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  1. #1
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    Default Should we always believe the experts?

    I just got an email from an expert/consultant/person in the know about construction stuff, and thought to myself how stupid I would be if I actually believed what this person was telling me. Basically they were telling me not to charge so much and then I will get more bids. Well, I suppose that is true, I just would work alot harder for alot less money. Here is the body of the "experts" email:

    "Know the Importance of Your True Estimated Costs
    Material costs are relatively straightforward. In a survey I did a few years back, I found that material costs varied less than 2% overall. While it's important to track long lead items and specialty orders, such as doors and windows, most material costs can be easily controlled.

    While not as easy to control as material expenses, trade contract costs tend to be subject to less risk IF a firm bid is received from the trade contractor and payments are tracked against that bid, thus flagging any overruns which might indicate work done outside the original scope and therefore produce a client change order.

    The big risk remains, as it always has, in labor. The past few years have been so easy that many remodelers sold jobs bloated by the fat contained in the labor rate used for estimating. Over and over I heard the number of $45/hour used to estimate field carpenters labor. Upon closer scrutiny the real costs of those carpenters, including the most common components of labor burden, were between $22 and $30, depending on geographic location. That represents anywhere from 50% to 100% fat. When this discrepancy was noted, the common response was that variation protected the remodeler against labor overruns. However, I strongly suggest that you use the true estimated hours at the real burdened cost to estimate labor. Only then can you truly trust your estimated to actual reports for both "dollars" and "hours."

    For example, if you originally estimated 100 hours at $45/hour for trim carpentry and the job autopsy showed that you were consistently on budget when you might have been anywhere between 50 and 104 hours over. Why not just use the "real" numbers, both for dollars and hours, and know that your estimate reflects reality for your company?

    Weathering the storm consists of the implementation of many small corrective changes applied consistently over time. We've already discussed many of these. Now is the time to apply what you've learned and truly know what it takes to run a job as well as your business."



    Now, here was my response to this nonsense.

    "I think your numbers for labor are bogus. I "pay" my carpenters $30 per hour as their base hourly rate. In my area you can't touch a carpenter with any type of experience for less than $25/hour. If I need to add a carpenter from a construction temp agency I can expect a bill from them of nothing less than $52/hour. So you keep telling my competition to further lower their rates and after one or two jobs of loosing their butt's they will be out of business and I can charge exactly what should be charged. Incedently, I bill my burdended rate at $68/hour. One screw up and my profit is gone and I will not work for free.

    As long as we keep thinking of ourselves as non-professionals and billing as such we will be looked down upon by our consumers. Local schlub handymen charge $45/hour, Case Handymen $90 (2 hour minimum), My garage door installer bills at $65/hr, mechanic at $80, my electrician at $95.00, plumber $105/hour, lawyer $160/hour, doctor $200, accountant $225.

    You question why we shouldn't just use the "real" cost to estimate. As if we are all awash with extra cash that we can't acccount for. "Gee, where did all this extra money come from, I must be overbilling like Haliburton?" The reality is exactly the opposite, look at the big fifty remodelers, they are lucky to pull down a 9% net profit at the end of the day. Contractors have one of the highest business failure rates of all business types, and that's not because they have too much cash.

    So what exactly are you suggesting, low ball the estimate with so called "real" numbers and then change order the crap out of the customer for every extra nail and saw cut? Thats just a recipe for business disaster.

    I have been through the exercise of determining my "real" burdened labor cost, and is no where near 22-30 per hour. It might be for a Walmart employee, but not for skilled labor.

    Thanks for your "advice", but I think I will stay with my plan. By the way, what is your hourly rate? Bet it isn't $25/hour."



    So, are the experts always right or am I way off base here. By the way this advice was free, so I guess I got what I paid for, kind of like our business.

    Scott

  2. #2
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    Default Re: Should we always believe the experts?

    I agree with you 100% I believe this paragraph sums it all up.

    As long as we keep thinking of ourselves as non-professionals and billing as such we will be looked down upon by our consumers. Local schlub handymen charge $45/hour, Case Handymen $90 (2 hour minimum), My garage door installer bills at $65/hr, mechanic at $80, my electrician at $95.00, plumber $105/hour, lawyer $160/hour, doctor $200, accountant $225.
    If you build it, They will come

  3. #3
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    Default Re: Should we always believe the experts?

    Hello Scott (et al), I think you missed the point of Judith Millers message in perhaps what can be described as a good example of "not seeing the forest for the trees".

    You became fixated on the numbers she used in making her example and missed on the principle behind the failing of so many contractors that she was trying to make.

    Her point was not the specific numbers per se but instead that contractors don't really know what their numbers really are and often just use arbitrary numbers that happen to work out in that they are artificially padded ("bloated by the fat contained in [their] labor rate") in such a way that they tend to cover up the variances in their estimating errors.

