What Can We Learn From This Chart?

I went around to a several of the online construction forums to see who would pick up on what the chart was telling us and while a couple of folks did pick out the significance my friend Bob Kovoacs who moderates the Estimating & Markup forum on the JLC Online web site perhaps summed it up best:

I think we can gather that labor costs and overhead costs stay rather consistent from month to month, whereas the other costs vary greatly from month to month. Seems like a good reason to tie (allocate) overhead costs to labor costs, rather than to total volume.

Exactly my point and one of the best arguments for using a Capacity Based Markup methodology over a methodology based on your Sales Volume. Your internal labor costs which are a true measure of your company’s capacity for work in a year correlate almost exactly with your companies direct overhead costs. The most prominent driver of your company’s overhead costs are people, your personnel, working and not the dollar value of the materials they install or the subs working on your projects.

While one contractor noted that the Total COGS (Total Cost Of Goods Sold) had something of a correlation with the materials line a higher variation in the sub contracting cost line would have thrown that correlation off.

For me the only significance I could draw from the Materials line being similar to the Cost Of Goods Sold line (COGS) is that that Materials sales can be seen as a Driver of the Total COGS. If you are contractor using the Total Volume Based Markup Method (like Michael Stone advocates in his books Markup & Profit & Markup & Profit Revisted) that’s a big huge important deal to consider. You then absolutely have to work at selling Materials (and subcontracted work) as part of your projects to cover your Overhead Cash Flow expenses and any Labor only, or high Labor to Materials ratio work you may get will hit you hard in the pocket book (see Comparing Markup Methodologies In Real Some World Pricing Scenarios here)

On the other hand if you are a contractor using the Capacity Based Markup method (like David Gerstel describes on pgs 167 through 168 of his book Running a Successful Construction Company where your Overhead Recovery is tied only to your Labor Costs you say “big deal”, or “so what”. Material sales are just gravy or icing on the cake (in that you can earn a Net Profit on them) but they aren’t at all important as far as recovering your Overhead Costs.

I thought this graph perfectly illustrated the reasoning as to why contractors should tie their markup to their labor costs (Capacity Based Markup) rather than tying it to the total volume of Cost Of Good Sold because that number varies to much to match the consistent line of Overhead Costs that contractors face month to month. My friend Jim whose company this chart was based on, uses a Loaded Labor Rate built using Capacity Based Markup so he doesn’t have any problem hitting hitting his Overhead Cash Flow requirements but if 2009 were to follow the same trend lines of 2008 and he was to use a Volume Based Markup like what is written about in Michael Stone’s Markup and Profit and like so many of us are first taught he would have Cash Flow shortfalls the first four months of the new year and wouldn’t get caught up until the fifth month when the summer outdoor season really picks up (and his projects sell lots of materials).

With any stable company that isn’t hiring and firing people all year long the labor cost line is going to remain relatively stable and consistent month to month. What drives the changes in the Materials and SubContracting lines is the changes in project mix for this particular company. If you take the SubContracting and Material costs out of the markup computation equations you are left with the Labor Cost component which is relatively stable and almost perfectly parallels the Overhead requirements. So,…. for those that are interested the lesson is you should tie your markup multiplier to Labor Costs alone (not COGs) to properly allocate Overhead Costs. (see Irv Chasen’s free JLC January 2004 article Allocating Overhead to Labor Makes Financial Sense).

In this case the company is a four carpenter general all around carpentry contractor but in the spring summer and fall they have an excellent deck business that really picks up for them and when the winter season takes over the outdoor work which is their bread and butter scales down and they go inside. The subcontracting they do is mostly for deck and outdoor lighting and little bit of plumbing for hot tubs and moving hose bibs.

The costs lines that are variable Materials (red) and Subcontracting (magenta) do trend down and in fact continue down through the tough winter months of January and February and that is because hey get more service and maintenance type projects in the winter months which have a higher ratio of Labor to Materials. And while it isn’t anything you could necessarily pick up from looking at the graph I also happen to know to first hand that two of the jobs they did late January and February of last year were labor only interior finish subcontracts to a Kitchen & Bath studio where the K&B studio supplied all the materials.

I’ve got an Excel workbook that I used to generate this chart that I try to work on hopefully sometime this weekend or possibly early next week and publish a link here to it here so everyone can look at it and see just how bad that Cash Flow shortfall really is. I think a lot of people will be shocked to see just how bad it is.

