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ELECTRICAL CONTRACTING

ESTIMATING, QUOTATIONS,

CONTRACTS, PROJECT MANAGEMENT AND

BUSINESS OPERATION

EDITION 3 June, 2010

KEN POSTILL

Copyright Ken Postill

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CONTENTS

Introduction, purpose and overview Page 3

Part 1Estimating and quotations for electrical work Page 15

Part 2Contracts, project management and financial Page 133control for electrical work


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PURPOSEThe purpose of this book is to provide information and mechanisms for electrical contractors to use as tools in the operation of a successful business.The rules for successful trading in electrical contracting work apply to all other trades where a service combining the supply of labour and materials is offered for payment. Substituting labour and material quantities associated with any such trade makes this book applicable to that trade.

Working for yourself can be a rewarding experience, both financially and emotionally. The direct reward for effort that is available to self employed persons is an essential part of why most contractors choose to be self employed. However, there are many risks in the electrical contracting industry, such as non payment by the client, that require a level of business acumen for success.In some areas of the industry, prices are too low to support a correctly run business, resulting in contractors working long hours to produce a return that may not be comparable with wages. Part of the training offered in this book covers the development of a method to provide minimum acceptable levels of return. Where the market will not provide work at these rates, it is important not to try to operate at the prices dictated by that part of the market.

If the market will not permit prices that give a return commensurate with the responsibility and risks of self employment you must try another area of the contacting industry, or give up the idea of self employment and become a wages employee with an established contracting company.

The people that do well out of the electrical contracting industry are those that think as contractors, and not as electricians.

An underpinning philosophy of successful contracting is that correctly prepared quotations are the foundation of success.

The most important function of estimating and the preparation of quotations is to ensure that the job provides for a profit. Many uninformed electrical contractors operate at unrealistic low prices, often not covering hidden costs such as overheads and ‘on costs’, leading to a high level of business failure among electrical contractors in Australia.

An equally important area of successful trading is the preparation of the quotation, or offer, to the client, which forms the basis of the contract between the client and the electrical contractor. Where the quote is poorly formulated, the contractor is in danger of being unable to pursue the client for payment, should the client be unwilling, or unable, to pay for the work.Poorly formulated offers to clients demonstrate a lack of professionalism by the contractor, and are a major source of misunderstanding between the parties, resulting in disputes and the loss of further work with that client.


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OVERVIEW

Part 1 of this book covers preparation of quotations, which involves the following considerations –

estimating the cost of materials to complete the work estimating the labour hours to complete the work adjusting estimated labour hours for productivity factors calculation of labour costs, including ‘on costs’ calculation of business overhead burdens calculation of minimum gross profit margins calculation and forecasting of nett profit margins the effect of labour/material ratios on quotations for specific projects consideration of market forces contract law standard conditions of tender preparation of a written quotation

Part 2 of the book addresses operating the business, covering areas such as managing each job as an individual project, involving

organising and planning labour purchasing and supply of materials costing of labour and materials management of contracts variations and associated claims progress and final claims management of sub contractors management of penalty areas such as liquidated damages retention and other deductions reconcilliation of actual costs to estimated costs assessment of estimating accuracy and job productivity compliance with sales targets

Other areas covered in this part include developing sales budgets, taxation requirements, business structures, management of overheads, etc.

Blank pages are intentionally inserted for future expansion, or for use as notes recording.


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Time is the most important of all resources for a contractor. The most difficult of all resources for contracting is time because it is a fixed value that cannot be expanded. Time wasted on duplicating effort or rectifying mistakes is lost forever.For a contractor, time and money are interconnected.The labour resource of a contracting operation is difficult to expand or shrink without problems. Labour time expended on low profit work is time that could be used on other work where acceptable profit margins are available.

Operating a successful contracting business means using the time resource wisely. This means that you should –

avoid low profit work by operating at rates that are viable. If a sector of the industry will not permit acceptable levels of profit, avoid operating in that sector.

know what profit margins are required to allow successful trading. Profit margins need to cover all costs, including overheads, and return a profit.

use the sale of materials to provide profit. Work involving the sale of materials can be rewarding at lower profit margins than those required for labour intensive work.

avoid labour intensive work as this limits the amount of sales/profit that can be achieved in a given time frame. Alternatively, use a charge rate that compensates for the loss of profit from material sales.

use the take off sheet as a tool for planning labour. When estimating, the time required to perform the various stages of a project has been estimated through careful study of plans etc.. Avoid replanning the labour requirements by studying the job plans - use the estimated values.

use the take off sheet as a tool for purchasing materials. When estimating, the materials required to perform the various stages of a project has been estimated. Avoid replanning the materials requirements by studying the job plans - use the estimated values.

use a purpose designed computer program to operate the contracting business. These programs will automatically keep track of costs, sales and profit margins, plus provide a reconciliation between estimated and actual costs to report on the accuracy of estimates. The use of purpose designed computer programs will ensure correct processes within the contracting business, optimising profit while reducing time used on administrative functions.

ensure that a fair contract is used so that the customer is not placed in a position that can disadvantage the contractor

avoid disputes with clients by following all required contract procedures, and keeping the client informed on all aspects of the contracted works. Disputes consume large amounts of time, robbing time from profitable applications.

maintain customer satisfaction, using this as the primary source of work operate to a planned trading structure, including the use of a sales budget,

planned profit targets, management of overheads, etc.


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MANAGING AN INSTALLATION PROJECTThe following flowchart shows the procedure for correct financial management of an individual project.


ESTIMATED MATERIAL COSTS

ESTIMATED LABOUR HOURS

ESTIMATED LABOUR COSTS

ESTIMATED DIRECT COSTS

ADD DESIRED PROFIT MARGIN

SALE VALUE

OFFER TO THE CLIENT

PROGRESS OF THE WORK IS COSTED

MATERIALS COSTS ARE RECORDED

LABOUR HOURS AND COSTS ARE RECORDED

ACTUAL COSTS ARE DETERMINED

RECONCILLIATION PROCESS, COMPARING ACTUAL COSTS TO ESTIMATED COSTS

FEEDBACK TO ESTIMATOR ON THE ACCURACY OF LABOUR AND MATERIALS ESTIMATES

OVERHEADS AND MARKET INFLUENCES ARE CONSIDERED

TRADING CONDITIONS ARE CONSIDERED AND DETAILED

CONTRACT

WORK PERFORMED

CLAIMS SUBMITTED

MONIES COLLECTED

ADJUSTMENT FOR VARIATIONS

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The primary professional association for persons involved in the electrical contracting industry in New South Wales is NECA (National Electrical Communications Association) which has affiliated organisations throughout Australia and New Zealand.NECA provides a wide range of services to members, including, but not limited to –

advice on contracts advice and assistance with debt recovery minimum recommended trading rates advice on correct wage rates for various industry agreements advice on employee leave and other entitlements for various industry agreements advice and legal assistance in the event of dispute with a client production of a unit rate book for estimating production of pro forma contracts for use with a range of jobs training in industry developments alerts on emerging trends in contracts or industry provision of local member meetings provision of annual conferences provision of industry awards for excellence in a range of trading categories

Attending local meetings of NECA members provides a wide range of information and support through general discussion with other contractors, without compromising the competition that is inherent within the industry. Areas of discussion include developments in OH&S, innovations in installation methods, use of sub contractors, etc. Discussion of customers that do not enjoy a reputation as worthwhile trading partners is also useful, as it may result in avoiding entering into a contract with a customer that is risky as a source of payment.

NECA NSW also operates a successful group training scheme for electrical apprentices, providing a service to members that wish to use the resource that apprentice labour provides. Under this scheme, NECA Group Training provides an apprentice to the contractor on the understanding that the contractor will provide the required training, while enjoying the benefit of lower wages cost. NECAGT provides the selection and recruitment of the apprentice, and the facility for the contractor to return the apprentice if work reduces, or the apprentice is unsatisfactory.At the time of writing, NECAGT is the largest employer of electrical trade apprentices in New South Wales.


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ABOUT THE AUTHOR

My qualifications for producing this book are as detailed below. An apprenticeship in heavy manufacturing Several years working as an electrician with a major contracting company One year working with a small contracting company. Eleven years self employed, initially in a three way partnership, then evolving to

the sole operator of a Pty Ltd company. During this period the crew ranged between three and sixteen.

Five years as installations manager with a major contracting company. During this period I initially built the crew up from eleven to in excess of fifty and maintained this for the remainder of my time with the company.

Twenty years as a teacher in TAFE, including a long standing involvement in curriculum and training in contracting related areas.

I became self employed through meeting my partners while working as an electrician for a small contracting operation. We decided that rather than making the boss rich, we could make ourselves rich by working for ourselves.During this period of self employment I made many mistakes, often more than once. These mistakes included trusting too many people, one of whom was the older partner, not checking the outcomes of jobs against the estimated values, focusing on the technical part of the work rather than the business side of the operation, not utilizing the information available through NECA, and being naïve in the application of contracts.Apart from the first twelve months of self employment, after which the older partner left, I did most of the estimating and accounts management. We did jobs that were very large for the size of our crew, many of a complex nature that involved significant design work. We had a good customer base, and enjoyed a good reputation with the supply authorities.However, we got ‘burnt’ by a number of customers, sometimes through liquidations, sometimes through the use of contract clauses, and sometimes through no intention to pay.I believe that I was typical of many hard working electrical contractors, operating in ignorance of good procedures, operating at rates that were too low, too busy to stop and review my situation, too preoccupied with getting the next job.At a time when I was in a secure financial position I closed the business and took a job with a major, long established contracting company, starting as a supervisor. I was put into the installation manager role a short time later, with instructions to expand the crew.The management were surprised at how little I knew about the business aspects of contracting, and provided the training. In return, I used my technical skills to expand the installation crew to a level that was very profitable.After five years of this work, for family reasons I changed my career to teaching in TAFE.I became involved in curriculum after twelve months in TAFE, and have maintained a passion for the introduction of training for the contracting aspects as part of an apprenticeship in electrical trades. Until the implementation of the current training package in 2006/7, electrical trades has remained one of very few trades that did not provide this training for apprentices. I would like to see emerging electrical contractors avoid the tough learning school that I went through. This book is a consequence.


