Know Your Costs
If you want to make a profit in low-bid construction, it helps to know your costs. Knowing your costs can make or break margins not only at bid time, but also when plans change during the work.
Every contractor has different methods to price equipment. You may (or may not) consider a multitude of factors, like operating labor, supporting crew labor, equipment “fleet” costs, overhead, and/or profit. Sometimes only your estimator fully understands the logic.
Show Your Costs
When plans change, the task of pricing equipment also changes. I recommend two simple strategies to make this task easier, and to improve your results when you want to get paid for changed or extra work.
First, maintain an Equipment Rate List. This should include all the equipment you own, and it should be updated each year. The list should clearly indicate what is included and excluded in each rate (such as operators or fuel). Then, when called on to price change order work, your Equipment Rate List can be a great starting point to demonstrate equipment costs.
If possible, use your Equipment Rate List for purposes other than pricing change order work (such as quoting rental rates or preparing actual competitive bids). Demonstrating other uses will ensure the list is more reliable and more credible to the engineer.
You should also be prepared to show how you calculated each rate. Your calculations must be reasonably demonstrated to capture your actual equipment costs.
The second strategy is to simply show your work when preparing bids, and to keep your written calculations and assumptions in your confidential bid file so that you can use those later if and when needed to price change order work.
Since you are presumably in the best position to know your own equipment costs, the costs you calculate at bid time (when your costs have to be competitive) are presumably the most reliable.
Many owners and engineers will consider paying for change order work based on the rates used in your bid, if you can clearly demonstrate how those hourly or daily were used to calculate your low bid.
Bid schedules typically call for lump sums or unit prices for each category of work, and the hourly or daily equipment rates are hidden within those prices as one of many components that make up the final bid. Engineers are far more likely to accept those rates if you can clearly demonstrate how you got from point A (the hourly rate) to point B (the bid).
HDD Example
Consider that you are attempting to drill through unexpected cobble with a 2005 Ditch Witch 4020 and a modified rock reamer.
The contract incorporates the 2007 edition of the EJCDC general conditions, which call for a change order based on the cost of the work, including the cost of “all materials and equipment furnished and incorporated in the work, including costs of transportation and storage thereof.”
You know that drilling through cobble took 50 hours, whereas drilling through the silty sands and fat clays shown in the soil borings should have taken only 20 hours. Your increased costs are for 30 extra hours.
In all likelihood, your drill rig is not listed in the Blue Book. Your modified rock reamer is definitely not listed. And, maybe your water truck is listed, but you know that the Blue Book severely undervalues it.
The question is what hourly cost to multiply by 30 extra hours for a revised bore price. You can answer that question by using either or both of the above strategies. And, under either strategy, you should be prepared to demonstrate to the engineer how your operated rate was used to calculate your low bid.
If your method is fair, consistent, and well documented, the engineer should give it fair consideration.
Build it right. Keep it real.
© 2013 Welle Law LLC. No unauthorized use or reproduction.