I’ve produced some spreadsheets in both Apples Numbers and Excel (and PDF that has none of the functionality by illustrates what I’ve written about here) that you can download to play with the data yourself to model different scenarios to see what happens to overhead recovery using the two different markup methodologies..

CBMvsVBMInADownturn.zip

CBMvsVBMInADownturn.xls.zip

CBMvsVBMInADownturn.pdf

Times change and the concerns a web designer/producer faces continue to change too.

Today the primary concern for a web designer/producer may indeed be what kind of device or devices will the website be viewed on. In addition to laptop and desktop computers we also have BlackBerries, iPhones, iPads, netbooks, Kindles and undoubtedly there will be more to come.

Web designer/producers are now interested in what we know as "Responsive Web Design" which is where the: "

…design and development should respond to the user’s behavior and environment based on screen size, platform and orientation. The practice consists of a mix of flexible grids and layouts, images and an intelligent use of CSS media queries. As the user switches from their laptop to iPad, the website should automatically switch to accommodate for resolution, image size and scripting abilities. In other words, the website should have the technology to automatically respond to the user’s preferences. This would eliminate the need for a different design and development phase for each new gadget on the market. (Responsive Web Design: What It Is and How To Use It – SmashingMagazine.com)

A great article with some visual examples of just how this works can be found here: Responsive Web Design: 50 Examples and Best Practices -DesignModoAn excellent example of how this works is second example they have there in their article for ‘Andersson-Wise Architects‘ so anyone in the building and remodeling industry wondering how this would apply to them should have no problem seeing how important this can be.

Responsive Web Design: 50 Examples and Best Practices -DesignModo
The Andersson-Wise Architects example

Maintaining a web site’s personality and feel and as a result maintaining the brand identity of a company across all those platforms is the new challenge web designer/producers face today.

P.S. this is another good reason supporting Why We Generally Don’t Use Flash.

For some futher information and education regarding Repsonsive Web Design may I suggest a few books and web articles:

• A Book Apart, Responvive Web Design an excellent paperback and ebook combo from the folks at A List Apart
• Techniques in responsive web design | Webdesigner Depot
  
• Responsive Web Design Techniques, Tools and Design Strategies – Smashing Magazine
  
• Responsive web design – webdesignshock.com
  
• Responsive Web Design Templates and Frameworks | Resources
  
• Responsive web design is boring! | Opinion | .net magazine
  
• Beginner’s Guide to Responsive Web Design | Think Vitamin
  
• 10 Excellent Tools for Responsive Web Design

“We believe that we are on the face of the earth to make great products and thats not changing. We are constantly focusing on innovating. We believe in the simple not the complex. We believe that we need to own and control the primary technologies behind the products that we make, and participate only in markets where we can make a significant contribution. We believe in saying no to thousands of projects, so that we can really focus on the few that are truly important and meaningful to us. We believe in deep collaboration and cross-pollination of our groups, which allow us to innovate in a way that others cannot. And frankly, we dont settle for anything less than excellence in every group in the company, and we have the self-honesty to admit when were wrong and the courage to change. And I think regardless of who is in what job those values are so embedded in this company that Apple will do extremely well.”

As the owner of a construction company: What’s your biggest concern?
Estimating Errors	Time to Bid
Printing Costs	Handling PDFs
Working Remotely	Managing Estimators

Now that as MacUsers we finally have Plan Take-off tool I’d be really interested in hearing what you all think.

Steve Jobs has resigned as CEO of Apple.

Apple, Inc. released this message from Steve:

PRESS RELEASE: Letter from Steve Jobs

August 24, 2011-To the Apple Board of Directors and the Apple Community:

I have always said if there ever came a day when I could no longer meet my duties and expectations as Apple’s CEO, I would be the first to let you know. Unfortunately, that day has come.

I hereby resign as CEO of Apple. I would like to serve, if the Board sees fit, as Chairman of the Board, director and Apple employee.

As far as my successor goes, I strongly recommend that we execute our succession plan and name Tim Cook as CEO of Apple.

I believe Apple’s brightest and most innovative days are ahead of it. And I look forward to watching and contributing to its success in a new role.

