Commercial Painting Estimating Guide!
You own your own company. Are you rich? No – why not? You have plenty of work, your reputation is spotless, your customers love you. So, why aren't you rich? For years subcontractors have asked themselves that same question. WHY AREN'T WE RICH? Truth be told, you should at least be well off. So, if you're not, why not?
Chapter 1 – Some Background
In 1985 I called on a large commercial painting contractor, shortly after seeing Tom Hopkins give a full day seminar on professional selling. Mr. Hopkins taught me to have unflinching confidence. And to respect my customers' time. So before making my sales call, I filled out all the paperwork in advance. It took about 20 minutes. I made my presentation and asked my closing question. After my customer said yes, I told him that to save him time I had taken the liberty of filling out all the paperwork ahead of time. He was so impressed at my preparation and confidence that he offered me a job, on the spot, working for him as a Project Manager/Sales Representative. I didn't take the job right away, but after a year of handling his account, and seeing what an impressive company he had, I joined his company as a PM. I knew this was someone I wanted to work for.
We worked for all the best GC's. Our prices were among the highest in town. But that didn't matter. Our quality and service got us all the work we could handle. With huge profit margins. We estimated our projects based on simple arithmetic. If we could get our desired profit margin we took the job. If not, we walked away. We had production rates to paint every possible substrate, knew our direct costs, indirect costs, material prices, and mitigating factors that might speed up or slow down production. It was downright scientific. And remarkably accurate. And I was good at implementing it all. By 1992 I earned $148,000.00 in a single year. I learned enough and saved enough in those 8 years to start my own company in 1994.
Over the years, I've made it a point to get to know my competition. By and large, they're really good at painting. Not so good at running a business. They can do a lot of volume but not make much profit. Here's a perfect example. One night my partner and I met a semi-competitor at a dinner. He volunteered how much business he had done the previous year. It was the same amount we had done. So I asked him how many painters worked for him. Twice as many as worked for us! That's right. We did the same amount of business but his labor costs were double ours. So, who do you think made more money? As I got to know him better, over the years, he once shared with me that his accountant had called him in to inform him he had “lost his a**“. He asked how that could be; they had been busy all year long, buried in work. The CPA replied that may be true but they had obviously had not charged enough. He told him he had to raise his prices. That was it. “Raise your prices”. Unfortunately, he stubbornly refused. After all, if they raised their prices they wouldn't get any work. They were already slightly above their main competitor (but way below us, I have to add). They figured they were as high as they could go. So guess what they did? They changed accountants! They shot the messenger. It didn't work.
A couple years went by with no improvement and they hired a high dollar consultant and yet another accountant. It took a while but they learned to read financial statements and started job costing their expenses. They also started getting monthly statements instead of annual ones. And they saw how much they made, but more often lost, each month. They'd make a killing for a couple months but then lose their shirts the next. Two million in sales but no profit. What the heck! Again, they were told to raise their prices. This time they listened and did better for a few months. But then when competition picked up they slid back to their old ways. They were stuck in their way of doing things. They were also stuck on using “square foot pricing”. And THAT is what eventually did them in. After 18 years they went out of business.
The truly sad thing is it all could have been avoided if he had allowed us to help him. Help him you ask? Yes. Better competition means more money for us. If he had been willing to take our advice, here is what he would have learned.
Chapter 2 – Your Company
Where are you at right now? I'm going to take a guess that you graduated from high school but didn't go to college. If you did go to college it probably had nothing to do with construction, did it? Out of HS you got a job painting. You're a hard worker with a good work ethic, so after a few years you worked your way up and got to be pretty good, an important member of the company, probably a foreman. Every once in a while you got a call to do some work on the side. Maybe relatives looking for a good deal? You did some nice work, you were really cheap and you began getting more and more calls for side work. As time went by you accumulated plenty of equipment for your little side business, getting paid in cash as you went along. You didn't really know how to price your work but you seemed to be making money basically guessing. Seemed really simple and easy didn't it? When you got paid you took the cash, paid off the paint store, gave your buddies a little bit and whoa – dadgum – you made out pretty good. This is easy. More time goes by, you're getting more and more calls for side work, the cash is great. You pick up on square foot pricing, maybe find out what others are getting per square foot. You figure that in order to get work you need to charge a lot less than the “real companies” but still you do OK. Then the day comes that you have so much side work that you up and quit your job. Maybe you took a co-worker or 2 with you and now you're in competition with your old boss.