    When she writes: For example, if you originally estimated 100 hours at $45/hour for trim carpentry and the job autopsy showed that you were consistently on budget... she should have perhaps better illustrated the problem by pointing out that hitting your $4500 dollar budget mark for an estimate item doesn't necessarily mean your Labor Costs and Effort numbers are correct.

    If that contractor who thinks his of her Labor Cost is $45 per hour really has a Labor Cost of $36 per hour and the job took 125 hours to complete they might think they hit their estimate number of $4500 right on target when in reality they really missed their targets on two counts. They missed their real actual Labor Cost by -20% ($36 per hr vs. $45) and missed on their hourly Effort estimate by +%25 (125 hrs vs. 100 hrs).

    A problem I often see with the contractors that we work with is that when they use a standard accounting program to do their job costing ("job autopsy") they miss those nuances because all they see is the composite $4500 dollar number.

    In further defense of what Judith Miller wrote from time to time I used to get emails commenting on a blog article I origionally wrote some 10 years ago (The Hidden Dangers of Square Foot Estimating) that the numbers I mention in the example aren't accurate and that you can't build a deck for those costs. That wasn't the point! The numbers I used I pulled out of thin air just to illustrate the mathematical principle. (I have since added a disclaimer to the text saying: "warning don’t use these numbers because they are semi-fictional and arbitrary just for the purpose of illustrating this example") and I stopped getting the emails. Judith Miller might very well have be using numbers from something she wrote ten years ago too but the business principle they were used to illustrate is perfectly valid and a very important one to understand. Yes, her numbers were "bogus". That wasn't her point.

    __________________
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    Quietly Re-Thinking Out Loud

  4. #4
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    Default Re: Should we always believe the experts?

    Quote Originally Posted by Jerrald Hayes View Post
    You became fixated on the numbers she used in making her example and missed on the principle behind the failing of so many contractors that she was trying to make.
    I thought the same thing when I read Scott's post. I think it was Emma Shinn who said that the most successful contractors she had dealt with over the years are those that really "know their numbers". That is one thing I like about CHS is the reports it furnishes really tell me a lot about the financial condition of my jobs and my company.

  5. #5
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    Default Re: Should we always believe the experts?

    Jerald,
    Thank you for your response. We've known Judith Miller for quite awhile and she sure knows contractors better than we know ourselves.

    The one thing I think you all missed on the labor was the time it took to complete a job. Say you think it's going to be a 1000 hour job. But you bid it at $55/hour ($10/hour over the real cost) for a total labor cost of $55,000. At the end of the job you have come in on budget, but over hours. At first you don't think it matter since the cost is the same. But you actually took 1222 hours to complete that job.

    The amount of days it takes to complete the job is super important. If you are 10% over on what it takes for you to complete a job, your overhead goes up on that job and you can't move on as soon to another job. Now you have a cascading effect that costs you really a lot more in the end.

    Let's face it, we need to be moving through our projects at a pace that makes us money. If we're constantly taking longer to complete projects, our employees and customers get frustrated with us for constantly changing the schedule. A changing schedule means it's a lot harder to make money.

  6. #6
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    Default Re: Should we always believe the experts?

    If scott847 missed the point I can see why. The quoted words certainly seem to speak authoritatively on actual numbers.

    This topic overlaps the T&M topic. No doubt, it is important to many business models to know the costs spot on. On the other hand, how do you account for the actual value and synergy that you add as the contractor as far as labor productivity goes? If customers are willing and able to pay $xx/hour and that is the perceived value, why would you charge them less even if your cost was less? How do you account for highly productive employees? Some can do 50% more work in the same time frame. Do you pass that on to the customer for free? Typically, the most productive employees only make a few dollars per hour more then the average guy.

    I’m willing to bet G E does not weigh labor costs very heavily when setting the price on their jet engines. They charge what their customers are willing to pay.
    The most successful contractors I know will not work by the hour.
    They are the specialty contractors.
    I just paid a blaster an outrageous amount that was twice what the same job was three years ago.
    Last summer I paid a sign contractor an outrageous amount for a 100’ tall sign.
    Same thing happened for a retaining wall for a shoreline and a directional bore.
    They do not have to know the labor costs that accurately because they mark it up so high.
    A few I know trick customers into signing with them by saying they can do it sooner then they actually will. Or else they bundle so many things together that the customer gets excited about having everything done at once. Nothing like having the pool in, the driveway done and the sod lawn in time to entertain friends for July 4th. Even if the 4th turns into the 14th.

    It seems to me like those types of financial measurements are most important to subcontractors that sell their work like fungible commodities. Not to put that model down, it works too. But you have to have someone that has the personality to run the ship that tight. Lets face it, most of us would rather do a project instead of trying to figure how much it will cost do to the project.

  7. #7
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    Default Re: Should we always believe the experts?

