The Myth of Materials X 2 Estimating

[Jerrald Hayes]

Thirty four years ago as an eighteen year old I was sitting in a bar talking with my new boss (who was probably all of 24 years old) and he told me that pricing jobs was easy, all you had to do double the material cost.

I was in another forum the other day looking at a discussion regarding "trim estimates" where a couple (albeit a tiny minority but still enough to be concerned about) chimed in with the pseudo-advice that if you take your material cost double that will give you your labor cost for the project.

Lest there is anyone here that thinks that's true I thought I would bring the topic up here for some serious debunking.

The idea that there is any kind of reliable consistent ratio between materials and labor costs that can be used to help estimate project costs is balderdash and a dangerous business idea to even think could be applied in tough economic competitive times like these. Back in May of 2004 in support of my reasoning for using a Capacity Based Markup (vs. using a Total Volume Based Markup) I did a study comparing 114 different remodeling projects to see what the ratios of labor to materials to subcontracting looked like and I could find absolute no kind of consistent ratio or correlation of costs that could count on in looking at remodeling projects. Indeed in the study I did the ratios of Material Dollars to Labor Dollars ranged from $1.00 material cost: ¢.20 labor cost to $1.00 material cost: $10.26 labor cost.

And just the other day I was reviewing the P&L and other financial information for one of the contractors I work with and did a chart to plot his labor material subcontracting sales for 2008 and if you look at the chart I defy anyone to tell me what kind of meaningful estimating ratios can be derived from it.

And given that I've estimated and job costed hundreds of projects over the years and our specialty is interior trim, architectural woodwork, stairs and railings I can assure you that there is no reliable ratio of materials cost to labor cost that you can apply to the mix of tasks involved in interior trim (or for that matter any trade involved in building remodeling).

The problem with specific respect to interior trim installation is the ratio of material dollars to labor dollars for base installation is different from the ratio for window trim and to further complicate the issues as your quantity of linear feet of base and the quantity of linear feet of window trim vary in relation to each other the overall ration will be further skewed.

Like smallpox all contractors should get a vaccination early on in their careers to prevent against this kind of infection like Materials X 2 Estimating.

__________________
J. Jerrald Hayes
Quietly Re-Thinking Out Loud

[carpenter]

Re: The Myth of Materials X 2 Estimating

20 or more years ago I took a plumbing class. I can remember the instructor telling us that all we had to do to estimate a bathroom job was multiply the materials X 3.

He must have been a gouger. :>)

Good Luck
Dave

[bkerley]

Re: The Myth of Materials X 2 Estimating

Materials x2 issue - agreed.

Other than that, I think everyone should be charting costs similar to what you did for his P&L. The sudden rise in materials is well illustrated there and goes a long way to explaining why some jobs may not have been as profitable as other similar jobs may have been.

That information can be used to help create formulas that anticipate cost increase impacts long before they arrive. "What if" type scenarios. The few that I have written caused me to wonder "what if" I paid someone to do this instead of making myself crazy trying to figure it out for myself.

[BC&C NY]

Re: The Myth of Materials X 2 Estimating

It is funny how many contractors and tradesman come up with thier prices. It seems the more you try and become a real business the harder it is though. Once you realize your true costs of doing business etc. it makes you different than others in many ways. I talk to other contractors all the time many think profit is thier salary. Or that you can only markup 10% etc. These individuals make less than they would working for someone else with more risk and more hours. They like the fact that they are working for themselves and no one tells them what to do. No one can help them understand that there is risk involved that needs to be accounted for or that there is a difference between net profit and gross profit or that markup and markdown have nothing to do with each other.

I know a roofer who uses the idea of doubleing materials to come up with his price.. He's a lot cheaper than the other roofer I know.

The problem with learning more about business, is that your price usually inreases with the more knowledge you obtain.. (It did for me anyway) And your net profits decrease because they were really part of some other expense that you did'nt even think of.

The sad thing is that the difference between the two roofers is: one does superior work and charges less and the other does mediocre work and charges double. So really you sould double the materials and then double your price then market and sell your product and then perhaps you might get a glimpse of real profit.. not just a wage or a truck payment..