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ANECDOTAL TALESThe following anecdotal tales are used at different points throughout this book as a means of introducing the need to trade in a way that minimises the risk of non payment or loss of profit to the contractor.Read these tales in order to gain an insight into instances that occur as part of contracting.The tales are based on actual occurrences, with the names of characters and businesses changed to avoid embarrassment or litigation.Any use names of actual persons or businesses is accidental, and in no way refers to any real persons.

Remember that there are many successful electrical contracting businesses, returning good profits to the operators. These businesses operate with correct procedures, including good contract formulation and procedures and strict financial controls. Electrical contractors that trade as ‘electricians’ rather than ‘contractors’ often suffer financially from their lack of professionalism.

TALE 1Kenny, an electrical contractor, observed that his mate Terry seemed to be in serious financial trouble. Terry was a great salesman, who had gone into business manufacturing and selling cleaning chemicals to the contract cleaning industry. Unfortunately, Terry had sold large amounts of stock to cleaning contractors that could not or would not pay their debts, leaving Terry unable to pay his suppliers.

When Kenny said to Terry “I guess you mustn’t sleep at night with all these problems” Terry replied “what problems”? I owe them money and can’t pay it – they are the ones with the problems!.

Terry said – “That’s Murphy’s Golden Rule – whoever has the gold, rules”.

i.e. the person that owes the money is in charge of the situation.

TALE 2Ray, an electrical contractor and air conditioning installer went to the home of a wealthy client to install a window mounted air conditioner. He did the job without a written contract. When he had completed the work the client congratulated him on the job, and said “While you are here, I will get you to do some more work, such as ....”This resulted in Ray returning each day for the next week to do more jobs in the premises. Each day Ray provided an update of the costs.When all the work was completed, Ray went to the clients office in the adjacent suburb and presented a carefully detailed invoice for the work, which the client casually tore in half, handed back, and said “Thanks for a good job, pity that I wont pay you for it. You should have got me to sign a written contract.”


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TALE 3After serving an apprenticeship and working as a tradesman for eight years with a large reputable company, Stovie Electric, Bob decided that he would be better off working for himself. While his wages at Stovies had been good, he had worked a lot of Saturdays to make the money. This interfered with his family and surfing activities.Bob decided that he would charge double the $30.00 per hour that he got at Stovies.He soon built up enough work to keep him busy, at $60.00 per hour. In the beginning, when the surf was good he postponed jobs and enjoyed himself, which led to unhappy customers, decreased income, and an ever increasing inability to pay his trading accounts.Consequently Bob gave up on the surfing and worked longer hours, but did not improve his business management methods. Doing more work meant higher trading accounts, with his debts slowly accumulating.After two years of trading, in spite of having a good reputation with his clientele, Bob was in serious financial trouble. So he took out a loan with his bank, using his house as collateral, and paid out all his supplier debts. He now needed to improve his income to support the loan, which he did by working longer hours rather than improving his business management, which meant even higher trading accounts. After four more years little had changed, his debts were similar and he was working long hours.He went back to Stovies, worked any overtime he could get and paid off his debts over a period of two years.He says that if he ever goes out on his own again, he will do a contracting business management course first.

TALE 4Kenny, an electrical contractor got a good job with a large building company that involved the construction of a large club. As part of the contract, liquidated damages of $1000.00 per day were included.(liquidated damages is a penalty for failure to comply with the construction schedule)While Kenny and the other sub contract trades performed well, the job ran over schedule, and had not seemed well coordinated throughout the work.The builder deducted $5000.00 from Kenny’s final claim for delaying the work 5 days.When Kenny complained, the builder threatened to cancel the cheque, and take even more money from the claim.Some months later, Kenny was talking to the plumber that had been on the job, to find that he had been ‘hit’ with five days liquidated damages, as had the painter, glazier and air conditioning contractor.Enquiries with the carpet layer (who was a director of the club) revealed that the builder paid liquidated damages of $1000.00 per day for five days to the club.The builder had profited from the use of liquidated damages!Note that since the time of this tale legislation has occurred in NSW that stipulates the total liquidated damages imposed on sub contractors cannot exceed that paid by the head contractor. However, recovering monies withheld in dispute conditions can be a protracted and expensive process.


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TALE 5Kenny, an electrical contractor and his mate Reg the plumber won a job to do work on a new factory. At the end of the job, Kenny noticed that the final claim of $6000.00 had been short paid by $230.00. He contacted the builder to be given the message they would look into it ....When talking to Reg he found that Reg had also been short paid by a small amount, and had received the same response from the builder. Reg contacted the concreter, and found that the same thing had occurred.After three months of phoning to try to get payment, Kenny ‘cut his losses’ and gave up.As did Reg and the concreter (and the other sub contractors) .......

TALE 6Reg the plumber won a job to do work related to a luxurious swimming pool/spa for a wealthy client, and referred Johnno his mate to the client for the associated electrical work.When the work was complete, the client requested that both contractors supply their invoices at the same time, which they did, after the work was complete.After some delay in payment, Johnno contacted the client to request payment, to be told that the client was dissatisfied with the use of steel saddles on a short section of well concealed pvc conduit, as the (galvanised) saddles may rust .The following day Johnno got his apprentice to drop in an replace the saddles with plastic units. He then contacted the client for payment, only to be told that the client felt the pvc saddles may not be strong enough.The following day Johnno got his apprentice to drop in an replace the saddles with copper units. He then contacted the client for payment, only to be told that the client felt the copper saddles would go green in the salt water environment of the pool. Johnno contacted Reg to find that he had the same problems getting payment. Johnno went to the property at a time that the client was absent, opened the switchboard, and disconnected the supply from the circuit breaker, fitting a danger tag to the switchboard.He then contacted the client and told him that the pumps would be reconnected after he was paid, and that no other electrician could legally remove the danger tag.He got paid promptly, but Reg didn’t.Both contractors had performed the work without a written contract.Reg remained unpaid.It was illegal for Johnno to enter the property and tamper with the switchboard without the clients consent.In general, materials, once supplied to the site become the property of the client, regardless of payment, and cannot be repossessed in the event of payment dispute.

TALE 7Bodgy Building Pty Ltd, a reputable company that had successfully traded in the club and hotel industry for many years, had a change of management when the founding owner retired and sold the business. The many subcontractors, who had a long standing relationship with the original owner were assured that it would be ‘business as usual’.Over the next two years the new managers, who were also the directors and company secretary, made multiple trading mistakes, leading Bodgy Building Pty Ltd into a precarious financial position.


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Payment to sub contractors extended out from the traditional 30 day terms to up to 120 days, but they were assured by the managers that it was a short term situation that would soon be rectified. Because of the previous tradition of reliable payment the sub contractors continued to start new jobs and finish existing projects.While remaining as managers, the managers of Bodgy Building Pty Ltd resigned their positions as company directors (having relatives appointed) and formed a new company Slimeball Building Pty Ltd.After some months had elapsed the (new) directors of Bodgy Building Pty Ltd put the company into voluntary receivership, with the managers of Slimeball Building Pty Ltd contacting all the hotel and club clients to inform them that Slimeball would take over the contracts and complete the jobs.Thus the significant debts to the sub contractors were left with the collapse of Bodgy Building Pty Ltd, and work recommenced as Slimeball Building Pty Ltd, with new sub contractors.At the creditors meeting with the liquidators, many of the debtors argued that the Bodgy Building Pty Ltd had been underclaiming on jobs, thereby leaving handsome profits for Slimeball Building Pty Ltd when it took over the work. However this could not be proved.A person that is a director of a company that is in liquidation cannot be a director of another company, therefore new directors were needed for Bodgy Building Pty Ltd.

TALE 8Two real estate agents, having formed Quickbuck Developments Pty Ltd, organised finances for three million dollars and purchased residential properties with the aim of building a large multi domestic development.With two million dollars remaining they engaged architects and designers to produce plans, and then put out requests to a number of builders to have the work done.However, the lowest price they could obtain was significantly more than their remaining capital.So they formed a building company, Quickbuck Building Pty Ltd, with the intention of building themselves. Quickbuck Developments Pty Ltd formed a contract with Quickbuck Building Pty Ltd after receiving a quote to do the works for the remaining capital.Quickbuck Building Pty Ltd (with different company directors to Quickbuck Developments) hired a building manager/ foreman and engaged subcontractors to do the work.Work commenced with the sub contractors being paid promptly for progress claims, establishing trading confidence with the contractors.Over a period of time payments became longer, and longer, eventually exceeding 120 days. The sub contractors were assured by the building manager/foreman that payment would be made immediately after hand over of the completed works, when finance would be available.At completion of the work, Quickbuck Building Pty Ltd handed over to Quickbuck Developments Pty Ltd, for a final payment that was less that the debts of Quickbuck Building Pty Ltd.Quickbuck Building Pty Ltd then went into liquidation, with Quickbuck Developments Pty Ltd having clear title to the development.The sub contractors received less than 10 cents in the dollar from the liquidation.