The first year life is great. Every job seems to be a winner. You've got a couple buddies working for you. They have no complaints, doing their job and you're making some money. With all the cash coming in you buy yourself a sweet new 4WD truck. Time goes by. Word is out that you do good work. What you don't hear is that people say you're cheap. You leave a ton of money on the table. Soon you have more work than you can handle. You need more equipment, the guys are often bent that they're working while you drive around in your fancy new truck. They just don't realize that you have to leave to quote on work to keep them busy. Shouldn't they be grateful? You're working on the job site much of the day, bidding work in the afternoon and on the phone all night. You're finding that you're always scrambling to find cash. The insurance premiums are due, the note is due on the new piece of equipment, the paint store wants their money, your customers aren't paying on time, your employees want some benefits, they're not showing up for work the morning after payday and they get angry when you move payday to Friday. Some of them call in sick on the same day to teach you a lesson. This is crazy! Absolutely nuts. You didn't sign up for this. What is happening?
So, at the end of the year your wife gets all the documents to the accountant. He calls. Bad news. You lost money.
Impossible you say. “How could I have lost money?” Unknowingly you charged your customers less than what it cost you to do the work. BS, you say. “I never do a job for less than the cost of the materials and labor”. Well, you're right! You never took a job for less than your material and labor. But what about overhead? How much did you allow for your overhead? How much is your overhead? (Do you even know how to calculate your overhead?) Your price is solely based on what the competitions price is. Not what your costs are. Big mistake!
Time goes by. It has now been 5 years since you started your little company. You're barely making ends meet. You can't believe the BS that goes with running a company. The money is not what you'd thought it would be. In fact, nothing is what you thought it would be. Luckily your work is much better than your competitions. In fact, were it not for your superior quality and good reputation, you'd have gone under by now. You have set your price a little higher than others but you're still not making any real money. You want to raise prices. Inside you know you have to, but you're afraid you won't get any work, so you don't. You have to do something, but what?
Actually, if you lasted 5 years you should give yourself some credit. You lasted longer than most. Most guys in your situation only last 3 or 4 years. By then they are so far in debt they fold. They bone their suppliers for tens of thousands of dollars. They go bankrupt, leave town, or both. Nice guys maybe. Hard workers maybe. They're good at painting and waterproofing, but they are terrible businessmen. Many of them actually went belly up during the boom times, with a huge backlog of work. To this day they have no idea why. Many opened up again under a new name and went bankrupt again. Still not knowing why. We have never cared what our competitors charge and never will. We have costs! Our overhead is not the same as theirs and consequently our prices can never be the same as theirs – period! Get out a bright yellow highlighter, because you're about to highlight this. From this moment on forget about what others are charging, and never, ever, use square foot or unit pricing again! Let me repeat that. From this moment on forget about what others are charging, and never, ever, use square foot or unit pricing again!
Chapter 3 – Accounting Terms
We cannot go forward without you having a clear understanding of a number of accounting definitions. Study these. Trust me, this stuff is important.
ANNUAL SALES – The entire amount of revenue generated by your company during the course of your fiscal year. We can only project future sales. Later on we will take your 3 year average sales to estimate this year's annual sales total. This is only an estimate. Note that if your sales projections change either up or down you can adjust the forthcoming formula as needed.
DIRECT COSTS – These are all costs directly incurred in completion of the job.
MATERIALS – Mainly paint, caulk, fuel for lifts, rental fees, sandpaper, visqueen, backer rod, permits, etc. You get the idea, anything going to the job.
LABOR – All labor only for the job being completed; including workers comp insurance, state taxes, federal taxes, and local taxes. Do not include any labor costs for office staff, estimators, etc. That is included in your overhead.
