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20–1 Profit
Profit is not included in a chapter with other topics because
it is the last thing considered and must be taken separately.
Keep in mind that construction is among the tops in the per-
centage of business failures. Would you believe that some
people even forget to add profit?
First, let us understand that by profitwe mean the
amount of money added to the total estimated cost of the
project; this amount of money should be clear profit. All
costs relating to the project, including project and office
overhead and salaries, are included in the estimated cost of
the building.
There are probably more approaches to determining
how much profit should be included than could be listed.
Each contractor and estimator seems to have a different
approach. A few typical approaches are listed as follows:
- Add a percentage of profit to each item as it is estimated,
allowing varying amounts for the different items; for
example, 8 to 15 percent for concrete work, but only 3 to
5 percent for work subcontracted out. - Add a percentage of profit to the total price tabulated
for materials, labor, overhead, and equipment. The
percentage would vary from small jobs to larger jobs
(perhaps 20 to 25 percent on a small job and 5 to
10 percent on a larger one), taking into account the accu-
racy of the takeoff and pricing procedures used in the
estimate. - Various methods of selecting a figure are employed that
will make a bid low while not being too low, by trying to
analyze all the variables and other contractors who are
bidding. - There are “strategies of bidding” that some contractors
(and estimators) apply to bidding. Most of the strategies
require bidding experience to be accumulated and com-
petitive patterns from past biddings to be used as pat-
terns for future biddings. This will also lend itself nicely
to computer operations.- Superstition sometimes plays a part. And why not,
since superstition is prevalent in our lives? Many con-
tractors and estimators will use only certain numbers
to end their bids; for example, some always end with a
7 or take a million-dollar bid all the way down to
50 cents.
One approach is to include all costs of the project before
profit is considered. Then make a review of the documents
to find whether the drawings and specifications were clear,
whether you understood the project you were bidding, and
how accurate a takeoff was made (it should always be as
accurate as possible). The other factors to be considered are
the architect/engineer, that person’s reputation, and how the
work is handled.
After reviewing the factors, the contractors must decide
how much money (profit, over and above salary) they want
to make on this project. This amount should be added to
the cost of construction to give the amount of the bid (after
it is adjusted slightly to take into account superstitions and
strategy types of bids). Exactly what is done at this point,
slightly up or down, is an individual matter, but you should
definitely know your competitors, keep track of their past
bidding practices, and use those against them whenever
possible.
Since profit is added at the end of the estimate, the
estimator has a pretty good idea of the risks and problems
that may be encountered. Discuss these risks thoroughly
with other members of the firm. It is far better to bid
what you feel is high enough to cover the risks than to
neglect the risks, bid low, and lose money. There is some-
times a tendency to “need” or “want” a job so badly that
risks are completely ignored. Try to avoid this sort of
PROFIT
CHAPTER TWENTY