Why is our industry so plagued with ignorance. There are so many poorly run businesses that do exceptionally great work and charge almost nothing. I have often struggled with the idea that it would be easier if I was iggnorant to get work and stay busy all the time. I know people that do it and because they make a living at it it seems to work. Thier customers think guys like us are rip offs because we charge for change orders and the process of change orders etc. Iggnorant to the point of no insurance etc.. It would work for a long time or perhaps only a week, perhaps less risk then what I am taking now..

Then there is the other idea, the one I believe in, that all this studing and effort is going to get me somewhere.. somewhere great.. I just have to keep setting goals and reaching them.


the myth of knowledge... the more you know the more expensive you are..now you just have to sell it..

The iggnorant guys are the hardest to compete against they are borderline illegal but perform good work. Trying to educate your customer that you are a real company and you perform great work as well but you charge for overhead and deserve a real profit is hard to do..

[Greg Di]

Re: The Myth of Materials X 2 Estimating

The iggnorant guys are the hardest to compete against they are borderline illegal but perform good work. Trying to educate your customer that you are a real company and you perform great work as well but you charge for overhead and deserve a real profit is hard to do..

Bjorn, you hit the nail on the head so many times in your post it should be bronzed.

Sometimes I am convinced that I am too smart for my own good and I bet I'm not the only one here that gets that feeling from time to time.

Great post all around.

[Jerrald Hayes]

Re: The Myth of Materials X 2 Estimating

Other than that, I think everyone should be charting costs similar to what you did for his P&L. The sudden rise in materials is well illustrated there and goes a long way to explaining why some jobs may not have been as profitable as other similar jobs may have been.

(The emphasis is mine)

With most of the contractor's that I talk with about finances or productivity the root problem they have regarding why some jobs are profitable and some are not are more often that not rooted in their use of the Total Volume Based Markup method instead of a Capacity Based one.

While this is really another issue all together (and I should really post about this over in the Estimating & Markup forum) most people here know for years I've been railing about the defects and dangers in using a Total Volume Based Markup such as Michael Stone writes about and advocates in his book Markup & Profit and why a Capacity Based Markup is so much more secure, consistent, robust and safe and the the chart is a perfect illustration of why. While the Materials and Subcontracting costs and as a resulting conseqeunce the Total Dollar Volume vary all over the place month to month the Labor Costs line remains very stable and consistent.

This makes me think why in anybody's right mind would they want to tie their overhead recovery to the Total Dollar Volume if it varies so much month to month? This is another chart of the same company only I've added a line that represents the Total Job Costs (the green line at the top) which is what Total Volume Based Markup say to base your overhead recovery on and a line for the company's actual Monthy Overhead Costs which is what they actually need to recover each month to avoid any cash flow problems.

The Labor Cost line parallels the Monthy Overhead Costs almost perfectly which is why a company should set up it markup as a multiplier of Labor Cost alone rather than the Total Job Costs.

__________________
J. Jerrald Hayes
Quietly Re-Thinking Out Loud

[Jerrald Hayes]

Re: The Myth of Materials X 2 Estimating

The problem with learning more about business, is that your price usually inreases with the more knowledge you obtain.. (It did for me anyway) And your net profits decrease because they were really part of some other expense that you did'nt even think of.

A very good observation and a painfully true experience that the contractors who take the time to really understand the "business of contracting" all go through.

My own thinking is to try and educate the contractors that don't get it at every opportunity I have. They both hurt the overall reputation of the industry as being real business men and women and they hurt us individually in the market place with their low ball bids.

