Pavement maintenance contractors who bid maintenance work without knowing their costs is like driving blind. When bidding projects, I have always said, “Put three different contractors bidding the same project you will get three different price quotes.” Successful contractors usually have their costs down pat. Bidding projects can be a nightmare for those contractors who continually lose jobs to their competitors because they are bidding projects not knowing their true costs.
Costing out projects is the only way to gage how your company is truly performing. Pavement maintenance contractors have always bid projects either by the square foot or, square yard, lineal foot, pounds, tons and number of Coats. All these methods are standard and have not changed in the three plus decades that I have been around in the pavement maintenance industry. What have changed are the costs. Fuel, sealer, crack sealant, and asphalt, all are directly related to the oil industry. Contractors think that raw materials and a little time to complete the job, is just all figured into one square foot or yard price and bid it without knowing their true costs.
As a former maintenance contractor, I had a system that came relatively close on costing out my jobs. I aligned my costing into these categories.
1. Cost of sales
2. Cost of materials
3. Cost of labor & Variables
4. Cost of processing (paper work)
Costing of sales
When costing out sales, you must figure your daily bid output per sales person and their bid close ratio. Getting a sale costs you money! How do you cost out sales when you have sales people bidding jobs everywhere, everyday? You must set up daily bid/work sheets that will show you what and where your sales people have been working. There are two types of sales that directly affect the costing of jobs, call in leads and cold calls. You make more money from a call in lead than a cold call. This is because call in leads, the sales person is only going from point A to point B, not driving around cold calling spending time, burning fuel looking for parking lots that need maintenance. For costing reasons, on their bid sheet, it should be noted if it were a call in lead or a cold call. This will make a difference in your costing. For example, I have always figured that my sales person cost my company start to finish an average of $150.00 per cold call closed sale. Salary, fuel, supplies, benefits, time on the job, filling out paper work, trouble shooting and any commission that applies make up this number. Cold calling on the other hand is more expensive than a direct call in lead. I figured $100.00 cost start to finish per direct lead sale, as there is less time, fuel and the close rate is higher because the prospect has called you with a need. “Contractors should have a handle on their sales costs; it directly affects their year-end bottom line.” Keep in mind that your sales persons may have to spend more time on one project than another and the numbers stated above were averaged out yearly over many years of tracking sales cost. These numbers do not apply to residential driveway sales, only commercial sales.
Costing of materials
When costing out materials the contractor must have knowledge of and a strict understanding of the products they buy such as coverage rates and cost of each product. In today’s volatile petroleum markets, you must be careful when bidding projects in the spring and then getting the contract in late summer. I guarantee your materials cost will change. Smart contractors negotiate their materials, sealer, crack sealant, additives, sand, asphalt, and try to reach a price agreement with their suppliers prior to the season. Some suppliers will not guarantee a fixed price for an entire season, so the contractor must compensate by adding a CEC clause (cost escalation clause) to your contracts. The CEC is like a fuel surcharge that we manufacturers are charged on freight. We pass this surcharge along to our customers, as you must to yours. However, it is a charge and should be added in your cost of materials. Contractors who incorporate a CEC clause are somewhat protected and have a leg up in final billing than contractors with out it. Contractors need to understand the coverage rates of the products they are applying. If you do not understand this, I strongly suggest you get in touch with your suppliers and have them go over the stated coverage rates and how they work. You will not be accurate in material costing with out this critical knowledge. For instance, you need to know how many square feet per gallon you actually get on a one coat or two-coat application. You need to know how to figure sealer usage on a porous surface verses a smooth surface. All these are critical tabulations that directly affect your per job costing. When crack sealing you need to know how many lineal feet per liquid gallon or pound of sealant. If you rout cracks, it is dramatically different than blow and go! You can loose on projects that are bid for a certain amount of sealant, but you may have a parking lot full of sinkers! My former company crack sealed a church calling for 400 lbs. of crack sealant and my crew put down 950 lbs… In costing out the job, I realized we had under bid the crack sealant and I had to confront my sales person to get the details. Had I not looked over the job sheet, I probably would have not have caught the overage. I now had to go back to the customer and try to get some compensation for the situation. “Not tracking material usage is the number one cause for profit loss.” Take for example when costing out sealer, you only cost out the raw sealer not the water, water is negligible but makes up 20 to 35% of your total mix. Do not use the water figure in job costing. When job-costing materials have a “JOB” sheet that each crew fills out for each project, bid, patched, crack sealed, seal coated, paved or striped.