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TALE 9Kenny, an electrical contractor got a good job with a large building company installing temporary builders supplies on a large site. At the time of starting the job the building project manager told Kenny that the job would span three months, and that they would require an ongoing tally of costs, updated each week, with a single invoice for all the work at the finish.Kenny thought that was okay, and having had a look at the contract supplied by the builder, signed it and commenced work.Having supplied the tallies as required, and completed all the work Kenny submitted a well formatted claim at the end of the works period for $18,990.00After delays in payment of 105 days, Kenny finally received a cheque for $6990.00When he contacted the project manager, he was directed to the contract, which stipulated 90 day trading terms, and included a clause that said ‘the contractor shall supply all site storage and amenities for his works’.The builder had deducted $12,000.00 for use of the toilets, rental of space for on site car parking, use of the temporary power, provision of hoists, scaffolding, etc.As Kenny had failed to notice the impact of this clause, and had failed to have such costs detailed in the contract, or had failed to have it removed from the contract, he had no recourse but to accept the values as detailed by the builder.

In all of the above tales, poor trading practices made the sub contractors vulnerable to financial loss.Professional trading practices help to minimise risk.While there are many professional electrical contractors that make a good income from trading, there are many electricians that produce less than wages by being unprofessional in the conduct of their business.


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PART 1

ESTIMATING AND

QUOTATIONS FOR

ELECTRICAL WORK


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CONTENTS (PART 1)

PURPOSE Page 17

Section 1 Processes for developing a quotation for installation or service work

Page 21

Section 2 Processes for developing an estimate for installation work

Page 28

Section 3 Processes for determining direct costs of labour

Page 58

Section 4 Processes for developing a margin to cover overheads

Page 71

Section 5 Processes for developing a bid price to be offered to the client

Page 83

Section 6 Preparing a quote to be offered to the client

Page 105

Section 7 Addendum – Ancilliary information for student exercises.

Page 119

PART 2 - CONTRACTS, PROJECT MANAGEMENT ANDFINANCIAL CONTROL FOR ELECTRICAL WORK of this book commences on Page 133


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PURPOSEThe purpose of this part of the book is to provide information and mechanisms for the preparation of quotations for electrical installation or service work.

An underpinning philosophy of successful contracting is that correctly prepared quotations are the foundation of success.

This part of the book covers preparation of quotations, which involves the following considerations –

estimating the cost of materials to complete the work estimating the labour hours to complete the work adjusting estimated labour hours for productivity factors calculation of labour costs, including ‘on costs’ calculation of business overhead burdens calculation of minimum gross profit margins calculation and forecasting of nett profit margins the effect of labour/material ratios on quotations for specific projects consideration of market forces contract law standard conditions of tender preparation of a written quotation

The information is provided to allow development of the skills and knowledge required to achieve competency in the Competency Standard Unit UEENEEC003 ‘Prepare quotations for service or installation work’


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MANAGING AN INSTALLATION PROJECTThe following flowchart shows the procedure for correct financial management of an individual project. Correct estimating methods are an essential component in the ongoing management of a project.


ESTIMATED MATERIAL COSTS ESTIMATED LABOUR COSTS



SALE VALUE

OFFER TO THE CLIENT









CONTRACT

WORK PERFORMED

CLAIMS SUBMITTED

MONIES COLLECTED



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PROCESS FOR DEVELOPING A QUOTATION FOR INSTALLATION WORK


Determine the direct costs to perform the work.Labour and material costs are recorded in a pattern that parallels the expected sequence of the work

Estimate the number of labour hours in the job

Adjust the labour hours to suit productivity rates

Estimate the cost of materials in the job

Convert labour hours to cost, being wages plus on costs

Develop a ‘break even’ cost

Margin to cover overheads, based on the labour hours in the job

Develop a sale price.Sale price is direct cost plus gross profit margin.Gross profit margin is overheads plus nett profit

Consider market forces, and the desired gross profit for this job. Where required, add ‘B’ factor

Develop an offer to the client, including all conditions of the offer

Include all conditions of the offer, such as standardised conditions, payment schedule and items specific to the job

See page 29

See page 44

See page 58

See page 29

See page 71

See page 40

See page 105

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An estimate is an educated guess of the time and materials required to achieve a desired outcome. Estimating is a part of everyday life, where individuals estimate the time required to perform tasks such as traveling to a destination, doing housework, cooking a meal, performing any of a wide range of work related tasks, etc. etc.The skills required to perform accurate estimates for electrical work are developed over time, and rely on the application of experience gained in the industry. Processes that supply feedback to the estimator on the accuracy of an estimate are essential in the development of the estimator’s skills.Unit rate manuals can be used to supplement the estimators’ experience, or as a substitute for experience

The most important function of estimating and the preparation of quotations is to ensure that the job provides for a profit. Many uninformed electrical contractors operate at unrealistic low prices, often not covering hidden costs such as overheads and ‘on costs’, leading to a high level of business failure among electrical contractors in Australia.

An equally important area of successful trading is the preparation of the quote, or offer, to the client, which forms the basis of the contract between the client and the electrical contractor. Where the quote is poorly formulated, the contractor is in danger of being unable to pursue the client for payment, should the client be unwilling, or unable, to pay for the work.

The introduction of training in this area of the electrical industry aims to alleviate this problem.


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SECTION 1

PROCESSES FOR DEVELOPING A QUOTATION FOR INSTALLATION OR SERVICE WORK

The following pages show the processes involved in the development of a quotation for either installation work or service work.

The process for the development of a quotation for installation work includes the production of an estimate of direct costs, and the ensuing process of developing the estimate into the quote to be offered to the client.

ESTIMATED COST + PROFIT MARGIN = PRICE OFFERED TO THE CLIENT

Some terms to understand are

Estimate – a forecast of the expected labour and material components and the associated costs to the contractor to perform a specific project.

Quote – the price offered to the client, for which the contractor is willing to carry out the works. This must include all appropriate conditions of trading, as it forms the basis of the contract upon which payment will depend.

‘Estimating’ is the process of making a forecast, or educated ‘guestimate’ of the amount of labour in a project and the cost of materials and labour, and is a part of the process required in developing a price to be offered to the client.

A quotation for service work, or ‘do and charge’ work must include provision for all trading costs, such as overheads and nett profit, within the hourly charge out rate. It must also include trading terms.

An important function in all successful contracting operations is to perform a reconciliation of the estimated values of labour and material against the actual values, determined at the conclusion of the work. This process provides essential feedback to the estimator/manager on the accuracy of the estimate, and the productivity of various individuals within the labour force.


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PROCESS FOR DEVELOPING A QUOTATION FOR INSTALLATION WORK


Determine the direct costs to perform the work.Labour and material costs are recorded in a pattern that parallels the expected sequence of the work

Estimate the number of labour hours in the job

Adjust the labour hours to suit productivity rates

Estimate the cost of materials in the job

Convert labour hours to cost, being wages plus on costs

Develop a ‘break even’ cost

Margin to cover overheads, based on the labour hours in the job

Develop a sale price.Sale price is direct cost plus gross profit margin.Gross profit margin is overheads plus nett profit

Consider market forces, and the desired gross profit for this job. Where required, add ‘B’ factor

Develop an offer to the client, including all conditions of the offer

Include all conditions of the offer, such as standardised conditions, payment schedule and items specific to the job

See page 29

See page 44

See page 58

See page 29

See page 71

See page 40

See page 105

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FLOW CHART SHOWING THE PROCESS THAT LEADS TO RECONCILLIATION BETWEEN ESTIMATED COSTS AND ACTUAL COSTS FOR AN INSTALLATION PROJECT.







SALE VALUE

CONTRACT







MARKET INFLUENCES ARE CONSIDERED

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PROCESS FOR DEVELOPING A QUOTATION FOR SERVICE WORK

The effect of overheads is discussed in Section 4For service work the cost to support the service vehicle is attributed directly to the output of the service person as a direct cost, on an hourly basis.It is not an overhead, as the cost be attributed to, and charged for, for each job.

Overheads are those business costs that cannot be directly attributed to any specific job. Examples include, but are not limited to, office rent, telephones, liability insurance, equipment depreciation/replacement, etc.


Labour cost per hour for wages plus on costs

Hourly allowance to cover overheads

Hourly allowance to cover nett profit

Hourly charge out rate for labour stated in the contract to be signed by the client

Materials sold at trade list price plus mark up. A mark up of 20% is typical

Materials charge out rate stated in the contract to be signed by the client

Standard conditions of trading, including payment requirements explained to the client

Penalty rates for out of hours work, if applicable

Formal contract to be signed by the client prior to work commencing

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NOTES


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SECTION 2

PROCESSES FOR DEVELOPING AN ESTIMATE FOR INSTALLATION WORKThe purpose of an estimate is to determine, or forecast, the costs to the contractor to perform the work.There are several methods used to estimate, but all should produce a forecast of the expected labour hours required to perform the work, plus the cost of labour and the cost of materials.

Having determined the estimated costs, a separate process is followed to develop a sale price to be offered to the client. This process involves adding a profit margin to the estimated direct costs. (See Section 4)

The following pages contain information on methods of estimating.


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INFORMATION

The primary purpose in estimating is to determine the cost to the contractor of carrying out the work, which is an entirely different function to developing the price that will be offered to the client.

ESTIMATED COST + PROFIT MARGIN = PRICE OFFERED TO THE CLIENT

Some terms to understand are

Estimate – a forecast of the expected labour and material components to perform a specific project.

