The Importance of Knowing Your Break-Even Cost
Before you can determine how much to sell a job for, you need to know exactly how much the project is going to cost you to complete. This is called your break-even cost. Only after you have calculated your break-even cost are you in a position to determine your bid price.
Profit is only possible if you know your break-even cost.
Please allow me to tell you a little story about my own experience back when I was an electrical contractor.
I was the type of person that desperately wanted to win every single job that I bid on. Once I took off my “Estimator” hat and put on my “Sales” hat, I was determined to convince my customer that they would be crazy to award the job to anyone else. Even if my price was a bit too high, no problem. I would enter into negotiations that would make any diplomat proud.
It’s important for you to understand that my electrical contracting company used to do a lot of work for many of the big home builders back during the housing boom. I’m talking about communities consisting of hundreds of homes that would take a few years to build out. These were incredible contracts for my company to be awarded.
I was fortunate enough to be able to develop strong personal relationships with the contract managers for these builders. They were very important players in my universe. After all, they had the sole discretion to award these really lucrative contracts and, right or wrong, having a good personal and professional relationship played an important role.
Not to say that these guys were pushovers. Just the opposite. They were tough. They liked their jobs and wanted to keep them. Why wouldn’t they? They had a bunch of chumps like me that would wine and dine them while treating them with the utmost respect and deference.
Their job performance was based on their ability to keep construction contract costs down. So much so that there was a saying at the time that “If they’re a buyer, they’re a liar“.
While this may sound a bit harsh, the truth is that some of these guys took great delight in squeezing the lowest price out of their vendors. I don’t know how many times I heard the following: “Come on Bill, you’re killing me. Out of the three proposals that I’ve received, yours was the highest! If you want this job my friend, you’re gonna have to sharpen your pencil!”
I’m pretty sure that I was told this more than once even though I wasn’t anywhere close to being the highest bid. Don’t get me wrong, I truly appreciated the opportunities that I was given to negotiate my price in order to win jobs.
What I didn’t appreciate at the time was that my old estimating system didn’t give me confidence in my numbers. Truth be told, that’s one of the reasons that I created TurboBid. I needed a systematical method of identifying and accounting for ALL of my costs. The only thing I disliked more than losing jobs was losing money!
Please keep this in mind. When you’re estimating a job, it is of the utmost importance that you know exactly what the project is going to cost you to complete. If you sell a job for less than your break-even cost, you will lose money.
How do you determine your break-even cost?
Many contractors end up losing money on jobs because they fail to accurately identify their break-even cost. This has been the cause and reason for the demise of many contracting companies.
Business is no place for guessing. Unfortunately, in our industry, many new companies don’t have the required knowledge needed to accurately calculate their direct and indirect costs.
Following are some examples of what should be included when calculating your break-even cost.
The cost of material to be installed
- Sales tax
- Material installation time – How many man hours the job will take to complete
- Direct labor cost – This is simply the number of hours that the project will take to complete, multiplied by each field employee’s hourly pay rate.
- Burden cost – This is the additional costs that your company incurs on behalf of your field employees.
- Payroll taxes
- Workman’s compensation
- Liability insurance
- Health insurance
- Paid time off
- Paid holidays
- Future pay rate increases – If you will incur a payroll rate increase during the project, you need to calculate the additional labor cost for the job
- Skill Level Adjustment – If the job includes an employee with a lower skill level that reduces his productivity, you must account for the additional time that the job will take to complete.
- Additional Labor
- Material handling
- Job setup and breakdown
- Drive time
- All additional tasks that the crew will perform other than installing
- Labor Hour Adjustments – Different types of work require labor hour adjustments. For example, you can’t use the same labor units to estimate commercial and residential projects.
- Miscellaneous Direct Job Expenses
- Inspection fees
- Equipment rentals
- Service mobilization fees
- Anything and everything thing that you’ll spend money on to complete the project
- Tools and tool replenishment due to wear and tear
Overhead consists of the costs that you incur to run your business.
- Office staff
- Physical business location expenses – Lease, repairs, trash, maintenance, etc.
- Financial – Accounting, loans, tax preparation, etc.
- IT, website, email, etc.
- Legal fees
- Office expenses – Ink toner, paper, postage, software, etc.
- Owner salary
What are the benefits of knowing your break-even cost?
Before you can determine how much to sell a job for, you need to determine exactly how much the project is going to cost you. This is your break-even cost. Once you know your break-even cost, you can determine your bid price by adding the profit that you need to make on the job.
Are you missing the final piece to your success?
- You’ll be in a position to negotiate your bid price without the risk of losing money. If it comes down to it, you’ll be able to tell your customer with conviction that as much as you want to do their job, if you lower your price any more, you will lose money. At that point, tell them in no uncertain terms that they need to be very careful about awarding the job to anyone that claims they can do it for less.
- If you’re bid prices are consistently too high, and you are including a reasonable profit margin, chances are that you need to reduce your costs. By having a detailed break-down of your costs, you have the ability to look for areas that you can reduce costs. Overhead costs are usually a big surprise to most people and can usually be reduced.
- If you have a high degree of confidence in your break-even cost, and you really need to win a certain job, in theory (as strange as it sounds) you could take a job for zero profit if…..
- You have a project winding down and you need a new job for your key field employees.
- Work is slow and you need cash flow to pay your company’s bills.
- If you work with the tools, you are not just an owner. You are an employee. If you’re not out working with the tools, you’re not earning a paycheck as an employee.
- You want to develop a relationship with a new customer that could lead into a lucrative long term relationship. I’ve been known to “buy jobs” in the past.
In conclusion, building a profitable business is really hard work. While you may be the world’s best electrician or plumber when working with the tools, becoming a business person is a whole different matter. If you want your business to prosper, you have to know your costs.
Founder & CEO
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