    Always remember the old Chinese Proverb: "Those who can do. Those who can't teach."
    “It is not an endlessly expanding list of rights —the “right” to an education; the “right” to health care; the “right” to food and housing. That is not freedom. That is dependency. Those are not rights. Those are the rations of slavery – hay and a barn for human cattle.” - Alexis de Tocqueville

  8. #8
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    Default Re: Should we always believe the experts?

    Quote Originally Posted by Stacey View Post
    Jerald,
    Thank you for your response. We've known Judith Miller for quite awhile and she sure knows contractors better than we know ourselves.
    I think what we all have to do whenever we hear something from any kind of consultant anywhere that doesn't make sense to us is perhaps first consider 'did I really understand just what the consultant(s) were trying to say?'. That's not to say that what consultants say is always correct, they (we) certainly aren't. Like anything in any area of life we all need to better use the skills of logic, reason, and critical thinking in evaluating what we hear.

    Quote Originally Posted by Stacey View Post
    The amount of days it takes to complete the job is super important. If you are 10% over on what it takes for you to complete a job, your overhead goes up on that job and you can't move on as soon to another job. Now you have a cascading effect that costs you really a lot more in the end.
    That is an excellent point that I had hoped we might all get to sooner or later in this discussion in that is part in parcel a component of one of my favorite schools of management thinking The Theory of Constraints (maximizing Throughput for a given amount of overheard).

    And not hitting and running over your labor hour targets not only hurts you 'hard' in the pocket book in the way you've just described but also it hits you in a 'soft' fashion too in that that excess time spent on the job also results in the lost opportunity to work on another project.

    __________________
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    Quietly Re-Thinking Out Loud

  9. #9
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    Default Re: Should we always believe the experts?

    Quote Originally Posted by johnny watt View Post
    If scott847 missed the point I can see why. The quoted words certainly seem to speak authoritatively on actual numbers.
    Well maybe, maybe not, but what's a writer to do? If she had used numbers in her example that made perfect sense for a contractor in the metro NY area the contractor in rural New Mexico that read those figures would think and say those numbers are unrealistically high. You're damned if you do and damned if you don't. The point in what most management consultants have to say is not in the numbers themselves but in the concept of the number's relationships to other numbers.

    Quote Originally Posted by johnny watt View Post
    ...On the other hand, how do you account for the actual value and synergy that you add as the contractor as far as labor productivity goes? If customers are willing and able to pay $xx/hour and that is the perceived value, why would you charge them less even if your cost was less? How do you account for highly productive employees? Some can do 50% more work in the same time frame. Do you pass that on to the customer for free? Typically, the most productive employees only make a few dollars per hour more then the average guy.
    I think, and I think Judith Miller would agree with me on this, that you account for the 'value and synergy that you add as the contractor' by defining it and charging for it, not by guessing at it and hoping for it with an arbitrarily derived (and inaccurate) Labor Cost figure. 'Hope is not a method'.

    And as for 'How do you account for highly productive employee' you can't possibly know if you have one if you are only tracking the total composite cost and not the actual time that employees put into specific tasks. Most contractors we work with judge their employees productivity based on observational impressions rather than real tracking of any numbers. I can recall years ago I had this one employee who gave everyone the impression that he was really productive. As he worked he would whip past you his tool belt and tools making a racket but when you looked at his actual output numbers they were piss poor. The reason was the inordinate amount of time he wasted in set-ups and between task activities and how he organized his work flow. That discrepancy between the observed impression (the show) and the real numbers (the substance) only turned up because we really make the effort to track our real numbers.

    And with respect to 'the most productive employees only make a few dollars per hour more then the average guy.' while that maybe true each employee carries a proportionally equal amount of Fixed Overhead costs (and often a proportionally equal amount of Variable Overhead costs too) that difference is even less obvious when you compare them as Loaded Labor Rates. I.e. let's say you have employees you pay a wage of $20 and $22.50 respectively, one employee is paid 12.5% more. After Fixed and Variable Overhead are calculated in their Loaded Labor Rates are $58.38 and $61.40, a difference of only 5%.

    Quote Originally Posted by johnny watt View Post
    I’m willing to bet G E does not weigh labor costs very heavily when setting the price on their jet engines. They charge what their customers are willing to pay.
    Well on that I beg to differ. Actually having some experience in the industry having worked as a productivity consultant to a jet engine re-building job shop I can tell you that GE and the other aerospace shops are very very conscious of just what their labor costs are. And certainly a lot more so than the typical average joe contractor that's for sure. But there is a difference between COSTING a job and PRICING a job and what Judith Miller was referring to in the Remodelers Advantage Power Tip was really in reference to Costing.