Quote – the price offered to the client, for which the contractor is willing to carry out the works.

Bid – the contractors’ full offer, including all conditions attached to the offer.

Tender – similar to a bid, but including the clients’ criteria, where the client requires the contractors offer to be presented in a specified way

‘Estimating’ is the process of making a forecast, or educated ‘guestimate’ of the amount of labour in a project, and the cost of materials and labour, and is a part of the process required in developing a price to be offered to the client.

Take off sheet – a purpose designed form or spread sheet that is used to record the various material and labour components of an estimate. The take off sheet may be a paper based form, or part of a computer based spread sheet.The following pages contain samples of take off sheets, with notes to explain the various components of a take off sheet.Remembering that the process of determining a quote price is a separate function to estimating, some take off sheets are developed solely as an estimating tool, while others include the facility to develop the estimated quantities to a quote price.Where an experience based estimating method is used the take off sheet requires one column only for estimating labour.Where a unit rate method is used the take off sheet requires additional columns to allow extension of the specific task labour units to provide a total labour hours for that part of the project.


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Sample of a take off sheet used with experience based estimating. The reverse side is a similar table. TAKE OFF SHEET

JOB NAME ...............................................................................................................DATE ..........................

JOB DESCRIPTION.......................................................................................................................................

............................................................................................................................................................................

SHEET ........ of .......... COSTED BY ............................................ CHECKED BY ....................................

DETAILS Qty Materials unit price

Per Material extension

Labour in hours

TOTALS Front sheet

Total labour hours = ............................... Total material costs = ........................................

Total labour costs = .......................hours @ $.......................... = ........................................

‘B’ Factor (if required) = ........................................


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Total costs = .......................................


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Sample of a take off sheet used with unit rate based estimating. The reverse side is a similar table.

TAKE OFF SHEET

JOB NAME ............................................................................................................................................................................................................................................

JOB DESCRIPTION..............................................................................................................................................................................................................................

..................................................................................................................................................................................................................................................................

SHEET ........ of .......... COSTED BY ............................................ CHECKED BY .......................................................................... DATE ...................................

DETAILS Qty Material unit price


Labour unit

Qty Labour extension

TOTALS Front sheet


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Labour hours = ........@ $ ......... Labour cost = .............. Materials cost = $.............. ‘B’ factor .............Total direct costs = ......................


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Sample of a take off sheet used with experience based estimating with the provision to develop the direct costs into a quote price. The reverse side is a similar table.

JOB QUOTATION TAKE OFF SHEET

JOB NAME ...............................................................................................................DATE ..........................

JOB DESCRIPTION.......................................................................................................................................

............................................................................................................................................................................

SHEET ........ of .......... COSTED BY ............................................ CHECKED BY ....................................



Labour in hours

TOTALS Front sheet

TOTAL HOURS ................. + ADJUSTMENTS = .................. @ $.....................p/hr = $.........................

PLUS MATERIAL COSTS = $ ....................... PLUS B FACTOR (if required) ..........................

JOB DIRECT COST = $....................... + MARGIN ...............% = SALE PRICE $....................

BREAK EVEN = DIRECT COST = $....................... + OVERHEADS @ ............p/hr = .....................


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NETT PROFIT = SALE – BREAK EVEN = $....................... - $...................... = $ ........................


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THE TAKE OFF SHEET IS ONE OF THE MOST IMPORTANT COMPONENTS OF ANY CONTRACTING OPERATION

A correctly formatted and utilised take off sheet performs three important functions in the management of any contracting operation.

(a) Estimating with a well formatted sheet will help the estimator in detailing the job components and developing a reliable cost for the job. If the sheet has provision for full itemising of the parts of the estimate, it assists the estimator to break down the separate parts of the job into individual material and labour components.

In addition to this, the full detailing of the work allows the estimator (or some one else) to check back through the estimate to see if anything has been missed or doubled up.

(b) Managing the job – once the estimate has been completed, and the job won, the take off sheet can be used as a useful guide in running the job.

Using the take off sheet as a job production plan means that the details of the job do not need to be retained in the contractors memory, thus freeing them to think about other profitable matters.

As a part of managing the job, the contractor can use the detailed take off sheet as an advance organiser to buy in equipment required for the job. If the contractor can spend a few minutes each day to advance order the equipment for forthcoming jobs, the hours lost obtaining supplies on a day to day basis, can be reduced to a minimum.

(c) Job cost reconciliation – in this function the take off sheet forms the record of the expected costs of the job, to be accompanied with the costing system, which is the record of the actual costs of the job.

Unless the take off sheet has sufficient details to allow the comparison of the two records, the analysis of the costs cannot be performed with any detailed accuracy.


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METHODS OF TAKE OFF SHEET USE

In estimating, there are two general methods used :

(a) Estimating using practical experience, where the estimator breaks the job down into its various parts, and estimates the labour (hours) by using personal experience to predict the quantities of labour for each part. Estimating is done in an order that parallels the way in which the job is expected to progress to allow for the reconciliation process that occurs once the project has been completed.

Since, in most small and medium operations, the contractor is also the estimator, and is often involved in the site work, this method is the most commonly used.

(b) Estimating using a unit rate method, where the estimator simply calculates the quantities of items from the plans and other job information, and then allocates costs from a labour unit rate list to these items. Many larger well established contractors have developed a unit rate list, in which the labour components for many common tasks been detailed.

This method relies on the development of an accurate list, which can only be developed after the work rates of the labour force have been carefully analysed and rechecked over a long period.The NECA Manual of Labour Units reflects such detailed research, and is available from NECA.

The primary benefit of unit rate manuals is that they allow relatively inexperienced staff to use the collective wisdom of experienced estimators to estimate from a given set of plans.

Other methods of estimating are

(c) Estimating using a schedule of rates. This method breaks the project down into a number of tasks, and allocates a set cost to each task. This is a development of pricing on a “per point” basis, and can be successfully applied to projects such as multi domestic (home units etc.), commercial fit outs in high rise buildings, and single domestic (cottage) wiring, where the projects involve a high number of identical tasks.

Using this system, the estimator separates the repetitive tasks such as lighting points, switch points, and power outlets from those items such as switchboards, mains, data, and other specialised circuitry. The specialised items are estimated on a quantity method (as in (b) above), and the remainder of the work is costed on a “per point” basis, using costs that have been developed over a long period of averaging prices arrived at through quantity estimates. This method allows for rapid estimating of


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projects, but creates difficulties in the reconciliation of actual job costs to estimated costs.This method relies on the estimate containing all the points in a project, allowing an “average” to occur across the project. Note that it is unsuitable for small projects and “one off” estimates.

(d) Historical estimates. This method uses a broad based average of costs for specific types of work. While it is not commonly used among electrical contractors, it is widely used in the building industry to supply builders with an allowance for electrical work. The costs are based on the average electrical price for a specific type of work, such as new cottage construction, high rise commercial, etc. These costs are usually expressed as a number of dollars per square metre of floor space, or per cubic metre of building space.

Construction reports, such as Cordell’s, supply these costs on a regularly updated basis, for the benefit of builders who are developing construction projects not yet tendered for.

While this system is not suitable for electrical contractors preparing competitive tenders, it is useful as a general guide as to the probable price range that may be expected for a specific type of project.

It should be noted that the pricing lists do not represent a method of “Pricing per point”. Some contractors are willing to estimate jobs using an average price per point method. For example, a contractor may quote a price of $70.00 a point for power points, irrespective of the job conditions. They use the philosophy that they will lose on some points, but win on others, and so attain an acceptable average.

In practice, however, when estimating jobs, the tendency will be to win all those jobs which have been quoted too low, and not win those that have been quoted too high. Consequently the operation will be trading at a loss on most of its quoted work.

Further, this practice effectively prevents the contractor from carrying out a thorough cost reconciliation, because it does not supply sufficient details of labour and material costs.


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COMPONENTS OF A TAKE OFF SHEET

To suit the optimum use of the take off sheet in the operations activities, there are a minimum number of items of information that need to be included in the design of the take off sheet. Each of these items performs at least one (often more) important functions, and are as follows :

(a) A title, such as ‘TAKE OFF SHEET”, OR “QUOTATION FORM” etc., to clearly identify the sheet and its function. This ensures that the sheet will not be confused with other forms, and is readily identifiable to all staff concerned in the operation.

(b) A general job information section, which will include a number of information items that relate directly to the job. This information would include items such as :

(1) JOB NAME – The job needs to be clearly identified in order to avoid confusing it with other jobs. This is especially so in the case where more than one job is carried out for the same client, often in the same premises.

Where the client has allocated a specific name to the job, the adoption of this job name by the contractor will reduce confusion during the production phase, and especially in the invoicing and payment phase.

(2) JOB DESCRIPTION – Here the estimator notes a brief, but accurately detailed, description of the job to be estimated. This performs several functions, the most important being that it forces the estimator to form an accurate idea of the job, before the estimate is begun. Other functions are to (i) further identify the job, (ii) simplify the entry of the job, once won, into the job book, by supplying a ready made description, and (iii) use the estimators job description sheet as a site staff instruction, so that the site staff have an understanding of the estimators concept of the job.

(3) QUOTE OR JOB NUMBER – This allows the contractor to keep a quote record by numbering the quotes in a sequences, not unlike a job book. This allows the client a reference number to identify the quote, and simplifies the method by which the quote is referred to, and included in, any contract documents associated with the job. Should the quote be successful, the job number can also be entered onto the sheet, thereby permanently linking the estimate to the job.

