Avoiding Costly Estimating Mistakes in Contracting

A profitable contracting business starts with a profitable estimate. Yet many contractors unknowingly lose money before a project even begins because of mistakes in labor, materials, overhead, and scope.

An estimate isn't just a number you give a customer. It should reflect the true cost of completing the work and the profit your business needs to remain healthy. When important costs are overlooked or assumptions are made without accurate data, even a busy contractor can end up losing money.

Here are some of the most common estimating mistakes contractors make—and practical steps to avoid them.

Key Points

1. Guessing on Labor and Time

One of the most common mistakes is guessing how long a job will take or how efficient your team will be. Contractors often base their estimates on their own efficiency rather than their team's, leading to underestimation. Additionally, non-productive time such as setup, tear-down, and client interactions are often overlooked.

2. Incorrect Labor Cost Calculations

Many contractors use the wage rate instead of the true labor burden cost, which includes benefits, PTO, holidays, and other additional costs. This miscalculation can lead to significant underestimation of labor costs.

3. Outdated or Inaccurate Material Costs

Using outdated prices or failing to account for waste, delivery, and freight costs can severely impact your bottom line. Price volatility and forgetting small materials can also add up quickly.

4. Missing Costs of Goods Sold (COGS)

Contractors often forget to include all necessary costs such as dumpster fees, permits, equipment rentals, and consumables. These overlooked costs can quietly erode your profit margins.

5. Pricing Based on Competition

Basing your prices on what competitors charge without knowing their costs, margins, or profitability is a flawed strategy. Your pricing should be based on your own business numbers.

6. Discounting Correct Estimates

Discounting your estimates to win a job can be detrimental. If you’ve done the work to estimate correctly, discounting undermines your profitability and can set a precedent for future negotiations.

7. Vague or Missing Scope

Poorly defined scope, missing exclusions, and assumptions that aren’t documented can lead to misunderstandings and additional costs. Clear and detailed estimates help avoid these pitfalls.

Action Steps

1. Use Accurate Data for Labor and Time Estimates

• Collect Historical Data: Use data from past jobs to inform your estimates. Track how long tasks actually take and use this information to create more accurate future estimates.

• Factor in Non-Productive Time: Include time for setup, tear-down, client interactions, and other non-productive activities in your estimates.

2. Calculate True Labor Burden Costs

• Include All Costs: Ensure your labor cost calculations include wages, benefits, PTO, holidays, and any other additional costs.

• Use a Labor Burden Worksheet: Tools like Brad Hebner’s labor burden worksheet can help you accurately calculate your true labor costs.

3. Regularly Update Material Costs

• Stay Current: Regularly update your material cost database to reflect current prices. This can be done by sending your price list to suppliers for updates.

• Account for All Costs: Include waste, delivery, freight, and any other associated costs in your material estimates.

4. Detail Your Scope and Exclusions

• Be Specific: Clearly define the scope of work and include detailed exclusions in your estimates. This helps manage client expectations and avoids misunderstandings.

• Document Assumptions: Ensure all assumptions are documented and communicated to the client.

By addressing these common estimating mistakes and implementing these action steps, contractors can improve their estimating accuracy, maintain profitability, and avoid costly surprises. Remember, a well-prepared estimate is the foundation of a successful and profitable project.