Project estimates are the key to maximizing profits. If you don’t know what you’re spending on during a job, there’s no way to ensure you’re hitting the profit margin you need to keep your business running. The best way to assign and track these expenses is to use a cost breakdown sheet.
Proper cost breakdown sheets will help your construction business improve project estimations and protect profitability. These sheets show all of the costs you expect to incur on an individual project so you can plan and bill accordingly.
It’s important to start developing your cost breakdown sheet when you’re bidding for a job or quoting a prospective client. To create an accurate sheet (and accurate estimate), you need to ask yourself some basic questions to correctly build out the cost breakdown for your business.
Questions to Ask Yourself
Whether you’re just starting your business and need a process for creating cost breakdowns or you have a successful business and need to optimize your existing workflow, asking yourself these three questions will help you get the most out of your planning.
1. Template or Custom?
Do you want to build one template that you can use for all future jobs or create a custom sheet for every project?
The answer to this question depends mainly on how you do business. If most of your jobs use similar materials, subcontractors, machines and timelines, then having a template will likely save you time when you need to make a bid.
Build out a master cost breakdown sheet that includes all possible inputs you might have on any one project. This allows you to follow the same process every time you estimate a job, which helps when storing and tracking business data.
If your projects vary greatly in scope, materials, timelines, etc., then you will likely be better off creating custom breakdowns for each project. To help speed up this process, you can keep a list of common expenses that may need to be added to the sheet so you don’t forget any line items. You can still track expenses with custom sheets, you just may have more categories and less streamlined reporting because of the variances in each project.
2. What Will Be Most Relevant?
There are five main types of cost you could incur during a project:
- Miscellaneous costs
Before you start building your cost breakdown sheet, you need to determine which of these will be relevant to your project.
When creating a template, keep in mind that you should include categories that will be relevant to all future projects. When using a custom breakdown sheet, you can focus on just the job at hand.
3. How Do You Quote Jobs?
The final item to consider about your business is what process you plan to use when quoting jobs. There are three ways to approach quoting:
- By each cost: This method informs your quote based on all of the costs that will make up the project. You create a final expense estimate, add your fee to reach the desired profit, and quote the final amount.
- By phases of the project: This is best for long-term projects that have multiple phases. You create quotes for each phase of the project instead of the project as a whole so you can track your progress and profits along the way. It’s a good way to maximize profitability over time instead of trying to predict costs and timelines well into the future.
- Blended method: This combines the previous two ways to approach quoting projects. For example, you might quote each phase of a project by the costs associated with that phase.
Once you answer these three questions, you can start building out a cost breakdown sheet that complements your business operations. This will help you to accurately estimate and track your costs for better reporting and estimating in the future.
Types of Costs
We mentioned the five main types of costs you might incur during a project. Now, let’s take a closer look at each one and see how it affects your cost breakdown and project estimation.
Materials are a significant cost for any construction project. As you build your cost breakdown sheet, you should make sure to list all reasonable material costs along with reasonable amounts for waste and overages.
If you’re working on a long-term project, it’s wise to consider the costs and benefits of buying and storing materials for later phases of the job. For example, if you know you’ll need a material later on, it’s on sale or currently at a low price and you have somewhere to store it, you might be able to maximize profitability by buying all of it now and saving the extra for later.
(This is just one way to help mitigate material price increases, since they are subject to market changes.)
Your cost breakdown sheet should have different cost code sections for different types of materials to help you itemize your costs. Assign all of your material costs to the correct code so you can track expenses throughout the project.
Labor costs will likely be the most expensive part of your budget, so you need to ensure you’re calculating them correctly. Estimate your labor costs across the entire project duration so you know you’re charging enough to cover those expenses.
As you calculate labor, keep in mind the ramp-up and ramp-down of the project. How many employees will take it to complete the work at different stages of the project? You don’t want to budget for five employees when some parts of the job will take 10 or 15.
Equipment, Subcontractors and Other Costs
The last three types of costs will follow the same process as materials and labor. Estimate the cost of each of these categories and add them to your cost breakdown sheet.
With these three categories, there may be some crossover among cost codes. Add new line items to those cost codes and the final cost for each code will be the total of all inputs.
After all of your costs are accurately calculated, you need to apply the appropriate markup to your project. This ensures you reach your desired profit margins and can cover costs that fall outside of the project scope, such as overhead.
Overhead costs include things like rent, administrative salaries, and other non-job related expenses. If you know your overhead costs on an annual basis, you can break it down into a monthly view and vice versa. This helps you calculate the appropriate percentage you need to apply to your cost breakdown to cover all overhead expenses and build in your profit margin.
Below is an example of how to calculate your gross margin and gross profits.
In this example, the business is working with a 30% gross margin and has $10,000 in monthly overhead costs. At this rate, they would need to make $33,333 in revenue each month to break even. If they made $40,000 in one month at this rate, that would leave them with a $2,000 net profit.
Finding your net profit is a two-step process. First, you need to calculate the total gross margin by multiplying revenue by that margin:
- $40,000 x 30% = $12,000 gross margin
Next, you subtract the overhead for that month from the gross margin:
- $12,000 – $10,000 = $2,000 net profit
These calculations make it much easier to ensure you’re charging enough to cover expenses and earn the profit you need to grow your business.
Don’t Miss Your Margin
Now you know how to create an accurate cost breakdown sheet and calculate your overhead and net profit margin. This will allow you to better estimate and plan projects to maximize the profitability of your construction business.
With this system in place, it’s time to go one step further and start tracking your cost breakdown data. Having a record of how these costs affect your business over time allows you to project profitability and scale your business. The best way to do this is with purpose-built construction accounting software.
Crewcost can help you create, track and manage your cost breakdown sheets and financial data over the life of your business. Start your free trial today to see how our accounting software can improve your construction accounting.