(4) DATE OF ESTIMATE – It is a common occurrence for a client to postpone a job until a later date, and then telephone the contractor, asking for an on the spot adjustment to the price before issuing a work order. This means the contractor needs to be in a position to quickly adjust the overall price, depending on the percentage CPI changes that have occurred since the date of the estimate. The contractor can then offer the immediately revised price as a provisional price,


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pending a full check of the estimate. This allows the negotiating process to begin, and often results in the winning of the job.

Another useful facet of dating the estimate is where previous estimates are used as a technical reference when designing another job prior to estimating it. The estimator/designer can gain an approximate idea of the costs, so that a decision on the best way of doing the job can be determined.

(5) SHEET NUMBER – This is usually detailed as “sheet … of …”. As most estimates will involve the use of more than one sheet to detail the costs, it becomes important to number the sheets for totaling the costs of the individual sheets in a summary page.

(6) THE ESTIMATORS NAME – Provision such as “Costed by …” allows for the estimators name or initials to be entered on the sheet. This serves two important functions.

(i) Having the estimator permanently identify himself with the product of his work tends to ensure a degree of care that may not always be present if the estimator remains unaccountable

(ii) Once a job is won, and production staff are issued with the job instructions, any matters that are unclear can be referred to the easily identified estimator.

(7) NAMING OF THE PERSON THAT CHECKS THE ESTIMATE – This is usually provided for with an entry such as “checked by …”. Since even the best estimator can overlook items, or misread specification clauses, it is an important practice in any contracting operation to have a second party check the estimators work.

This second party should, where possible, be experienced in estimating or production techniques to ensure the best checking of the estimate. In a partnership based operation, all partners share a joint responsibility for any errors or miscalculations in the estimate, thus safeguarding any one partner against recriminations.

Where the operation is very small, and the contractor is also the estimator, and the production staff, then it is still a wise practice to have someone else, such as a wife or other involved person, check through the estimate. An unskilled person can often detect errors or ask questions that prompt the estimator to re evaluate parts of the estimate.

(8) COLUMNS FOR TAKING OFF THE JOB QUANTITIES – The take off sheet needs to be arranged in a series of columns in which the various items of the estimate are arranged. While there is perhaps no maximum number of columns,


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there is a minimum number to allow the take off sheet to be developed to its full potential.

For the sake of the exercise, and in line with the philosophy of minimising the time used on paperwork, only a minimum number of columns will be developed in the information to follow.

(a) A DETAILS column in which a brief description of the item of work and its associated materials is entered. Note that this description and materials details may be used for other purposes, such as ordering materials for the job or site instructions for production staff, and so should be detailed enough to provide clear information to people other than the estimator.

(b) A QUANTITY column in which the quantity of materials measured from the job plans is entered. This column can be used later as a source of information for materials ordering and job instruction for site staff, as an adjunct to the details column. The site staff can be supplied with a photocopy of the take off sheet showing this and the details column, with all other columns (where costs appear) blanked out. This will inform the site staff of quantities and types of materials allowed for on individual parts of the job, without disclosing the materials costs or labour hours allowed.

(c) UNITS columns – this will involve two columns :

(i) A column to detail the units in which the individual items are costed, eg. Cable per metre, switches per each, clips per 100, etc. This column is generally titled “PER” at the top of the column.

(ii) A second column to detail THE UNIT COST of the item of material. eg. $1.80 per metre for cable, $3.10 for a switch, $5.60 per packet of 100 clips, etc. These column are used to establish the base price for the material item being costed.

(d) COST EXTENSION column – in which the information developed in the three previous columns is extended to form a cost (in dollars) for the particular item of the estimate. This column is totaled to provide a final estimated cost for materials to be used in the job.

(e) A LABOUR HOURS column – in this column the labour, estimated in hours, to carry out the item of work is entered. The labour is always estimated in hours, rather than dollars, for several reasons :

(i) The totalled labour hours can be used to carry out project viability considerations, with respect to both the sales budget and the capacity of the workforce to perform the work.


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(ii) Simplicity in comparing the take off sheet and the cost sheet hours when analysing discrepancies during a job cost reconciliation.

Some larger estimating offices will estimate the labour in specialised categories, such as apprentice, tradesman, labourer, foreman, etc. This method allows for greater accuracy in estimating labour costs, and requires additional columns in which the varying costs for labour rates are developed to provide a dollar cost for labour.

However, very few small to medium sized operations are in a position to allocate labour arrangements as far in advance as the tender stage. This means that these operations need to develop a general hourly rate for labour, and this is based on the most common costing rate for labour used in the operation. Most trade associated operations will use the labour cost of a standard tradesman as the general hourly labour cost.

While it is true that this cost will not be accurate at all times, the following considerations should be examined :

(i) The lower rate of cost for apprentice labour will be offset by the higher “on cost” level, and the likelihood of a lower productivity.

(ii) The lower rate of cost for labourers will be offset by the lower skill level causing a lack of useful employment at some times during the job.

(iii) Leading hands and foremen, etc. will have a higher degree of site productivity offsetting the higher cost of labour. However, on jobs where it is clear that a higher cost of labour will be required due to the fact that a foreman or leading hand will be required throughout the job duration, an additional allowance for this can be made during or at the finish of the estimate, by adding an adjustment to cover the number of hours that this person will be on the job.

(9) A TOTALLING AREA - where the material costs and labour hours can be totaled, then developed into an estimated cost for the job. If the take off sheet is to be used to develop the estimate into a quote or bid, then a further provision needs to be made for adding a profit percentage to the costs to form a quote. This area should also allow for the inclusion of any special costs, such as mileage, abnormal delivery costs, etc

(10) “B FACTOR – this is an allowance as a safety margin for suspected but undefined problems that may occur.


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“B Factor” is not always used, and is based on a matter of experience and any “hunches” that the estimator or manager may feel apply to the project being estimated.

It should be noted that for large involved estimates, there will be a need for the estimator to develop the cost estimate first, and then for the manager or senior estimator to use this job cost to add a suitable profit margin in order to form a bid price for the job. At the time of tender and the subsequent negotiations, it may be undesirable to have the added gross profit margin commonly known in the contractors office. Consequently, in larger operations the take off sheet may not include an area for converting the estimate into a bid price.

However, in smaller operations, where the estimates are not spread over several estimators, and are contained on a limited number of take off sheets, it is very practical to use the take off sheet to form a bid price. Therefore, the take off sheet used under these conditions, also becomes a “quotation sheet”, and requires the section for converting the estimate to a bid price.

Examples of estimate take off sheets and quotations sheets are supplied on the pages in this book.

Remember – when using a take off sheet, you should enter the materials and labour quantities in such a fashion that the take off sheet can be used as :

(i) a job planner, to reduce the time required to refresh your memory or instruct site staff on the work required for the project

(ii) a materials lit, to reduce the time required to purchase and organise the stock needed to carry out the work

(iii) a job cost reconciliation document, where the estimated labour and materials can be compared with the actual costs incurred and recorded on the job cost card. This is an essential process that provides feed back on the accuracy of the estimate, and the productivity of the site activities.

DOING THE PAPERWORK CORRECTLY = LESS MISTAKES= BUSINESS PROFIT= LESS STRESS= BETTER BUSINESS= MORE TIME FOR LEISURE

DOING DUPLICATED PAPERWORK = LESS TIME FOR BUSINESS= MORE STRESS= LESS PROFIT= LOST LEISURE TIME


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POOR PAPERWORK = MORE MISTAKES= NO PROFIT OR A LOSS !!!= LOTS OF STRESS= POOR BUSINESS= EVEN LESS LEISURE TIME

ASK YOURSELF – “If I am not willing and committed to running my business correctly and as efficiently as possible, should I be in business at all?”

HOW EFFECTIVE IS YOUR ESTIMATING METHOD?

Can the take off sheet be used as :

1. An accurate estimate of the cost of all job materials, broken down into each stage of the job?

2. A total of the expected labour hours, broken down into each stage of the job?

3. A total of the cost of labour for the job?

4. A method of planning labour and materials requirements for the job, as each stage of the job approaches? Is the estimate arranged in a sequence that parallels the expected progress of the works? Will the take off sheet allow you the luxury of not needing to remember or re-engineer the job on a continuing basis?

5. A materials list, to facilitate the purchasing of items for the works, as they are required for each stage?

6. A job instruction sheet, for site personnel. (With materials details shown, but costs and labour hours/costs blanked out from the photocopy).

7. An easily compared reference to the job cost record, for the purposes of the job cost reconciliation?

8. A technical reference, for similar jobs priced at a later date?

9. A reference detailing the clients name for the job, and the client contact person (by name) and phone number, etc.?

10. A method to allow you to determine a minimum profit margin, based on the number of labour hours in the job?


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In any contracting operation, time is the most valuable asset of the management and production processes. If the labour capacity of the operation is not used at maximum efficiency, trading capacity is restricted, leading to loss of profit and potential business failure.If the management processes are not streamlined to minimise the time, resources are not available to take on new business opportunities. Poor management of individual projects leads to confusion and mistakes during the production phase of individual projects.

Use a diary to maximise time management.