EXPENSES – Often called INDIRECT COSTS or OVERHEAD. From this point on I am going to refer to these as overhead. These are simply the costs it takes to be in business. NOT the cost to complete a job. The list is long. Here are some examples:
Fuel
Building payments
Equipment payments
Insurance
Phones
Professional fees (lawyer, accountant)
Rent
Taxes
Office salaries
Office equipment
Office supplies
Postage
Vehicle repair and maintenance
Equipment repair and maintenance
Building maintenance
Utilities
Bank fees
Advertising
Re-work
Vacation pay/holiday pay
Employee benefits
Customer entertainment
Season tickets used for customer entertainment
Training (sales seminars, time management seminars, management seminars, continuing education)
Trade organization dues
Subscriptions
Employee gifts
Tolls
Chapter 4 – If You Have an Accountant
Now we are finally getting to the good stuff. This is going to take you some time. Hopefully you've kept good records. What I am going to give you, if you use it, will change your life. It would have saved Al's company. It can save yours. Now this can be tough for a paint guy, but prepare yourself for some serious office time. No interruptions, no phones, no kids, no wife – nothing but you and your paperwork. Clear off a large table or desk where you can spread out lots of documents. If your statements are in good order and accurate, plan on a minimum of 4 hours, maybe more. If your wife does the books this job is for her also. If you have an accountant perhaps he/she can help. Of course, you're paying for their time but it's worth it. If you have trouble understanding the following, ask for their help.
First you will need to get out your yearend statements for each of the past 3 years. If you do not have annual statements you are going to have to create some (See chapter 6). Add up your ANNUAL SALES for each year and average it out. (See example #1) Write down your 3 year average sales on a blank sheet of paper. The amount is an estimate of your annual sales for this year. We are assuming that this year's sales will be close to this amount. More on this later.
The last thing to do is average out your OVERHEAD over the past 3 years. Write this down also on the sheet of paper. (See example #2)
Here's the formula, (See example #3). Divide your average overhead by your average annual sales. You now know what percent of your annual sales is OVERHEAD (indirect costs). From now on you will use this amount while pricing every job you quote. Never use square foot or unit pricing again. You will come to understand this and love this. Trust me. Later we will get to the next formula.
Chapter 5 – So You Don't Have an Accountant
Unless you have meticulous records the following will not be as accurate as if you had been using an accountant. Be as precise as you can. It won't be perfect but you'll be light years ahead of much of your competition. This is going to take some work on your part. Clear an entire day. Get out the last 3 years check registers, some paper, and various colors of highlighters. For each year, using 1 color only, highlight every deposit, then total up the amount for each year. These amounts are your ANNUAL SALES (See example #1). If you are often paid in cash it is extremely important to factor those amounts in to your calculations (And start saving your money for an attorney when the IRS comes calling). If you are not sure of these amounts give it your best shot. Add up the 3 amounts and average them out. Write this number on your sheet of paper. This is your average annual sales for the past 3 years. We are assuming the current year's sales will be somewhat close to this amount. More on this in a later chapter.
Next, with a different colored highlighter, go through and highlight every single expense you can find. Look at the above list for help with expenses. As you did with your annual sales, total up the amount for each year and average it out. Also write this down on your paper. This is your average annual OVERHEAD (See example #2).
Take your average expenses and divide them by your average annual sales. You now know what percentage of your annual sales is OVERHEAD (See example #3). From now on you will use this amount while pricing every job you quote. Never use square foot or unit pricing again. You will come to understand this and love this. Trust me. Later we will get to the next formula.
Chapter 6 – Square Foot Bidding
My guess, if you're reading this, is that you bid by the square foot or use unit costs. $X.00 per 3x7 door frame, $X.00 per 3x7 hollow metal door, so many cents a square foot for 1 prime coat and 2 finish coats of eggshell latex on new drywall walls, etc. Some of you have given price sheets out to your customers so they can bid your jobs for you. And those price sheets are also in the hands of your competition. See where I'm heading with this? Square foot or unit pricing is bad. Very, very bad. It doesn't work. Here's why.
