorporate the five steps and suggestions as listed below:
1. Plans and Specs need to be fully defined before offering a price. You cannot accurately estimate and solicit bids from subs until things are fully defined. (Maybe this should be steps 1 through 100 because lots of contractors and subs ignore this rule).
2. Work with the clients to complete the plans. Incomplete plans often lead to problems of indecisions, expectations not being met, and a requirement for lots of client-builder-architect interaction while that time should be spent building the project. Does a skier ever secure their bindings after proceeding down the mountain? You working hand-in-hand with the client produces synergy and comradery.
3. Minimize, if not totally eliminate Allowances. Filling in a spot with an allowance is postponing a decision. It generates a void/a pothole/a problem that must be resolved later. When is later? If a client cannot finalize selections, models, wants or needs associated with a specific line item of the production, such as appliance models/details, the ramifications of indecision multiply quickly. Lack of appliance models and selections impact: Cabinetry, Elec/Venting/N-Gas Plumbing, Countertops and even perimeter items such as floor coverings and wall colors. Allowances are a catalyst for discontent, false expectations and an unhappy client. Lastly, projecting an accurate allowance cost for an estimate Line Item Cost Category is difficult. Any additional costs, charges, fees, taxes, etc. are going to leave clients with an unprofessional opinion of you.
4. Estimate projects that you can handle. Taking on and estimating projects that are out of your experience realm are dangerous. You're in shark infested waters. And the sharks are the client, their referrals and their bankers. They'll be poised for attack at any sign of poor professionalism or experience. This situation occurs in difficult economic times because everyone is seeking work. If you still proceed into a situation such as this, be prepared to spend more money on supervision, book-keeping and paperwork.
5. Don't spin gold out of straw (as if you can anyway!). Novices can always find ways to save or cutout non-existent funds to save money and land the job. "I'll do the tile myself for $5 per SqFt and I'll use up all the old tile scraps that I have from my other previous projects". Some jobs aren't worth landing. Just because a potential client has an approved budget of $35,000 for a total Kitchen Demo and Remodel, does not mean that you should take this job. The clients arguing with you about the budget being able to provide funds for granite countertops vs. laminate tops is an argument that you cannot win (unless you donate the cost out of your pocket and or profit). Work with realistic clients, budgets and financial expectations. And, never, ever cut field supervision on the job to save money. It will lead to more problems.
Dennis A. Dixon, owner of Dixon Ventures, in Flagstaff, Arizona, is an author, speaker and general contractor, mainly focusing on combining craftsmanship with profitability in custom home building. Dennis has more than 25 years in construction, plus he is the author of Finding Hidden Profits: A Guide for Custom Builders and a columnist for Custom Home magazine. dixven@aol.com