Do not rely on memory – write things down in a diary or project file

Use the estimating process as the foundation for efficient financial management of each project

Use a ‘gang rate’ to adjust labour hours where labour involves larger groups

Use an adjustment rate to adjust labour hours where abnormal installation conditions exist

Use a minimum hourly return rate to determine the minimum sale value for each project

Consider the material to labour ratio when assessing the profit margin for each project

Convert estimated costs to a sale value expressed as a margin (not mark up) to align with the reconciliation process

Obtain feedback on estimating and labour by reconciling final costs to estimated costs for each project


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ADJUSTMENT OF ESTIMATED LABOUR HOURS FOR PRODUCTIVITY CONDITIONS

There is a wide range of influences on labour productivity, such as :

Number of workers on site Multi storey work Heat and humidity General work ethic Very large site areas Wet weather Very low temperatures Difficult access

When estimating, an estimator determines labour hours at what is an ‘average’ or ‘bench mark’ level of productivity. Where productivity may be influenced by site conditions, the total of estimated labour hours must be adjusted to suit the expected outcome.

Adjusted hours = estimated hours for standard productivity adjustment factor(s)

Example 1

Where site conditions will cause a reduction in productivity to 90% of normal, and the project has an estimated labour content of 500 hours, the total labour hours must be adjusted to reflect the expected actual outcome.

Expected hours = 100 x 500 hours = 556 hours 90

or = 500 = 556 hours 0.9


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Example 2

Where more than one productivity influence is anticipated, such as work occurring with large crews on multi storey sites, in hot weather.

If the productivity value adjustments are :

Crew size – 0.9 Multi storey – 0.85 High temperature – 0.8

The adjustment factor is 0.9 x 0.85 x 0.8 = 0.612

Therefore, if the project had 2000 hours of estimated labour, the expected, or adjusted estimate, is :

2000 hours = 3268 hours Adjustment of 0.612

The above adjustment factors are hypothetical, and should not be used in actual conditions.

To obtain correctly determined adjustment factors for most conditions, reference may be made to the NECA Labour Unit Manual.


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‘Gang Rate’

An alternative method for smaller contracting operations is to use a ‘gang rate’ adjustment factor. This involves determining an average productivity for the employees, based against a ‘bench mark’ employee.

Example – a contracting operation has a workforce of six employees, who are graded against the bench mark employee.

Employee Description Grading

Bob Skilled tradesperson used as bench mark 100John First year apprentice 10 month experience 60Bill Fourth year apprentice 90Jack Leading hand highly motivated 120Ken Poor work ethic, tradesperson 60Bruce Trades assistant, good work ethic 80_

510

Average = 510 = 85 6

the labour adjustment factor on ‘gang rate’ for this group of workers is 0.85.

Example – where the labour for a project is estimated at 1000 hours, and a contracting operation has a gang rate of 0.8, the expected hours to complete the project will be :

Labour hoursAdjustment

= 1000 = 1250 hours 0.8

Always remember that the purpose of estimating is to forecast the cost of performing the work. This must be the cost to the existing structure of the contracting operation. Estimating at rates relevant to other operations leads to inaccuracy and incorrect pricing.A large company does not have the same labour productivity as a small company, particularly where the owner/operators are not involved in the day to day installation work.

Therefore, if a large company was to attempt to estimate at the productivity rates of a smaller company, each estimate would result in under estimating the labour costs.


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Larger companies remain competitive by operating with a relatively low hourly overhead burden, achieved by spreading the overheads across a much larger number of productive hours.

The estimate must provide for the process of comparing estimated to actual labour and material costsThe estimate must be detailed in the time sequence that the job is expected to follow, so that as labour and material costs are incurred during the works, they can be compared to the estimated labour and material costs as an ongoing reconcilliation process.This allows for monitoring the profitability of long term jobs, and provides essential feedback on the accuracy of the estimate.


Actual labour hours used for the work

Actual labour cost to do the work

Actual cost of materials to do the work

Estimated labour hours used for the work

Estimated labour cost to do the work

Estimated cost of materials to do the work

RECONCILLIATION PROCESSFeedback is provided on the accuracy of the estimated values, plus indications of the workplace productivity of production staff and methods

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EXAMPLE OF THE USE OF TAKE OFF SHEETS TO FORM AN ESTIMATE

The following pages contain examples of take off sheets used to complete an estimate for a small commercial fit out job with the following details.

The job involves a small office area that has the following electrical work

twenty 2x36 watt recessed ‘troffer’ type fluorescent lights, wired with 1.5mm2 TPS cable, controlled by a two gang switch

one emergency pack, fitted to one of the troffers, for egress lighting 15 metres of three channel skirting trunking fifteen double 10 amp socket outlets, over three circuits, wired with 2.5mm2 TPS

cable fifteen data outlets, using Cat5e cable with RJ45 socket points one package type sub board one data hub

Labour costs are $30.00 per hour, with 38% on costs

The first example take off sheet is an estimate, using an experience based method, as performed by an estimator that is not part of the managerial process that leads to a quote price.

The second example is typical for that used by a small contracting operation that has a requirement to recoup $15.00 per hour to cover overhead costs. This example is a quotation sheet where the estimated quantities are used to develop a price for the project, based on a gross profit margin of 20%. The estimating method is experience based.

The third example is an estimate, using a unit rate method, as performed by an estimator that is not part of the managerial process that leads to a quote price.

Note that the labour hours in each example provide a total of 39 hours. As the purpose of an estimate is to determine the cost to do the work, and the labour used on the job is based on eight hour days, or two 4 hour half days, 39 hours is an impractical value to base costs upon. Therefore it is converted to 40 hours.

Note that the labour units used in the example of unit rate method are not to be used for actual estimating purposes. They are not a genuine reflection of values shown in unit rate manuals.


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TAKE OFF SHEET

JOB NAME . .Dodgipay Accontancy Services – Office fitout.......................DATE ..20/2/2009........

JOB DESCRIPTION....Wire in 20 2x36watt troffers on two switchgroups, 15 double socket outlets, 15 data points. Package type switchboard and data hub...All outlets on three channel skirting trunkingSHEET .....1... of ....2... COSTED BY ...I N Fallible......... CHECKED BY ...D Unno.........................



Labour in hours

Rough in lights 2 switch groups 1 emerg.1.5mm2 twin & earth 130m 110 00 100 1 4 3 1 63 pin sockets with base ACME 413 21 8 20 @ 1 7 3Cable ties 200 7 00 100 1 4switch mounting bracket ACME S14 1 2 50 @ 3

Fit off skirting trunkingACME S 3x150 3 channel skirting15 metres in 2.4m lengths 7 56 00 @ 3 9 2 1 2knock in masonry fixings 100 32 00 100 3 2internal corners ACME ENC 4 12 00 @ 4 8joiners ACME ENJ 5 6 00 @ 3 0end caps ACME ENC 2 6 00 @ 1 2socket outlet kits ACME SO2 15 12 00 @ 1 8 0data outlet kits ACME DA 1 15 12 00 @ 1 8 0

Rough in socket outlets 3 circuits 72.5mm2 twin & earth 70m 180 00 100 1 2 6

Rough in data outlets 6Cat 5e 4 pr cable 220m 60 00 100 1 3 2

Fit off lightsACME 2x36 PRDTR 20 72 00 @ 1 4 4 0 8ACME EMR emerg kit 1 140 50 @ 1 4 1Plasto light switch LS2 1 7 60 @ 8

Fit off socket outletsPlasto 210 outlets 15 12 30 @ 1 8 5 3

Fit off data outletsPlasto DRJ45 8 15 11 40 @ 1 7 1 4

TOTALS Front sheet 3 4 1 0 5 6

Total labour hours = ..63.. Total material costs = .$ 3855.......................................

Total labour costs = .....63.............hours @ $30.00 + 38%.. = .......$2608......................

Add ‘B ‘ factor (if required) ...................... Total costs = ..$6463......................


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Labour in hours

Fit off switch boardPlasto PAK 15P 1 42 80 @ 4 3 3Plasto Comb RCDCB 20 3 38 60 @ 1 1 6Plasto Comb RCDCB 15 1 38 60 @ 3 9

Fit off data hubPlasto D25 LP 1 246 80 @ 2 4 7 4

TOTALS rear sheet 4 4 5 7


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TAKE OFF SHEET

JOB NAME ...... Dodgipay Accontancy Services – Office fitout.................................................................................................................................................

JOB DESCRIPTION.... Wire in 20 2x36watt troffers on two switchgroups, 15 double socket outlets, 15 data points. Package type switchboard and

data hub...All outlets on three channel skirting trunking.............................................................................................................................................................

SHEET ...1... of ...2..... COSTED BY ..... I N Fallible......... CHECKED BY ....... D Unno....................................... DATE .... 20/2/2009...............................



Labour unit


Rough in lights 2 switch groups 1 emerg.1.5mm2 twin & earth 130m 1 10 00 100 1 4 3 8 .7 1.3 1 1 .33 pin sockets with base ACME 413 21 8 20 @ 1 7 3 .1 21 2 .1Cable ties 200 7 00 100 1 4 1 200 2switch mounting bracket ACME S14 1 2 50 @ 3 .2 3 .6

Fit off skirting trunkingACME S 3x150 3 channel skirting15 metres in 2.4m lengths 7 56 00 @ 3 9 2 .3 15 4 .5knock in masonry fixings 100 32 00 100 3 2 .02 100 2internal corners ACME ENC 4 12 00 @ 4 8 .2 4 .8joiners ACME ENJ 5 6 00 @ 3 0 .2 4 .8end caps ACME ENC 2 6 00 @ 1 2 .2 2 .4socket outlet kits ACME SO2 15 12 00 @ 1 8 0 .2 15 3data outlet kits ACME DA 1 15 12 00 @ 1 8 0 .2 15 3

TOTALS front sheet 1 2 0 7 3 0 .5

Labour hours = ..63.....@ $ .41.4.. Labour cost = .$2608......... Materials cost = $.3855.......Total direct costs = $6463......................Add ‘B’ Factor (if required) ..................................


