The estimating and bidding process can be a tricky one, and sometimes customers want to see a specific type of itemization to protect their interests. One contractor in CBO’s LinkedIn group recently posed this question:
I like to bid with lump sum pricing to include the intangibles of running a business. How should I respond when customers request “time and material” billing?
Digital Detection Corporation
“T-and-M work has its advantages. Owners can make any changes they want whenever they want because you will get paid for it. Also, scheduling can be changed because if you are required to work after hours, you can bill at overtime rates.
Time and material means exactly that: you get paid for every second you work, and you get paid for any materials you provide. Trips to pick up materials are, again, part of the time you bill for because they are required by the scope of work.
Generally, the mark-up on T-and-M work is not as high because the risk is far less. You don’t have to worry about not achieving your estimated hours to perform a task because there aren’t any estimated hours.
If you are doing the billings yourself, that’s part of the ‘time’ component as well, so you should bill for your time doing that. If you use a clerical worker to do your billing, then you either bill for that person’s time or you add enough overhead in your hourly rate to pay for the administrative portion of the work. That’s where things can get complicated.”
Chief Operating Officer
“Begin by categorizing your resource rates table based upon role, be it supervisor, PM, foreman, welder, carpenter, etc. Take all labor-related costs, and roll them into an hourly rate, thereby breaking down your role-based labor rate to include base and burden (including fringes, taxes and insurance). As man hours are nearly always a basis for pricing, it’s imperative to determine them accurately.
Identify the detailed scope of the project to ascertain what’s being done, assign the appropriate resources, estimate the productivity and consider all schedule variables to calculate the precise total man hours for the project. Then utilize the man hours as the basis to calculating your indirect costs and mark up. Spread the indirect costs and mark-up across resource rates with resource utilization in mind. In other words, strategically layer your indirect costs/overhead and profit into resource hourly rates based on the use of that resource.
As is evidenced by the myriad ways detailed here for calculating variables and developing an hourly labor rate that includes salary, fringe, benefits, overhead, G&A and profit, there isn’t just one way to accomplish this. The key is to approach this from as many angles as possible and factor in as many elements as you can for the highest level of accuracy in your hourly rates. Aim for this, and you’ll start seeing competitive bids and more jobs in no time, with the cherry on top of increased profitability.”