    That said however there is a lot to be said about Pricing for ‘Perceived Value’ that I've said and written about before but I do know you know that. :-)

    Quote Originally Posted by johnny watt View Post
    ...They do not have to know the labor costs that accurately because they mark it up so high.
    I have a friend who runs (or who ran) his contracting business precisely that way. The key to his company's success was that they had tons of leads every day and churned out anywhere from 3 to 10 quotes per day with a 1:6 closing ratio. And that worked very very well for them in the good times but now things are tightening up both in terms of leads and closing for them and retroactively now they're digging into figuring out just what their costs really are and what are the kinds of projects they really make their best money on. However in the space in between the good times and the leaner times we have today while they are figuring things out they aren't making the money they used to so there is really no good excuse for not really knowing your costs.

    And think about this too if business is all about maximizing profits they lost out on some additional bucks back in those good times not really understanding and knowing their real production costs.

    It seems to me like those types of financial measurements are most important to subcontractors that sell their work like fungible commodities.
    And yes that is absolutely true in regard to contractors or any business for that matter whose work product is fungible, a very good point.

    __________________
    J. Jerrald Hayes
    Quietly Re-Thinking Out Loud

  10. #10
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    Default Re: Should we always believe the experts?

    Quote Originally Posted by Dick Seibert View Post
    Always remember the old Chinese Proverb: "Those who can do. Those who can't teach."
    I don't know Dick, while cute that so called proverb probably isn't Chinese and probably isn't apropos here either.

    Regarding Judith Miller:
    Judith Miller, popular industry expert, began work with the remodeling community in 1984 when neighbors asked her to work part-time in their construction office. When that company grew from $350,000 to $18 million in 5 years, her fascination with construction management began. After reading an article from Harvard Business Review on the stages of business growth, she began to apply those stages to the remodeling industry.

    Her first article for The Journal of Light Construction appeared in December of 1992. Thereafter she continued to write for The Journal, and to speak at industry trade shows around the country. During the same period she became a Certified Professional Advisor and Master Trainer for the Intuit Master Builder construction accounting program. She has taught Construction Accounting and Project Management at a state university, facilitated remodeling groups and presented numerous day-long seminars for local NARI and NAHB chapters.

    She considers herself a “forensic accountant” and has helped many companies around the country better understand both their accounting and their job costing. Forensic accounting involves deep research into the meaning behind the numbers. Both standard accounting reports and more detailed job reports provide glimpses into the efficiencies of any organization. Understanding where the reports have validity and where they might be suspect and implementing corrective actions allow you to take control.

    She is a respected teacher and trainer, a sought-after presenter and an exceptional facilitator. She knows the remodeling industry and understands the personality of remodelers. Any remodeling company will benefit from her experience and understanding.
    She's one of my favorite authors that I look for in JLC and I always look forward to her email Power Tip messages.

    __________________
    J. Jerrald Hayes
    Quietly Re-Thinking Out Loud

  11. #11
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    Default Re: Should we always believe the experts?

    I dare anyone to open their books to Judith. We do on a regular basis and it's always an interesting experience hearing what she sees. She's worth every penny.

    I don't beleive there is a business owner alive that can see their company completely without an outside set of eyes. She doesn't just audit your books, she audits the flow of money in your business.

  12. #12
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    Default Re: Should we always believe the experts?

    Jerrald:

    Apparently it was Mencken:
    # Those who can -- do. Those who can't -- teach. (H.L. Mencken).

    # Those who cannot teach -- administrate. (Martin)
    “It is not an endlessly expanding list of rights —the “right” to an education; the “right” to health care; the “right” to food and housing. That is not freedom. That is dependency. Those are not rights. Those are the rations of slavery – hay and a barn for human cattle.” - Alexis de Tocqueville

  13. #13
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    Default Re: Should we always believe the experts?

    Maybe I should give that saying some more thought, but it sounds like a load of horsesh!t to me, regardless of who said it.

    Judith Miller consulted to a couple of companies I worked for in CA. I've seen her at JLC Live. Since she moved to WA I've vaguely considered looking her up but never got around to it. I probably should...
    Last edited by David Meiland; 05-19-2008 at 07:58 PM.

  14. #14
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    Default Re: Should we always believe the experts?

    Quote Originally Posted by Stacey View Post
    I don't beleive there is a business owner alive that can see their company completely without an outside set of eyes.
    While I've never had an "outside set of eyes" look at my financials, I do agree with the value of having someone like this. Tha'ts why the Builder 20 and Remodeler 20 Clubs are so powerful, you have an outside accountant and your peers examine your books.

  15. #15
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    Default Re: Should we always believe the experts?

    Quote Originally Posted by David Meiland View Post
    Maybe I should give that saying some more thought, but it sounds like a load of horsesh!t to me, regardless of who said it.
    I agree, it's a saying that might apply 5% of the time, but in reality usually doesn't. There are some very good consulatants out there for contractors who are willing to learn.

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