I have made some of the best friends of my life at Apple, and I thank you all for the many years of being able to work alongside you

I find myself alittle stunned by this and at a loss for words but while it seems right now that Steve Jobs will stay on in his role a Chairman of the Board we all wish him the best and know he is doing the right thing for himself and has prepared Apple well to continue on without him at the helm. His inovation and business DNA will continue on.

One of my favorite most inspiring Apple advertising pieces…

Well now there’s QuickEye and while it does bring a rich set of take-off features to the Mac platform its’ also for Windows users too.

They say on thier website:

“With only one to three hours invested in learning and setup, you will gain one to two hours each day in productivity.”

It took me a lot less than that. They have a regulary updated schedule of Go To Meeting based taining classes that you can just call them about and speak to one of the trainers .

If you’re ready to go and want to get started right away visit their Account Setup & Purchase License page to get yourself started.

On Using “Canned” Estimating Data

Case One:

In considering the cost of installing field tile I noticed that for installing the exact same size 4-1/4” x 4-1/4” field tile that two different books from two different publishers one had a Labor Hour figure for that same task that was 41% higher than the other.

So which one is right?

To tell you the truth,…they both are. It really all depends upon how the estimator interprets the data and which one most accurately depicts the way your company performs the task described.

As I written here before:

A contractor estimator needs to look at the “canned” book figures for labor hours as starting benchmarks, they are not absolutes. The labor hour units are standard as to “generally speaking” but individual as to interpretation. They are based on valid statistical samples that those publishers have researched but we don’t know the exact criteria they had in mind so they are subject to interpretation, in fact your interpretation. Use those data book labor figures with your own interpretation of their meaning. If it “sounds right” then go ahead and use it and monitor the results to see how accurate your judgment and interpretation actually turned out to be.

Also in talking with my client(s) about those figures for laying tile it was my considered opinion that laying tile that makes up an edge where you have to cut the tile is perhaps twice as labor intensive as the general field so to really develop a good pricing system for tiling you need a SF Labor Hour figure for the main body tile and a LF Labor Hour figure for the edges.

While I think any tile installer will tell you it is more expensive to lay tile on the diagonal than in a square grid pattern it is really only the perimeter edge work which is more labor intensive and therefore more expensive than the field where you are essentially laying full square tiles just like you do in a basic square grid installation.

I have yet to see a data book that mentions that or gives a special labor rate for that consideration.

What is essentially that same thinking then again also applies to other task such as installing trim for instance. If you strictly use a LF (Linear Foot) Labor Hour figure for installing trim when you get to that quirky 14′ x 16′ library that instead of just having 6 corners requiring miters or copes instead has 36 that price per LF wont work. You need to have a Labor Hour per joint figure for work that exceeds a typical amount of cuts in a space.

Case Two

Lets say that a hypothetical Kitchen and Bath Contractor is perfectly happy with one of those tile installation figures for the work his or her own employees do. The labor cost plus the material cost figure regardless of which markup method you use, Capacity Based or Volume Based, gets marked up to give you a price for that task.

The next thing the estimator does is look for the task of installing the sink, toilet and shower and again a markup is applied to that to give you a Price for that group of tasks.

The problem is that the "Price" that comes out of that book or software with the markup applied is really the "Price" a plumber should charge for that work. The "Price" the book is telling you to charge your customer is actually more realistically the "Price" you are going to pay your plumber for the work. That book "Price" is actually really your "Cost." If you use that figure to charge your client you wont make a dime on that subcontracted work even though you thought an appropriate markup was applied to it.

And Case Three

After correcting and adjusting some imported data for roofing for that subcontracted work markup problem I just mentioned I noticed that the base costs for some of the material budget costs seemed off to me.

Checking the figures that that particular book was giving I made some calls and compared them to some real material cost figures from actual real suppliers.

The cost they had designated in that particular book and data set I was working with for Laminated Lifetime Shingles was 211% higher that what the local cost actually is and the cost for the "economy" alternative 3-Tab 25 Year Shingles was 35% lower than what the local cost for those shingles are. You therefore might overprice yourself out of the better LifeTime shingle job or lose money providing the economy alternative if you trusted the book data.

Again I think this all goes back to what I said earlier.

…Use those data book labor figures with your own interpretation of their meaning. If it “sounds right” then go ahead and use it and monitor the results to see how accurate your judgment and interpretation actually turned out to be.

Actually come to think of it. I wouldn’t wait for the results to come in to see how accurate your judgment and interpretation is. I would check the figures before ever using them in an estimate.