You meet a new GC and give him all your unit prices. He calls about doing a tenant build out in a local office building. He plugs in your square foot prices for gypsum board walls and ceilings, hollow metal door frames, hollow metal doors, painted wood base, painted crown molding, etc. He tells you it's worth $7,500.00 and asks if you want to do it. You agree. The job turns out great! The superintendent is a real pro. When he tells you it's time to start all the drywall has been finished and sanded to perfection. The permanent lighting is burning. The ceiling grid hasn't been installed yet and you can really fly on those first 2 coats. He consults with you before bringing the carpet guy in to see if you want to do your final coat before or after and you work out a plan that minimizes the damage to your walls. The paint you are using touches up very nicely and the drywaller does his part by not got going crazy during punch out. All in all, a very well run job and you make a very nifty 35% gross profit.
The GC is very happy with your workmanship and calls you a couple weeks later and tells you he has another tenant build out. Same “type” building so same price, right? Darn right, you say, and you start counting all that profit you're going to make. You show up with your 3 man crew for the first day. Whoa! What a rat hole. The job site is filthy! There's no permanent lighting yet, but you can still see that barely any walls are ready to be painted. And did I mention this building is a 45 minute drive from your shop and your men want to be paid for their “travel time”. It takes you a couple hours to figure there's nothing you can do and you send your crew home. But not before they all put 2 hours on their time cards plus 15 minutes travel each way. That's seven and a half hours of pay with zero production. You are already losing money.
Not only that but unlike the other job, this one is in the corner of the building and there are windows everywhere. 3 feet of drywall below the windows, 4 foot high windows, and another 2 feet of drywall above the windows. And the grid is already installed. So instead of only cutting in the grid one time on the last coat (like the last job), you now have to cut in the wall below the window, above the window, and at the ceiling grid. Almost 9 times as much cutting in as last time. God almighty! Can this get any worse? You betcha. The superintendent tells you the electricity won't be turned on until the very end so you're going to have to paint in the dark. But don't worry he says. The drywaller is great. There won't be much touch up at all. He promises all the drywall will be finished by the morning so you head on out and tell him you'll be there at 7:00 AM the next day. You take a deep breath and say “OK, it will all work out in the end”. No! It won't work out in the end! The GC will make money and you are poised to lose your shirt. GC's rarely lose money. Their subs lose the money.
You and your crew arrive the next day and it's time to paint. Uh oh. No freight elevator in this building. You and your guys have to haul 30, 5 gallon buckets up 9 flights of stairs. Plus your spray rig and baker scaffolds You're now cursing yourself for not going to the gym more. But it's not like you have tons of free time. This business is consuming you. You finally start painting but with all the cutting in, it is slow going. Add the pigsty of a jobsite to the equation and the lack of permanent lighting and it takes twice as long to get the job done as you thought it would. But at least you're done.
Not so fast my friend. The paint isn't touching up like the last job. You used some what the GC said was specified and the garbage doesn't touch up. And much of the job was done with deep colors. You have to re-paint every wall that has a drywall patch from corner to corner. Now you have officially lost your shirt. You pay all your guys, as well as the paint store, and your $5,800.00 job has cost you $6,950.00. And you haven't even paid yourself... Very depressing. Remember that highlighter from earlier? Get it out and highlight this. Every job is unique and different. Different subs, different architects, different colors, different paint, different location. Why in the world would you ever price each job with the same unit prices? Insanity. Total lunacy. I know some of you are thinking “I need work. I don't want to rock the boat. I can't raise prices.” Yes, you need work, but you need to make money, not be a nice guy.
The following examples are in round numbers for easy understanding.
Example 1: Annual Sales Average:
Sales 2010 – $480,000.00
Sales 2011 – $500,000.00
Sales 2012 – $520,000.00
Total 3 years – $1,500,000.00 divided by 3 = average annual sales of $500,000.00
Example 2: Annual Overhead Average:
Overhead 2010 – $140,000.00
Overhead 2011 – $150,000.00
Overhead 2012 – $160,000.00
Total 3 years – $450,000.00 divided by 3 = average annual overhead of $150,000.00
Example 3: Overhead as a Percentage of Sales:
Take your average overhead and divide it by average sales:
$150,000.00 divided by $500,000.00 =.30
Your average overhead percentage is 30% of your annual sales
This is only an example. Your numbers will be different. The lower your overhead is, the lower your estimates will be. You will have to monitor your sales as the year progresses. If you project your sales being much higher than your average, simply go through the process again to find your lower overhead percentage. Same if your projected sales are lower.
