Nailing quotes to optimise profits

It was a pleasure to be able to present at the recent Fencing Contractors NZ Conference in Paihia.

It was suggested that it would be good to follow up the presentation with some articles in WIRED so here is the first of those articles.

The aims of undertaking any project are to make a reasonable profit and to have satisfied clients, to name a couple.

Here is some brief guidance to assist you in pricing prospective work.

Scope

When quoting a project, it is important to understand what you are pricing.

Make sure that there is a clear understanding between you and your client of what the scope of the project is:

• What is the finished project to look like?

• What materials are to be used and who is going to provide the materials and where are they going to be delivered to. What form are they to be delivered in? If the materials are arranged correctly this could help you to be more efficient in the construction?

• Where is the work to be undertaken? Is the terrain difficult? How much travel is going to be involved to get to the work site?

• Is there additional specialised equipment that you may require for the job?

• What is the timeframe that the job is to be completed within?

• Are additional insurances required for the work?

Always try to limit your indemnity for the project to the value of the project or a value you and your insurer are comfortable with. If in doubt discuss with your insurance broker.

Lay out your expectation around when payments should be made to you.

Include details of how variations are to be dealt with as well as any items or areas of work that are excluded from the scope.

Put all of the agreed scope, terms and conditions, and your pricing in writing and get it signed to avoid possible issues later.

Costing and Quoting

Confirming the scope of the work enables you to quote the work more easily and efficiently.

There are a few ways of building up a quote all of which need some rates to be calculated before you commence.

Before you do those calculations, you need to know what your fixed costs are that you need to cover. These may be costs associated with your premises (rent, power, telephone, rates, insurance), computer costs, the costs of your administrator, any finance costs for loans that you may have, and so on.

Once you know what your fixed costs are you can calculate how much per hour you need to allocate to your cost of labour or your machinery rates to ensure all costs are covered and you can add a profit margin to that.

Using a quoting template is a good idea as this provides you with a check list of things that you need to consider when pricing a job.

The rates that you may need to calculate are:

Labour rates

Things that should be included when calculating a labour rate are:

• The hourly rate you are paying your staff. This may be an average if you have several workers at varying pay rates or separate rates for levels of experience such as Project Manager, Supervisor, Fencer, Labourer.

• Any add-ons to the hourly rates such as ACC, KiwiSaver, holidays, sick leave, any other allowances that you may pay staff.

• Costs of PPE – if not included in fixed costs.

• Costs of staff training – if not included in fixed costs.

• The allocation per hour of your fixed costs mentioned above. One way to calculate this is to take your monthly fixed costs and divide by the number of hours that your team can charge to a job over an average month. For example: you have $4,000 fixed costs per month and 2 staff members working 40 hours per week. In a month they can charge 320 hours to the job assuming they are 100% productive. Therefore, the amount per hour that needs to be added to the hourly rate is $12.50.

• What margin profit that you want to apply to each hourly rate. This can either be a percentage or a dollar value to be added. If using a percentage remember that adding a 33% markup equates to a 25% margin or gross profit. Do not get that confused.

Machine rates

When calculating these you need to decide are you going to use an hourly rate for this or a day rate?

You need the following information:

• The cost of the equipment.

• How many hours or years of operation will the equipment be able to operate.

• What training and safety equipment costs are related to being able to use the equipment?

• The cost of running the equipment (fuel, oil, etc).

• The cost of the regular maintenance of the equipment.

• The expected utilisation of the equipment. For example: the equipment is likely only to be used 25% of the time but needs to be available to do that. This may increase the day rate or hourly rate as you still need to be able to cover all the costs associated with that piece of equipment.

• Will you allocate some of your fixed costs to the rates for the equipment?

• As for the labour rate above you will need to decide what margin you wish to add to the machine rates. “ Using a quoting template is a good idea as this provides you with a check list of things that you need to consider when pricing a job

Per Metre rates

To calculate a per metre rate you need to know your hourly wage rate as well as:

• The type of fencing that is being constructed. This has a significant impact on how quickly installation can be undertaken.

• How difficult is the terrain that the fencing is to be installed on, for instance, a hilly piece of land may only be able to have half as much installed in the same time as a flat piece of land.

• Is there a lot of rock expected or scrub to clear which will make installation slower?

• What, if any, preparation need to be done to be able to do the work. This may be daily or another period. This could amount to a large amount of time.

It should be noted that the suggestions in this article may not be the only matters that you need to take into account. Each fencing contractor will have their own unique ways of operating and each project will have its own set of factors that need to be considered.

The above is meant to be general guide – for specific assistance talk to an advisor.

The difference between Estimates and Quotes

An estimate is not a fixed price and the invoice might vary from the estimate. You need to make the client aware of this in your Terms and Conditions or within your estimate. A good rule of thumb is to allow a 10-15% contingency in your estimates.

A quote is an offer to do a job for a specified price. Once the client accepts a quote, you can’t charge more than that unless the client agrees to extra work, or the scope of the job changes while it is underway. Legally, this is known as a variation to the contract and should be supplied in writing to the client and accepted prior to the variance being undertaken.

Graeme Bratty www.bizassist.nz graeme@bizassist.nz 022 587 0149

Graeme Bratty operates Biz Assist Limited, a consultancy that specialises in providing small and medium businesses with wide ranging advice and guidance in how to make their businesses stronger and more efficient. He has 30 years’ experience in senior commercial finance roles and has a passion for guiding small and medium business owners to plan for and achieve their aims.