Labour can be one of the most expensive project costs and the hardest to estimate. Here's how to stay ahead of the game.
As a general contractor, you want to make sure that you’re pricing out each project accurately; otherwise, you could find yourself running out of budget mid-project, and ultimately having to break the news to your clients that their project is going to cost more than anticipated.
But in construction, there are a lot of moving parts; you need to figure out how many (and what type of) workers to hire, what materials (and how much of each) you’ll need, and how much overhead you’ll need to charge to walk away with a profit.
And in order to do that effectively? You need a system—more specifically, a job costing system.
Having a job costing system in place will help you more effectively price jobs, deliver more accurate estimates to your customers, and track expenses along the way—which can help you more accurately price similar projects in the future. But how, exactly, do you do that?
Let’s take a look at the step-by-step process for pricing a job as a general contractor:
Calculating Labor Costs
The first step in pricing out a construction job? Figuring out how much you need to budget for labor.
First, you’ll want to figure out how many workers you’ll need—and when and how long you’ll need them for. For example, let’s say you’re working on a bathroom remodel and you need a worker to retile the floors (worker A), another worker to fix the drywall and paint the walls (worker B), and another worker to manage the plumbing (worker C).
You may decide you need worker C to come in for half a day to fix the few plumbing problems, worker B to be there for two full days (one for drywall, one for painting), and then worker A to round things off by spending two full days retiling the floors. So, you would need to price out worker C for 4 hours—and workers A and B for 8.
Once you’ve determined how much labor you need, it’s time to price it out. If you have your own staff that’s going to manage the job, you would just take their hourly employee cost (which includes their hourly rate plus your costs for employing them, like taxes and insurance) and multiply that by the number of hours you’ll need them on the job. If you’re planning on hiring a subcontractor, you would just ask them for their hourly rate—and then multiply that rate by the number of hours you anticipate they’ll need to finish the job.
Now, you might think you know how long a job is going to take. But when you’re managing a construction project, things pop up—and the job may take longer than anticipated. Make sure to work in a buffer on your labor costs; that way, if you have to keep your team or subcontractors on the job longer than anticipated, it doesn’t push you over budget—and put you in a bind with your clients.
Calculating Material Costs
Once you’ve nailed down your labor cost estimate, it’s time to move on to materials.
Take stock of all the materials you’ll need for the job—and how much those materials will cost. For example, if you’re repainting the interior of a client’s home, you’ll need paint, paint trays, paint brushes, and rollers. You may also need things like drop cloths (to protect furniture), ladders (to paint the ceilings), and a mechanical paint sprayer (for a more even finish). Even if you have these items on hand and don’t need to buy them at the start of the project, you’ll still want to include these indirect material expenses into your job costing.
Estimating Applied Overhead
Pricing out your labor and material costs will help you estimate how much it’s going to cost to complete a specific project. But project-related costs aren’t the only expenses associated with running a contracting business—and if you want to keep your business moving forward, you need to include those overhead costs in your job costing process.
Calculating overhead costs (which include everything from rent for your office to software costs to depreciation on your equipment) can be tricky; unlike labor costs or material costs, it’s hard to nail down (pun intended!) an exact figure. Instead, you’ll need to estimate your total overhead costs—and then figure out how much of those overhead costs you want to cover with each project.
The easiest way to include overhead costs in your project job costing is as a percentage of the total project cost (so, for example, you might charge a 15 percent overhead fee on all projects); that way, you don’t need to estimate your applied overhead separately for each project. That being said, every business is different—so ultimately, you’ll need to find an overhead cost estimate process that works for you, your clients, and your contracting business.
Time Tracking and Projects
As mentioned, there’s a lot of moving parts when it comes to pricing out construction projects—and in order to be successful, you need the right system.
Not sure what the “right” system for your business looks like? No worries—FreshBooks is here to help.
FreshBooks’ Time Tracking and Projects features makes it fast, simple, and straightforward to effectively price your jobs as a general contractor—and to gather the data you need to more effectively price jobs in the future. With the Projects feature, you can easily set your project budget, add your project services, and assign budget, hours, and deadlines to each service. From there, you can invite team members (whether that’s internal employees or external subcontractors) to your project and use the Time Tracking feature to keep track of their hours and costs.
Time Tracking and Projects not only make it easy to systematize your job costing process, but it’s also easy to track your progress throughout the project—and make sure that you’re on track to finish on time and on budget.
FreshBooks organizes all your project data, which makes it easier than ever to dig into each individual project to get a better understanding of where you might have under or over-budgeted. Not only does this give you total control and foresight with your projects, but you can make for more accurate and consistent job costing for your clients.
Use Job Costing to Make Your General Contracting Business More Efficient
Understanding job costing can make the process of pricing your construction jobs easier and more accurate—which is beneficial to you and your clients. And now that you have a better understanding of job costing (and how FreshBooks can help you stay on top of your job costing workflow), you have everything you need to more effectively price your construction jobs—and take your business to the next level in the process.