How to calculate the cost of a project: a vital step in the construction industry
Are you a company in the building and civil engineering sector and wondering how to cost a building site effectively?
It's an essential step in your construction project, and there are many criteria to consider in the process.
From determining costs, to drawing up an estimate, to evaluating a job site, we'll explain how to unravel the mysteries of job costing.
The 5 steps to effective job costing
#1 Get to know the project
During this stage, get to know the customer's needs, his vision of the project and what he expects from you. You need to gather the information you need to move forward on your project:
- the nature of the project (renovation, construction, fit-out, etc.),
- the size of the project,
- equipment and materials required,
- deadlines to be met,
- your customer's budget.
💡Tip : always make sure you visit the job site before accepting or drawing up an estimate. Not only does this enable you to determine more precisely the work to be carried out, but above all you'll save your company from unpleasant surprises.
#2 Determine costs
This step enables you to estimate the total cost of your project. You need to put a figure on it that's in line with your competitors' average, while remaining as profitable as possible for your company.
To do this, consider two categories of costs:
Direct costs
These are all the costs directly linked to the realization of your project, also known as dry disbursements :
1- The cost of materials: bricks, cement, wood...
👉 Setting the cost of supplies isn't something you can do on your own; you'll need your supplier to determine it. In general, the margin on materials is around 30%. The trick? Negotiate with your supplier. The lower the price, the higher the margin.
2- Labor costs: your workers' wages, charges...
👉 To ensure the profitability of your project, it's equally important to establish the cost of labor. It is made up of two elements:
- The hourly rate: this represents the cost of your service per hour. It varies according to your profession. Electricians, painters and tilers all have different rates. That's why it's important to know what your competitors are already charging, so you can set your own rates.
- Number of working hours: this is the amount of time you'll devote to your project. Establish the total number of hours to be allocated to the various tasks on your site.
Once you've collected these two elements, all you have to do is multiply them and eureka 💡 you get the labor cost.
3- The cost of equipment, not to be confused with the cost of materials.
Here, we're talking about the tools needed to complete the project: scaffolding, machinery...
☝️Le should not include your company's overheads , such as rents, charges, salaries and margins, which will be included in your pricing.
Indirect costs
Indirect costs are those that are indirectly linked to your work, also known as price calculations.
1- Travel expenses
There are 2 ways to calculate your travel expenses:
- Calculating mileage costs, as the name suggests, involves calculating the number of round trips and kilometers traveled.
- Fixed costs: you determine a price for your travels, which you apply to each of your jobs.
2- Insurance costs
Select the insurance that best protects both you and your customer, by identifying the potential risks associated with the job site.
3- Marketing costs: online advertising, flyers...
It's easy to forget, but marketing on a construction site is an essential part of your business. It helps promote your project and therefore attract new customers.
🤓When you add up direct and indirect costs, you end up with your cost price, i.e. the total amount needed to complete the project.
How do you set your costs?
As a building and civil engineering professional, it's up to you to advise and guide your customers as best you can, and it's also up to you to propose a quote that's both correct in relation to the market and consistent with your own skills, and to guarantee yourself a good return.
💡 Here are a few tips to help you:
- Carry out a market study to get an overview and identify how to position yourself;
- Know the rates charged by your competitors to establish a price range;
- Diversify your sources of information to gather as much data as possible;
- Your experience justifies higher prices.
To help you determine your prices, there are several software programs available that give you access to a costing library. This provides you with regularly updated data on labor and material prices in your sector.
🛠️Le Graneet's commercial and financial tracking software is an excellent aid for your site costing, in disbursements or sales prices. Designed for SMEs, it enables you to :
- control your budget,
- get an overview of your business,
- draw up quotations.
- manage your customer relations.
What's more, Graneet works in partnership with the Batiprix costing library. This collaboration enables even more precise costing and simplifies the production of your estimates, even for the most complex jobs.