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Labour unit


Rough in socket outlets 3 circuits2.5mm2 twin & earth 70m 1 80 00 100 1 2 6 8 .6 70 6

Rough in data outletsCat 5e 4 pr cable 220m 60 00 100 1 3 2 2 .7 220 6

Fit off lightsACME 2x36 PRDTR 20 72 00 @ 1 4 4 0 .3 20 6ACME EMR emerg kit 1 1 40 50 @ 1 4 1 1 1 1Plasto light switch LS2 1 7 60 @ 8 .2 1 .2

Fit off socket outletsPlasto 210 outlets 15 12 30 @ 1 8 5 .2 3

Fit off data outletsPlasto DRJ45 8 15 11 40 @ 1 7 1 .2 3

Fit off switch boardPlasto PAK 15P 1 42 80 @ 4 3 2 .5 2 .5Plasto Comb RCDCB 20 3 38 60 @ 1 1 6 .1 3 .3Plasto Comb RCDCB 15 1 38 60 @ 3 9 .1 1 .1

Fit off data hubPlasto D25 LP 1 2 46 80 @ 2 4 7 4 1 4

TOTALS rear sheet 2 6 4 8 3 2 .1


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JOB QUOTATION TAKE OFF SHEET

JOB NAME . .Dodgipay Accontancy Services – Office fitout.......................DATE ..20/2/2009........

JOB DESCRIPTION....Wire in 20 2x36watt troffers on two switchgroups, 15 double socket outlets, 15 data points. Package type switchboard and data hub...All outlets on three channel skirting trunkingSHEET .....1... of ....2... COSTED BY ...I N Fallible......... CHECKED BY ...D Unno.........................



Labour in hours

Rough in lights 2 switch groups 1 emerg.1.5mm2 twin & earth 130m 110 00 100 1 4 3 1 63 pin sockets with base ACME 413 21 8 20 @ 1 7 3Cable ties 200 7 00 100 1 4switch mounting bracket ACME S14 1 2 50 @ 3

Fit off skirting trunkingACME S 3x150 3 channel skirting15 metres in 2.4m lengths 7 56 00 @ 3 9 2 1 2knock in masonry fixings 100 32 00 100 3 2internal corners ACME ENC 4 12 00 @ 4 8joiners ACME ENJ 5 6 00 @ 3 0end caps ACME ENC 2 6 00 @ 1 2socket outlet kits ACME SO2 15 12 00 @ 1 8 0data outlet kits ACME DA 1 15 12 00 @ 1 8 0

Rough in socket outlets 3 circuits 72.5mm2 twin & earth 70m 180 00 100 1 2 6

Rough in data outlets 6Cat 5e 4 pr cable 220m 60 00 100 1 3 2

TOTALS Front sheet 1 4 6 5 4 1

TOTAL HOURS ....63........ + ADJUSTMENTS = ...64....... @ $.41.4.....p/hr = $..2650...................

PLUS MATERIAL COSTS = $ ..3855.............. PLUS B FACTOR (if required) ..........................

JOB DIRECT COST = $...6505....... + MARGIN ..20......% = SALE PRICE $...8132.............

BREAK EVEN = DIRECT COST = $.6505....+ OVERHEADS 64hr@ .$15.00.....p/hr = $7465...

NETT PROFIT = SALE – BREAK EVEN = $..8132..... - $.7465..... = $ .667......


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Labour in hours

Fit off lightsACME 2x36 PRDTR 20 72 00 @ 1 4 4 0 8ACME EMR emerg kit 1 140 50 @ 1 4 1Plasto light switch LS2 1 7 60 @ 8

Fit off socket outletsPlasto 210 outlets 15 12 30 @ 1 8 5 3

Fit off data outletsPlasto DRJ45 8 15 11 40 @ 1 7 1 4

Fit off switch boardPlasto PAK 15P 1 42 80 @ 4 3 3Plasto Comb RCDCB 20 3 38 60 @ 1 1 6Plasto Comb RCDCB 15 1 38 60 @ 3 9

Fit off data hubPlasto D25 LP 1 246 80 @ 2 4 7 4

TOTALS Rear sheet 2 3 9 0 2 2


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Remember that the most important resource for any contracting operation is labour, and the use of that labour is to produce optimum sales outcomes.Time spent managing projects is an essential component for any successful contracting operation, but is an overhead cost that diminishes profit.therefore, time spent managing projects must be kept to a minimum, but be used to provide all necessary management functions.A correctly formatted take off sheet can be used to reduce the amount of time used to manage a project.

Use the take off sheets provided on the preceding pages to see if the time invested in producing the estimate can also be used to –

plan the labour required for each part of the work, as it arises. Will this avoid the need to study the plans for the job in advance of each part as it occurs in order to determine the labour requirements?

purchase the materials required for each part of the work, as it arises. Will this avoid the need to study the plans for the job in advance of each part as it occurs in order to ensure that the required materials are available on time?

monitor the labour hours consumed by each stage of the job in order to check the labour productivity against the estimated values

monitor the usage of materials for each stage of the job, checking for loss or misappropriation of materials

use mismatches in the recorded costs to estimated values to check if unauthorised variations to contracted work have occurred

use mismatches in the recorded costs to estimated values to make enquiries with production staff as to how the unexpected outcome occurred

determine minimum values for progress claims, submitted as the work progresses

Will the use of a correctly formatted take off sheet result in a reduction of time consumed to manage a project?


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NOTES


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SECTION 3

PROCESSES FOR DETERMINING DIRECT COSTS OF LABOUR

THE DIRECT COST OF LABOUR

The direct cost of labour is the cost of employing a person on an hourly basis. This cost must include all ‘on costs’ such as paid leave, public holidays, workers compensation insurance, superannuation, etc.

The following pages provide information on the method for determining the on cost provision for labour. As on costs are determined by employment conditions, it is best to develop the on costs margin as a percentage of wages paid so that it remains stable unless there is a change to working conditions. Where a salary increase occurs, without a change in working conditions, the fixed percentage margin is easily applied to the new wage rate to determine the new direct cost of labour.As wage increases are a regular occurrence, but working conditions rarely change, most contracting operations use the percentage method as a means of avoiding constant recalculation of on costs for labour.

THE DIRECT COST OF MATERIAL

The direct cost of materials for an estimate is that cost born by the contractor to supply the materials to the project. It is not the price or sale value provided to the customer.As the purpose of estimating is to determine the cost to the contractor to perform the work, the direct cost of materials is that cost that includes regular discounts, but also includes expected wastage, such as cable off cuts, short ends from cable drums, etc.


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DIRECT COSTS

In any contracting operation utilising labour to perform its normal trading activities, there is an inescapable need to determine the cost to the operation of the labour, on an hourly basis. When an estimator calculates the quantities of materials in a particular job, it is a simple matter to express the cost of materials in dollar terms, based on the cost of purchasing the materials.

However, labour is estimated in units of time, usually hours, and not in dollar terms. Therefore a cost per hour for labour is required. This cost must encompass

cost of wages ‘on costs’

Wages costs are those costs that are paid as a component of salary, and can usually be identified with those monies detailed on a pay slip. This must include costs such as hourly wage, travel allowances, tool allowances, license allowances and other wage components that are part of an employment agreement.

On costs are those costs that are directly related to wages, but not specifically detailed as part of salary payments. On costs include provision for sick leave, annual leave, annual leave loadings, workers compensation insurance, superannuation, long service leave, family and community leave and any number of other employment conditions.

On costs are calculated as a percentage of wages, rather than as a dollar value. Since on costs result from employment conditions which do not change regularly (unlike wage rates), determining a percentage value allows for simple adjustment to labour cost.As a guide, the on cost value for electrical work ranges between 35% to 40% for most Australian employment conditions.

The hourly cost for labour is determined by dividing the wages payment by the number of working hours per week, and adding the on cost percentage to that value.

Note that the on cost margin is covered by the normal working hours. It is not applied to overtime payments. Therefore, where overtime is worked at 1.5 times normal rate it may not be unduly punitive to the costs to perform the work.


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DETERMINING AN HOURLY COST OF LABOUR

The first step in arriving at a direct cost figure for labour is to establish the actual dollar figure paid as wages per week to a particular employee.

Calculating wage costs

The following example uses hypothetical values of employment conditions for determining the wage cost for a specific individual.The calculations are based on a 38 hour working week

(a) Base electricians wage rate $32.00 per hour $1216.00 per week(b) Licence allowance ………………. $ 30.00 per week(c) Tool allowance ………………….. $ 25.00 per week(d) Special (skill) allowance $2.31 per hour $ 87.78 per week(e) Construction allowance …………. $ 64.00 per week(f) Travelling time allowance ..80 minutes pay per day, on a 38 hour week

= 5 x 80 hours per week @ $32.00 $ 213.33 per week 60

Therefore, the normal weekly wage for this employee will be the sum of these items :

= $1636.11 per week

Dividing the weekly wage by the number of working hours per week, the wage component is

$1636.11 = $43.06 per hour 38 hrs

However, the actual cost is a lot more than $43.06 per hour, because there remains the ‘on cost’ component to be added to this figure.

The on cost margin, expressed as a percentage of the employees wage rate, will apply to all employees in the one operation that are employed under the same award.


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Calculating ‘on costs’

On costs should be calculated as a percentage that can be added to the wage rate for any employee engaged under the local employment agreement.