In addition, let's say you focus on lowering your expenses. With luck, let's say you lowered them $3,000.00 per month. Go ahead and work your formulas with the new numbers. It's that easy.
Now with our new formula let's do a sample bid. It's a very basic tenant build out:
Labor (I'm not going to tell you how we establish the number of labor hours needed or what our cost is to put a man in the field. That's intellectual property. I'm simply using round numbers):
120 hours X $25.00 (Includes all WC insurance and payroll taxes) = $3,000.00
Material: $1,153.00
Total Direct Costs (Labor and material) $4,153.00
Overhead (In example #3 we know it is 30%) $4153.00 X 30% $1,246.00
Total Cost (Break even number) $5,399.00
So now we know your break even cost is $5,399.00. If you get paid this much money by your customer you have covered all your costs. That's excellent but you still need to make a profit to satisfy the bank and the bonding company.
For a 15% net profit, divide your breakeven number, $5,399.00 by.85 and your price is
$6,352.00.
For a 20% net profit, divide your breakeven number, $5,399.00 by.80 and your price is
$6,749.00.
Remember the highlighter from earlier on? Get it out and highlight this: You deserve to make a profit. After all, you're doing the work and taking the risk.
Chapter 7 – Reality – It is what it is:
I can hear you out there. You're saying “Jeff, I can't charge that much money. I need work.” Remember Al, my competitor/friend who went bankrupt? That's what he said. Right up until the day he closed his doors. Let me state this in no uncertain terms. You have costs. Your costs are not the same as anyone else. Your price cannot be the same as anyone else. You can't dismiss reality. Your costs are your reality. DO NOT DISMISS REALITY – PERIOD! Use the formulas; price the jobs where you have to, not where you want to.
The next time a GC asks you what your unit prices are; you confidently look them in the eye and say “We don't have unit prices. Every job is unique, so we make it a point to price out every job independently of the others.” Go on and explain how you carefully estimate labor, materials, and take in to consideration any extenuating circumstances that might add to or lower your estimate. Quite simply it's how professionals do it, and it's how you should be doing it. You are more than just another painter!
Chapter 8 – Stick With It:
Here is a little tip for you. When you tell someone you don't use unit prices, talk to them in a matter of fact manner. Don't apologize or be nervous. Just tell them that you need to dig in to the job to determine the appropriate price based on today's marketplace.
It might be hard at first, giving a potential customer a quote that is 30% higher than other quotes. Remember, you cannot dismiss reality. You have costs. Do not lie to yourself. You cannot work for free. Be confident. You know your costs, the others do not. It's easy to be confident when you know more than the competition. Many of them do not know what you know. Your confidence (or lack of) will subconsciously be picked up by your customers. They will KNOW that you know what you're doing. And many will hire you for that reason alone.
Don't worry about losing a customer or two. Don't worry about losing some jobs. Don't let your ego keep you broke. You win some and you lose some. The other guys will get busy with unprofitable work while you are doing profitable work. You will do less work and make more money. Then, when they start cutting every corner imaginable to make a buck you can swoop in and grab their customers. There is something else, though, that is very important. To get the highest price your work has to be second to none. Your reputation must be flawless. Your personal integrity must be beyond reproach. If word is out that you're a shyster, you're ruined. You could give your work away and people wouldn't use you. Most of the time the lowest price gets thrown out anyway. And there's only 1 low price. I you're depending on being low to get work, the odds are NOT in your favor. I find it much easier explaining higher price than apologizing for poor quality.
Chapter 9 – Your Ego:
Of everything you need to do from this pamphlet, this will be the most difficult. Check your ego at the door! Don't let emotions cost you money. If your ego is such that you have to get every job, then I promise you, you will lose your rear end because of it. If you use these formulas but ignore your costs and low ball, just so Company X doesn't get the job, you are a fool. Who cares if you lose a job to Company X? Some of the best jobs you'll ever get are the ones you don't. That's worth repeating and highlighting, by the way. How stupid would you have to be to take a job that you know has no profit?
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