Cost of labor and variables
Costing of labor is probably the easier part of job costing. Normally the laborer is on either a punch clock, salary, or a daily rate. Labor includes all employees in the company. Breaking down the labor per job must be done in the field after the sale person has sold the job. Each crew, cleaning, crack sealing and seal coating should have work order sheets that have time on the job and time off the job spaces to fill in for job costing. When I sent out my crews each morning, each crew supervisor had a work order sheet that was to be filled out by each crew leader. On the work order, it would have the sales person’s job notes, square footage, square yards of patching and sealing footage, one or two coats. It had spaces for the amounts of materials applied to that particular job. Also had space for hours worked on that job. “You cannot properly cost out any project if you do not know how much materials went into the job, and how long it took you to complete it!” how are you going to compare it to what your sales person bid it for? You must pay particular attention if you are paying the sales person straight commission off the total job price. Costing the job means you will know where you are losing or making money! Work order sheets tally crew efficiency and “variables” as equipment breakdowns, weather issues, rental costs. You will be able to track material usage for future ordering your materials, inventory, planning for upcoming jobs that are tight in schedule and the rotation of your labor force to minimize overtime that may drive the job cost up and profits down. Labor is including the sales person to the person taking down the barricades. Large companies charge their own company hourly equipment fees for each job. This allows for covering depreciation, maintenance, and tracking where that piece of equipments life is in the fleet. Keeping track of costs does more than just tell you where you are, but tells you where you are as a unit, a company. From time management to applying sealer, all costs money. Therefore, when you are bidding projects, think about all that is included before you submit your bid that you probably will loose if you are not “Job costing savvy!”
Cost of processing
Costing out-processing. From the time the sales person reaches the prospects bid location, to the final billing all costs money. Bid sheets, business cards, job sheets, work orders, literature, contracts, statements, collection letters, and processing the payments. This usually is considered office or administrative costs. Depending on how many office people you employ to handle these tasks will determine how you cost out administrative costs per job. I took the total number of weekly jobs completed and divided that number by 6 (days) and obtained that number. I then divided that number by the total number of administrative people who handle any part of the tasks that are performed in this costing section. Example: if my company completed 30 jobs in a 6-day week, I would divide that number 6 into 30 which would be 5. I then took five and multiplied that times the number of office staff which was 3 in my case. That equals 15. Then again, I would take 15 and multiply with the office personnel, which is three. My number is now $45.00 cost per job to process start to finish. It seemed to average out over the season and covered a large portion of my paper expenses and processing. This does not include labor as that is already figured into the labor costing section above.
Tips for reducing some of your costs.
In sales, if your sales person is bidding a call in lead, work that area.
• Offer your customer a 2% discount if you can do the job during the week, this will be less costly to you than Saturday’s overtime.
• Have your sales staff make good notes on their bid sheets. Maps of the job site and the customers comments.
• Remember you are the one that runs the ship; make sure you follow the plan in costing the jobs.
We all need to know where we stand in the business world, every company has a general costing process, but in the pavement maintenance industry you will find and be surprised how you will close more jobs and make more profit knowing your true cost. Pavement maintenance companies that are successful usually attribute their success to the fact that they not only know where the money is going, but where they can save money!
Mark McLeod is Vice President of Maintenance Inc, a leading manufacturer of sealer additives for the sealcoating industry. Visit their website at http://www.maintinc.com.