When bidding a project, it's not good enough to bid by the square foot, per unit, or using any other method that doesn't account for unique project logistics. This was a lesson I learned the hard way as a young contractor.
Years ago I was hired to do an interior restoration project on a sizeable historic home here in Seattle. Among other things, the project consisted of refinishing hardwood floors, painting walls, electrical, plumbing, and some remodeling in a guest bathroom. I submitted a solid proposal with the standard contractor markups. Altogether, it was a financially viable, profitable project.
About ¾ of the way through the project, the owner decided he wanted to do the bathroom remodel another time. I said: Sure! No problem, I'll just remove that from the proposal and we'll take care of it whenever you want.
Sure enough, he called back in a few months to complete the bathroom part of the project, so I recreated the bathroom portion of the original bid. The project started out alright until I realized the owner expected me to be there when the drywall subcontractor was stopping in to work on his portion of the project. He didn't want people in his house without me there.
The problem was that my drywall contractor's work would require him to stop by for four days in a row for about 20 minutes each day to complete his patches. I was using a 20% markup at the time. Since the drywall portion of that part of the project was $600, that meant my portion was only $120. At the time, I was on another project across town, so I ended up driving an hour and a half to babysit my drywall contractor for four days in a row—for $120. Not worth it.
Driving an hour and a half clear across the city to open a door gave me plenty of time to think about the situation. As a business owner, I wanted to understand what I could learn from this. How could I implement methods to running my business better? How should I deal with this type of situation in the future?
It wasn't long before I realized if I had bid the bathroom as a project all to its own, it would have had a much higher final price. It was a valuable lesson in understanding the hidden costs of a project. When my customer wanted the bathroom done as a separate project, I should have explained the change in logistics and how much more time it would cost.
I began to think about the cost of providing service as an altogether separate thing from installation labor. I was starting to see how time is a consistent factor for each of the separate sections of my business. I learned how to identify the different components of my business. I refined my proposal process to accommodate the economics of business, and the art of learning to understand it.
Every project has its own unique logistics—and thereby unique costs. These are the five business components that can help in identifying the unique costs of each project.
1. Project-Specific Customer Service
This just means some people require different services than others. This may include design work, budgetary consultations, or restrictions in access to the project. Maybe the customer has allergies that need special consideration, or they live offsite but require daily communication.
2. Project-Specific Logistics
This category is a reminder to help in identifying things like movement of workstations, material and tool storage on-site, proximity of parking, type of and length of access to work area, how material deliveries are handled, and even parking permits. Each project has its own set of unique logistics that relate to time and money.
3. Project Labor
This includes all specific project hands-on work. Not only for the standard time for installation of carpentry, or say, demolition labor, but also, for things like dust control, material hauling, workstation set up and take down, movement of ladders or scaffolding, or the time factor for all the trips it will take to climb two flights of stairs to access a small bathroom remodel, for example.
4. Project Management
This is different than business management and project labor, and the costs for this category do not come from contractor markups. Project management refers to scheduling, having meetings with the architect or engineer, meeting with the subcontractors— managing the project. That comes from the cost of the job.
5. Business Management
In my business, contractor markups cover business management costs. Whether it's a multiplier, a percentage, a combination of both, or some other calculation doesn't really matter: This portion of revenue is allotted for things like advertising, accounting, insurance, vehicles, tools, licensing, phone, internet, looking at projects, paying bills, writing contracts, business communications, owner's salary—and of course, profit!