__________________
J. Jerrald Hayes
Quietly Re-Thinking Out Loud

[BThomas]

Re: The Myth of Materials X 2 Estimating

You guys are all right in what you are saying but back to the origional post...34 years ago things were a little different from now. The cost of labor was well less than the cost of material. Of course there are exceptions but I am generalizing. There were also less variables in terms of materials. Today there are more material choices with varing price ranges. Today labor costs and associated labor costs are much higher in relation to materials.
34 years ago I used the 2x material rule - Not today
BillT

[Jerrald Hayes]

Re: The Myth of Materials X 2 Estimating

You guys are all right in what you are saying but back to the origional post...34 years ago things were a little different from now. The cost of labor was well less than the cost of material. Of course there are exceptions but I am generalizing. There were also less variables in terms of materials. Today there are more material choices with varing price ranges. Today labor costs and associated labor costs are much higher in relation to materials.
34 years ago I used the 2x material rule - Not today
BillT

No,... I don't think so. The logic in math and statistics hasn't changed in 34 years. It was bogus then just as much as it is now. Even though I was probaly drunk and/or high when I first heard that axiom it didn't make sense to me then and it certainly still doesn't make any sense today.

Even if it was true that "...34 years ago things were a little different from now. The cost of labor was well less than the cost of material." (and I am not so sure that's true) it wouldn't make any difference. For one thing in any project there are plenty of miscellaneous labor costs that change the labor cost for the project that have absolutely no relationship at all to the material cost i.e. unloading of materials from trucks, handling and temporary storage, scaffolding set ups, moving the materials from storage to the work area, etc. etc. and they all change the Labor Cost of the project.

It's not that the costs of labor are relatively higher today than they were 34 years ago it because the relationship of costs moves all the time, project to project, in relationship to each other. If it was just that the labor costs are relatively higher then we would be just using a different number as a multiplier like 2.6 or 3 or 3.14159265. Like I said earlier I looked at 114 different remodeling projects and the ratios varied all over the map from 1:0.20 to 1:10.26.

Being a case of 'lucky guessing' is the only reason I can think of that of that would allow it to ever work.

__________________
J. Jerrald Hayes
Quietly Re-Thinking Out Loud

[David Meiland]

Re: The Myth of Materials X 2 Estimating

A pretty good roofer here will install a metal roof for about the cost of the roofing. If you ask for a price he figures the metal package cost and then doubles it.

[J.Buesking]

Re: The Myth of Materials X 2 Estimating

I don't use this method but have heard of it. When customer's ask for a labor/material break down I just tell them 50/50.

[Jerrald Hayes]

Re: The Myth of Materials X 2 Estimating

A pretty good roofer here will install a metal roof for about the cost of the roofing. If you ask for a price he figures the metal package cost and then doubles it.

He's really not too bright then. Think about it, even if the ratio hold true for a straight plain and simple gable roof the intersection of the different planes in some as simple as a L-shaped layout takes more labor and changes the cost. What does he do then? What if the roof is all cut up with dormers? How does he account for the different types and grades of metal roofing? Copper is a little over four times the cost of steel. Is the labor for a copper roof 4 times the labor of a steel roof? What about the degree of difficulty related to the pitch?

[Jerrald Hayes]

Re: The Myth of Materials X 2 Estimating

I don't use this method but have heard of it. When customer's ask for a labor/material break down I just tell them 50/50.

Why not just tell them what the real breakdown is? What's the problem with telling the truth?

[David Meiland]

Re: The Myth of Materials X 2 Estimating

What does he do then?

Apparently he averages out pretty good over a year's worth of work, and he spends zero time estimating.

I'm not advocating this, just telling you it's still alive and well.

[J.Buesking]

Re: The Myth of Materials X 2 Estimating

Why not just tell them what the real breakdown is? What's the problem with telling the truth?

Because it's actually pretty close in my trade.

I charge about 200/sq for siding. Material/Labor is 50/50.

I charge about 8/ft for overhang. Materal/Labor is 50/50.

Those are my main items on 80% of the work I do so 50/50 is pretty accurate.

I can't actually think of something that's cheaper to buy but costs more to install. I can think of plenty of things that cost me more material wise like aluminum columns than they do to install.

If you looked at my job reports you would agree that i'm close enough to 50/50 to not be lying to the customer.

Also you missed the part about me saying I don't rely on this method. I'd be pricing myself out of plenty of work because it's lop sided on specialty items.