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Subcontractors, general contractors, and others in the construction industry often wonder how to bid small construction jobs.
If you are unsure how to create accurate estimates and construction contracts that give you a great profit margin, then stick around.
I’ll show you a simple formula you can use on your bid document for pricing new projects.
To understand how to successfully bid small construction jobs, we first need to know the numbers in our business.
Let’s start by defining revenue...
Revenue is the total collected dollar amount of the construction work you performed.
Yearly revenue is the total sales, or work, you perform in a given year.
When a construction company says they are a $10 million company, they mean their overall sales for the year (usually the previous year) were $10,000,000.
Revenue also refers to each job or project.
If you do a job for a homeowner or general contractor and the total amount you are paid is $15,000, then the revenue from that job is $15,000.
But we both know that to complete that $15,000 job, you had expenses that went into it.
Those are called direct costs, which we’ll talk about next.
Direct costs in construction are the costs you incur as a direct result of a specific job.
Note: For the purposes of this article, “job” and “project” are the same thing.
Throughout the construction and completion of the project, there are costs and expenses that are tied specifically to that job.
These are called direct costs.
Here are examples of direct costs a construction project may have:
Another way to think about direct construction costs is this: if you hadn’t done that project, then you wouldn’t have had those expenses.
Now that you know what direct costs are, let’s talk about gross profit.
Gross profit is what’s left over after you’ve subtracted the direct costs from the revenue.
Revenue minus Direct Costs = Gross Profit
For example, if you did a job for $20,000 (Revenue), but you paid $17,000 to subcontractors and material suppliers to do the job (Direct Costs), then your gross profit is $3,000.
The revenue minus the direct costs equals the gross profit.
Another example: You completed a small construction job and got paid $2,500. You paid your employees $1,000 for the labor, and you bought $1,000 in materials to complete the job. Your gross profit on that project is $500.
But gross profit isn’t real profit.
This is a common misconception among unsophisticated contractors.
They think that if they made $500 on the job after paying their direct costs, then that’s how much money they’ll take home.
This is completely wrong!
And if a contractor doesn’t change his thinking about this, it’s only a matter of time before he’ll be out of business.
That’s because this type of contractor hasn’t taken into account their overhead costs, which is what we’ll talk about next.
Overhead, also known as indirect costs, are the expenses a construction company has in addition to its direct costs.
Overhead costs are expenses that are not directly related to one specific project.
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Here are examples of overhead costs a construction business might have:
Overhead costs happen even if a contractor doesn’t do any work.
The costs continue despite how many projects are completed.
Note: Overhead costs are also referred to as indirect costs because they aren't directly related to a specific job.
In most cases, overhead costs remain constant, whether you do one job in a month or 30 jobs in a month.
The overhead costs are paid for by the gross profit from each job.
Unlike direct costs, overhead costs are not easy to assign to individual jobs.
But it is very important to figure out your overhead costs, and then assign a certain amount of those costs to every project you complete.
If you don’t assign an overhead amount to every job, then you’ll never know your actual profit on each job – and you’ll be flying blind.
You won’t be able to determine your net profit.
Net profit is the most important number in construction.
It is the true measure of how profitable you were on the project.
The net profit is what’s left over from the entire project after you’ve paid the direct costs and the overhead costs.
Revenue minus Direct Costs minus Overhead = Net Profit
For example, let’s say you finished a job for $15,000. Your direct costs were $10,000 and your overhead costs were $4,000. Your net profit on the job is $1,000.
Net profit is the amount remaining after paying all of the costs that need to be attributed to the project.
Net profit is what matters the most in any construction business.
Net profit is far more important than high revenue and high gross margins.
Many construction companies have gone out of business by having tens of millions in revenue, but no net profit.
And, contractors can have very high gross profit margins, but their overhead costs are so high that they don’t produce a net profit, and it puts them out of business.
Net profit equates to cash on hand.
The old adage "Cash is King" is true. When you have cash in the bank, you can overcome obstacles and take advantage of opportunities.
The only way you can determine how much net profit you made on each job is by doing a cost analysis.
We'll talk about that next...
Profitable contractors analyze every project after it has been completed.
They perform a cost analysis to determine how they did on the job.
A cost analysis accounts for all of the direct costs attributed to a specific job. It calculates the gross profit. It applies the overhead cost to that job. And finally, it shows you what your net profit (or loss) was on that project.
If your company already does a cost analysis report for every completed job, then you understand how powerful this can be for your business.
You can use that information to learn how to bid small construction jobs.
Every time you finish a job and do a cost analysis on it, you get better and better at bidding on upcoming projects.
You get feedback that tells you how to adjust your pricing.
If you don’t currently perform a cost analysis for each job, then you don’t have the feedback to know which jobs are profitable and which ones are not.
Having that information is extremely important.
Make a goal within your company that within three months, you’ll start doing cost analysis on every job.
Trust me, it will be a game-changer for your business. Do everything you can to make it happen.
In the meantime, if you don't have cost analysis reports to show you how to bid small construction jobs, here’s the formula you can use…
If you don’t have a good handle on how much your overhead expenses are, then use this formula:
Direct Costs Plus 60% = Bid Amount
When a potential customer asks you to bid on a small job, first calculate all of the direct costs that will go into that job.
As a recap from what was already mentioned above, direct costs are things like:
Once you’ve totaled all of your direct costs, then multiply that by 1.6 (which is the same as adding 60%).
Direct Costs x 1.6 = Bid Amount
For most contractors, when you add 60% to your direct costs, your overhead expenses are covered and you’ll have a net profit.
