Running a profitable company is hard enough, with the increasing costs, growing competition and unforeseen expenses. Whether you are new to electrical contracting or have decades of experience, the list of ways to lose money on a project is never-ending.

From an operations standpoint, we could discuss processes and systems for operating your business profitably. Of course, the discussion of getting the right people on the bus (thank you, Jim Collins) and in the right seat is always relevant when it comes to running a profitable business. 

Whether you are a large company with hundreds of employees or just starting and wearing all the hats, focusing on three key factors can make the difference between losing money and making a profit on a project.

In this two-part series, I will explore three factors you can manage with just a little effort to have noticeable effects on the bottom line. Some may say it is just common sense. As I’ve traveled around the country working with electrical contractors of all sizes and experience levels, all want to put more money on the bottom line, yet some of the simplest things prevent them from doing so.

Factor 1: Identify and include costs

Estimating the cost to complete a project involves more than figuring out the needed material and labor. It starts with an accurate project takeoff, identifying all the material that must be installed and any tasks that must be completed to build the project. 

This holds true regardless of the project’s size. On a small service project, you might walk through with the customer to identify the scope and material needed, while on a large project you will probably need fully designed plans and specifications to complete the takeoff.

In addition to material and labor, you must include any direct job expenses such as tools, equipment, permits and inspections, safety, supervision, nonproductive labor and storage, to name a few. These direct job expenses are just as necessary to include in your price as the material and labor. They are often overlooked, especially by inexperienced estimators and those new to contracting. Some of these direct job expenses are specifically called out in the bidding documents and commonly found in the general conditions or front end of the specifications. Other direct job expenses will vary between contractors.

The fourth cost that must be included in each bid is the overhead expenses associated with operating your business, such as rent for the office, taxes, general insurance, office staff, marketing and utilities. Including a portion of your overhead on every project ensures you cover the costs of operating your business a little on each one. The most common method for including overhead as part of your project cost is by applying a percentage markup to your raw costs (material, labor and direct job expenses) to cover them.

Direct job expenses versus overhead

While there may be some similarities between direct job expenses and overhead, an easy way to distinguish between the two is to remember that overhead costs cannot be attributed to a specific project. Overhead costs continue whether or not you have work, and direct job expenses typically stop at the completion of the project.

As crazy as it may sound, I have worked with more than a handful of ECs who don’t have a firm grasp on figuring costs beyond material and labor. Some of these contractors have formulas and multipliers they apply to their material and labor costs to cover direct job expenses, overhead and even profit. This method may work to come up with a bid price and even win a job, but it doesn’t lead to having a solid base to manage the costs on a project or as a business.

If any costs are left out of your bid, the only way to make them up is with the job’s profits. Having a solid understanding and accurate representation of all the costs of a project is vital to making more informed decisions when bidding on a project, and it gives you a better foundation from which to manage the project’s success. Stay tuned for June’s article, where we will look at two other factors that play a crucial role in putting more money on the bottom line. 

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