#3 Determine your profit margin
The profit margin is an essential element in measuring the profitability of your business. There are 4 types of margin:
- The sales margin is the difference between sales and the cost of goods sold. It is used to measure your company's commercial profitability.
- Gross margin refers to the difference between sales and the cost of goods sold. It measures your company's direct profitability.
- Net margin defines net profit after tax divided by sales. This measures your company's net profitability.
- Margin rate is the ratio of profit margin to sales. It enables you to measure your company's profitability as a percentage.
☝️ In order to choose the most appropriate method, you first need to determine the type of business you're in, and what data you have at your disposal.
#4 Draw up an estimate
Drawing up a quotation enables you to summarize all the elements of the project. This document includes :
- price,
- payment terms,
- deadlines.
It must be clear and precise, and signed by both you and your customers before work begins.
👷Example of an estimate for building and civil engineering work:
#5 Choosing the right costing method
There are different methods for costing worksites :
Costing by the square metre
This is the simplest method. It consists in determining a unit price per square meter, which is then applied to the entire surface area of your work, whatever the service.
👉For example:
On the same site, if you install tiles on a certain surface and electricity on another surface of equal size, the price will be the same for both services.
Task-based costing
Job-by-job costing is a very precise, but also very time-consuming, method. It involves breaking down the job into tasks, then estimating the time and resources needed to complete them.
👉For example:
Building a swimming pool involves a number of different tasks, such as earthworks, plumbing and liner installation. For the earthwork, for example, you determine the time it will take and multiply it by the number of workers required to carry out the task and by the labor rate. By doing this calculation for all the tasks involved in building a swimming pool, you obtain an accurate cost result.
Schedule costing
Scheduling involves listing all the elements of the project and assigning them a unit price.
👉For example:
To renovate a kitchen, you need to install a new sink, repaint the walls and demolish the old worktop. By assigning a unit price to each of these tasks, you can calculate the total cost of your project more accurately.
Parametric costing
Parametric costing uses more specific software and enables you to calculate costs more precisely by taking several factors into consideration:
- building surface area,
- type of construction,
- materials used.
👉For example:
You're building a 60m2 apartment with a brick frame, tiled roof and parquet floor. By entering these parameters, the software calculates the cost of construction quickly and accurately.
This is a very important step, as it is this choice that determines a reliable costing and thus guarantees the profitability of your business.
What are the mistakes to avoid when costing a project?
Costing a job site is a long and complex process, so it's quite possible to make mistakes. Here's a list of some common mistakes to help you avoid them:
- Not taking all costs into account. There are a lot of costs involved in costing, so make sure you've listed them all.
- Underestimating costs. By studying the market and your competitors, you'll be in a better position to determine the best rates to charge.
- Too low a profit margin. If it's not high enough, you won't be able to cover your costs and therefore make a profit.
- Writing an imprecise estimate could lead to misunderstandings between you and the customer.
- Not taking deadlines into account. It's vital that you respect the deadlines imposed by your customer.
What are the risks of poor costing?
A job costed too low
An under-costed job means that you've estimated the price too low, and you end up spending more than the original estimate.
Unfortunately, once your estimate has been signed by the customer, it's very difficult to go back.
Unforeseen circumstances can arise, which is why it's possible to renegotiate a quotation with your customer. However, if it's your mistake, the customer may be much more reluctant to revise the terms of your quotation.
This can have serious consequences for your business. An unhappy customer is more likely to talk about it, and your reputation can suffer. What's more, if you don't succeed in renegotiating the estimate, you'll have wasted time on a job that won't bring you any profit.
A job estimate that's too high
On the other hand, you may have overestimated the cost of the work. Here again, this is a problem.
If a customer considers that he has paid too much for your services, he may strongly criticize them, and this will damage your company's reputation. What's more, if your figures are too high, you could drive potential customers away. And without customers, there's no money!
How to cost a job: the key to your company's success
Rigorously costing your job enables you to win contracts and ensure your company's profitability . By investing in reliable, efficient tools and methods, you can ensure that your business develops profitably and serenely, over the long term.
Article translated from French