For example, you meet with a potential customer and decide to work up a price for them. After figuring out how much it will cost in labor, materials, and any other direct costs, your total is $1,000. Add 60% to $1,000 and the total price for the project is $1,600. That gives you $600 to pay for your overhead costs and net profit.
Why 60% you ask?
Why not 15% or 85%?
I recommend 60% because there just isn’t much money in a small job to begin with.
The direct costs don’t add up to very much, so you have to add a high percentage markup just to cover your overhead and profit.
You will spend about the same amount of time on a small job as you do on a regular job, so you have to make sure you cover those costs.
Here’s what I mean:
So, if the time spent selling the job, going to the job site, communicating with the customer, and getting paid for the job is about the same for a $1,000 job as it is for a $10,000 job, then you have to add a high markup to the project.
As an aside, this formula is not a good strategy for United States government agencies, government projects, and even city departments.
That's because the bid solicitation and procurement method of the federal government for government contracts is very time-consuming.
Luckily, those public construction projects don't typically fall into the "small" category.
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As you do more projects and review the cost analysis on each one, you may see that you don’t make a net profit on jobs below a certain dollar amount.
You may find that the "Direct Costs plus 60%" formula doesn’t give you the net profit that you want.
There are three options to fix this:
Reevaluate your direct costs.
Perhaps the labor rates or manhours you use for a $10,000 project are not accurate for a $2,000 job.
For example, if three laborers are sent to a job to do eight hours’ worth of work, they will be productive.
On the other hand, if they do a small, four-hour job then they should be finished by lunch.
But if they know they won’t be able to go to another job afterward, then that four-hour job may be stretched out to a six-hour job.
That will completely blow apart your estimated manhours. By 50% in this example!
So, when your employees will be sent to a small job, you may have to anticipate this in your bid (and then manage it so your team knows what is expected of them).
Don’t bid small jobs.
If you are constantly losing money on small jobs, then one option is to stop doing them.
Just because general contractors, homeowners, or project owners ask you to bid on a job doesn’t mean you should do it.
Especially if you lose money every time you do it!
Figure out the range of project size that your team excels at and is profitable doing. Then, stay in that range.
Oftentimes that worn-out contractor phrase “No job is too big or too small” is just not true.
Charge a minimum job fee.
If you find that you can’t make money by adding a 60% markup on small jobs under a certain revenue amount, then consider a minimum job fee.
A minimum job fee is a specific amount you add to a job when your initial estimate comes in under a certain dollar threshold.
For example, you may find that for every project you do under $1,600, you either break even or lose money. But, every project you do above $2,200 is profitable.
The thing to do is to add another line item on your internal estimate for a dollar amount that will get every bid over that $2,200 threshold.
In this example, if your direct costs plus a 60% markup come out to $2,000, then you need to add a line item for “minimum job fee” for $200. Your bid then totals $2,200 and you’ll likely be profitable on that job.
Every time I recommend contractors add 60% markup on small bids, I hear people say, “60% profit on a job?! That’s an outrageous profit! The contractor is ripping off the customer!
First of all, I didn’t say to add 60% profit. I said to add 60% for markup.
And secondly, markup and profit are not the same thing. They are very different from one another.
When done correctly, profit is a part of markup. But it isn’t the whole thing.
That’s like saying a cake and an egg is the same thing. An egg is a part of what it takes to make a cake, but it isn’t the whole thing.
When you add a markup amount to the direct costs of a project, the markup pays for the overhead costs and the net profit you want from the job.
As I mentioned above, overhead charges are the charges that go on day in and day out – whether you do one or 100 projects. They are items such as:
Your markup on every job must cover these overhead costs. If it doesn’t, then you’ll lose money on your jobs.
Markup must also cover overhead when you have a few slow work weeks while waiting for upcoming construction projects.
And, the markup must provide a good net profit.
Net profit is needed to run your business effectively. It pays for employee raises. It pays for company improvements. It gives the company the ability to provide good service and retain great employees.
Remember this: Making a net profit and solving the client's needs on every job is the goal.
You are not trying to be the lowest bid.
The "lowest price" strategy is terrible for small businesses. And it's certainly not the best way to run your contracting company.
I think you’ll agree that breaking even or losing money on construction jobs is for amateurs.
Profitable contractors figure out how to bid jobs so they consistently make a net profit.
Effective bidding starts with assessing construction bid opportunities.
Your selection criteria allow you to evaluate the project type and help you determine if you can profitably perform the construction services.
Whether you bid on public sector projects, private projects, or residential projects directly to property owners, use an estimating system that captures everything in the scope of the project and construction documents.
When you submit your bid, make sure the bid package shows how you'll solve the client's needs.
Show them how your project delivery method is better than your competitors and how you are the best fit for their project.
Think of ways to present the best construction bids to your potential client.
After submitting the bid, be sure to follow up multiple times. Create a system to follow up with phone calls, emails, mail, and text messages.
When paired with effective sales & marketing, great follow-up is often the determining factor in winning bids.
Learn how to create systems in your construction company that will reduce mistakes, increase productivity, and free up your time.
When it comes to winning bids, you can tip the odds in your favor. And it doesn't involve lowering your price! This free guide shows you how.
Every contractor needs sales. This free guide reveals the first six sales and marketing tools that must be used before anything else.
Hi, I'm Doug Herbert. I'm a 30+ year veteran of the construction industry and the active President of Herbert Construction Company in Atlanta, GA.
Contractors are often over-worked, stressed, and frustrated with their business.
I created Profitable Contractor to help good contractors make more money, find better employees, and delegate tasks so they can make it home in time for dinner.
Receive the weekly email that's filled with tips and tactics to grow your construction company, gain market share, and increase your profits.