Business Management, Billing Changes: Estimating, Etc.

During a discussion of change orders at a project recent pre-job meeting, a question was raised regarding the billing formula set out in the Special Conditions section of the specifications. The ensuing discussion reminded me of the many times this subject was discussed at my University of Missouri estimating seminars.

The formula for costing change orders on this particular job was as follows:
“The mark-up for cost of additional work for combined general conditions and overhead shall be limited to ten percent (10%) of the estimated cost of the change in the work, plus a five percent (5%) profit for the party actually performing the work.”

Now, it isn’t rocket science to figure out that if you apply these percentages to your wage rate and material cost, you are going to be in a losing situation, yet in just about every seminar, there was someone who didn’t know or couldn’t figure out how to deal with this. In fact, at one seminar, a contractor had a T&M job on which he was losing money because of the billing formula he was locked into.

The answer is fairly simple and should be obvious, but first, let’s review the “average” painting contractor’s pricing or costing structure, however you want to term it.

Most reference manuals or price guides, when discussing painting contractors’ costs, suggest that overhead costs (both fixed and variable) and profit be applied as a percentage of labor cost. This is a concept that I and many others do not agree with at all. That figure, as we pointed out in a previous article, can range from possibly 50 percent to over 100 percent. Sixty percent seems to be a commonly accepted figure. Obviously, you cannot substitute 10 percent and 5 percent for 50 percent or more and expect to make a profit.

The solution is to break down your overhead costs as much as possible into separate cost items and apply your overhead percentage differently, so the variation in the formula would be something like this.

Contractor’s Normal Cost Structure:
— Labor Cost $ 100.00
— Overhead and Profit (60%) 60.00
— Material Cost 50.00
— Cost $210.00

Contract Formula:
— Labor Cost $ 100.00
— Payroll Taxes and Insurance (30%) 30.00
— Supervision Cost 5.00
— Material 50.00
— Tools and Sundries 5.00
— Cost $190.00

— Overhead (10%) 19.00
— Cost $209.00
— Profit (5%) 10.00
— Allowable billing $ 219.00

Obviously, this is a very simplistic example, but the basic idea should be apparent.

One of the major problems that we painting contractors have to deal with in working with these types of formulae is that they are not designed for painting contractors, or for that matter for other smaller trades, but rather are designed for the mechanical and electrical trades where there is an inverse ratio of labor costs to material and/or equipment costs compared to our trade. We are comparatively more labor intensive. I’ve found over the years that almost without exception, a properly prepared proposal that can be readily justified will be accepted.