When you first start most construction companies or contracting businesses, calculating construction quotes is pretty simple. Your average construction estimate is simply a priced material take-off plus the cost of the time it will take to get the job done and whatever markup you want to apply to the quote.
However, as your company grows, construction quotes get more complicated, projects get larger and take longer, and you probably find you need to do your construction estimates in more detail.
One way to do that is to understand the difference between variable versus fixed costs in construction estimating and calculate your construction quotes to ensure you’ve covered all the bases – variable, fixed or otherwise.
The first thing you need to know when you’re tweaking your construction estimating systems to split variable and fixed costs is what variable costs actually are.
In the construction world, variable costs are costs that might change over the course of the project.
Sometimes, this happens because an element of the project grows in size and scope, and you need more material to complete the work. Other times, it is because something took longer than expected, and your labor, equipment, and other time-related costs increased.
Variable costs are any material, labor, or other costs that could fluctuate when the project size and scope change. One great way to ensure that you’re covered if that happens is to break your construction quotes down into line items with quantities. That way, if things do change, everyone will know how to recalculate the final project price.
Fixed costs are the costs associated with construction projects that don’t change, even when the size and scope of a project change. This could be things like permits' cost or material or equipment freight to the site. Even if the project size and scope change, you still have to do those things so that the cost won’t change, and that’s why we call them fixed costs.
You might wonder why you don’t add fixed costs to your variable and line-item rates. After all, when the quantity for those things increases, so will the amount of fixed costs built into the rate!
However, quantities don’t always go up in the construction world. Sometimes, quantities go down, or something might be omitted entirely. In fact sometimes, when this does happen, an architect, engineer or project manager might even ask you for the cost to omit – and this is often mostly the fixed costs that were embedded in that item.
If you have embedded some of your fixed costs into those line items and they are eliminated, you will also be losing the fixed portion of the costs associated with that item. That’s why it’s always a good idea to treat fixed costs to mobilize to the site and for other non-variable costs as their own line item and break them out from everything else.
As your business grows and calculating construction quotes becomes more complex, having good construction estimating software really does make all the difference.
At Bolster, we’ve made it easy to set up your construction estimates exactly how you prefer them, and our system is flexible and innovative. So, if you need something that can cope with all the new estimating demands of a growing construction company, we’d love to show you how we can help.