Each of the on cost components is calculated as a percentage of the wage, and then added to supply a fixed percentage that will allow for all the ‘on costs’.

Note that although the employee gets paid 52 weeks a year, income for the yearly salary is produced over less than that period. Those times for holidays, sick leave, etc. are not income earning periods.

As an example, the number of working weeks for most electrical workers is

Annual holidays .......... = 4.0 weeksPaid public holidays – 9 days ……… = 1.8 weeksPaid sick/family leave – say, 10 days … = 2.0 weeksTotal non income earning weeks ………. = 7.8 weeks

Therefore incoming earning weeks = 52 – 7.8 = 44.2 weeks

Calculation of on costs must be based on the number of income producing weeks, rather than 52 weeks per year.

The following calculations are provided as an example of determining the on cost percentage required for a hypothetical employee.

1. Workers Compensation Insurance

This is usually based on a percentage of the wages paid to an employee. It varies in levy, depending on the competitive rates at which the insurance companies are prepared to operate.

Assuming that suitable cover is obtained for 8% of wages paid.

Therefore the on cost component for workers compensation insurance will be 8%, to be gained over the 44.2 productive weeks.

Workers compensation on cost = 8% x 52 weeks to be paid 44.2 productive weeks

= 9.41% of wages paid


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2. Long Service Leave

This hypothetical example allows for eight weeks long service week after ten years of service.

For each year worked, allow 0.8 weeks pay, spread over the number of productive working weeks in the year.

Converting this to a percentage, = 0.8 x 100 = 1.8% 44.2 wks

Long Service on cost = 1.8%

(Footnote: In NSW the long service costs for employees engaged in the construction industry are paid by a levy on developers, via the Building Industry Long Service Corporation, and not by the individual contracting industry employers. So, in NSW it is not an on cost component).

3. Annual Leave

This comprises four out of every fifty two weeks.

Converting this to a percentage form for use as an on cost component = 4 x 52 x 100 = 9% 52 wks 44.2

Annual Leave on cost = 9%

4. Annual Leave Loading

For this hypothetical employment agreement, employees are granted a 17.5% loading on all annual leaveConverting this to a percentage form for on cost purposes, we can use the 9% already allowed for annual leave, and simply calculate an additional margin for the leave loading.

Additional on cost for leave loading = 17.5% of the 9% on cost = 17.5% x 9% = 1.58%

Annual Leave Loading on cost = 1.58%


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5. Public Holidays

For this hypothetical employment agreement there are nine paid public holidays, and a paid union picnic day, each year. This is yet another cost that must be carried by the 44.2 working weeks.

Converting this to an on cost percentage, and using the five day working week, 10 paid holidays = 2.0 weeks, which represents an on cost percentage of 2 x 52 x 100 = 4.52%

52 44.2

Public Holiday on cost = 4.52%

6. Sick Leave

For this hypothetical employment agreement employees have eight days paid sick leave and two family/community days each year. Using the same methods as for public holidays (as above), an on cost component can be derived.

10 days = 2.0 weeks = 2.0 x 52 x 100 = 4.52% 52 wks 44.2

7 Superannuation This cost is currently set at 9% of wages paid. therefore the on cost component is

9% x 52 = 10.6%44.2

TOTAL OF ON COST MARGINS

Adding the various on cost percentage margins will give a total on cost margin

Workers Comp = 9.41%Long Service = 1.8%Annual Leave = 9.0%Leave Loading = 1.58%Public Holidays = 4.52%Sick Leave = 4.52%Superannuation 10.6% TOTAL = 41.43%


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For this hypothetical employment agreement the true cost of employing a tradesperson will be the wages component of $43.06 per hour, plus an on cost margin of 41.43%.

= $43.06 plus 41.43% = $60.90 per hour

Or the cost of employing a foreman, who is entitled to an additional $100.00 per week, will be :

($43.06 + $100 ) + 41.43% = $64.62 per hour 38 hours

The simplicity of using a fixed on cost margin (expressed as a percentage of wages paid) to determine the direct cost of labour, allows for quick calculations of various labour rates and costs.

Changes to wage rates caused through bargaining adjustments will not require a recalculation of the on cost component unless there is a variation in the working conditions, meaning that frequent ‘on cost’ recalculations are unnecessary.

NoteNECA provides guidance to the on costs applicable to a range of employment conditions as a service to its’ membership.


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EXERCISES

Below are some exercises in calculating the direct cost of labour for operations trading under differing employment conditions :

EXERCISE ONE

Calculate the direct hourly cost of employing an electrical serviceman, using the following award conditions :

38 hour working week4 weeks annual leave, with 17.5% leave loading21 days full pay sick leave10 weeks long service after ten years service9% non contributory superannuation9 paid public holidays per annum1 paid industry union picnic dayWorkers compensation insurance at a rate of 8% of wages paid

Wage rates :

Base award rate $ 35.20 per hourTool allowance $30.00 per weekSpecial (skill) allowance $48.00 per weekElectronics certificate allowance $30.00 per weekServiceman’s allowance $46.00 per week


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EXERCISE TWO

Calculate the direct cost of employing an apprentice under the following award conditions :

38 hour working week4 weeks annual leave17.5% annual leave loading8 days full pay sick leave9% non contributory superannuation9 paid public holidays per annum36 paid days per year at collegeWorkers compensation at the rate of 10% of wages paid

Wage rates :

Base award rate $15.00 per hourTool allowance $30.00 per weekConstruction allowance $51.00 per weekTravelling allowance 80 minutes per day

EXERCISE THREE

Calculate the direct cost of employing a leading hand under the following employment conditions :

36 hour working week4 weeks annual leave17.5% annual leave loading21 days full pay sick leave per annum9 paid public holidays per annum1 paid union picnic day per year8 weeks long service after ten years serviceWorkers compensation insurance at the rate of 9% of wages paid9% non contributory superannuation

Wage rates :

Base award rate $30.20 per hourLeading hand allowance $56.00 per weekTool allowance $30.00 per weekSpecial allowance $66.00 per weekConstruction allowance $55.00 per week


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EXERCISE FOUR

Using the data supplied in exercise three (above), determine the new direct labour cost for the leading hand following a national award wage adjustment that grants a flat 5% increase to the hourly base award wage rate. Note that this would not apply to the various allowances, which, in this case, are adjusted in a separate award adjustment.

P.S. If the answer you got in calculating a direct cost for apprentice labour alarmed you, remember that the Federal Government generally supplies a training subsidy to employers that engage apprentices as part of their workforce. In addition to this, apprentices can be profitably utilised to carry out work that would otherwise be done by a tradesman on higher wages.


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ANSWERS TO EXERCISESExercise 1Productive weeks = 41.8workers comp insurance = 8% x 52 = 9.95% 41.8superannuation = 9% x 52 = 11.2% 41.8annual leave = 4 weeks x 52 = 9.6% 52 41.8leave loading = 17.5% of 9.65% = 1.68%Public holidays + union picnic = 2 weeks x 52 = 4.8% 52 41.8 sick leave = 4.2 weeks x 52 = 10% 52 41.8 Total on cost percentage = 47.23%

Hourly wages rate = ($35.20 x 38 hrs) + 30 + 48 + 30 + 46 = $39.25 per hour 38 hours

Direct cost for labour = $39.25 + 47.23% = $57.79 per hour

Exercise 2Wage rate = $17.66 per hour On cost percentage = 64.2%therefore direct cost for labour = $30.00 per hour




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NOTES


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SECTION 4

PROCESSES FOR DEVELOPING A MARGIN TO COVER OVERHEADS

The following pages provide information on the processes involved in developing a price to be offered to the client.This price must include provision for all direct costs (labour and materials), an amount to cover overheads for the duration of the job, and an amount for nett profit.

The method for overheads allowance is development of an amount allocated for each working hour of a job, ensuring that each job carries its’ share of the overhead burden. The overhead margin, once developed, can be simply applied to each estimated job based on the hours in that job.Service work rates are developed in a similar manner to estimated work.


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FORMULATING A BID PRICE

BID PRICE - The sale value of the offer to the client.This sum must include -(a) the total direct costs for materials and labour(b) the gross profit margin, comprised of hourly overhead costs and nett profit

DIRECT COSTSMaterial - the expected cost to supply the materials for the projectLabour - the cost of labour - being hourly costs based on wages plus on costsOn costs include those costs, other than wages, that can be directly attributed to the hourly cost of labour. This includes, but is not limited to, sick leave, paid public holidays, annual leave, annual leave loading, workers compensation insurance, redundancy funds, long service, and any other paid non productive events that are directly attributable to employed labour hours. On costs are calculated as a percentage of the hourly labour rate. By determining a percentage value, the on costs do not need to be recalculated in the event of a change to the hourly wage rate.Where a change to employment/working conditions occurs, the on cost percentage must be re calculated.

HOURLY OVERHEAD COSTSThe hourly overhead cost for an operation is the annual overhead costs divided by the annual productive working hours.By calculating an hourly loading for the coverage of the overheads, the overhead cost burden can be allocated to each project, based on the estimated labour hours in the project.

GROSS PROFIT MARGINThe gross profit margin is expressed as a percentage of the sale value (not as a mark up on the costs). This allows easy comparison to the final result of the job, where actual costs determine the resultant gross profit margin, when compared to the sale value. Actual gross profit margins are compared to estimated gross profit margins and costs during the job cost reconciliation process that should occur for each project.

Sale value - direct costs = gross profit percentage Sale value

NETT PROFITThe nett profit is the final profit, after all direct costs and hourly overhead costs for the project have been deducted from the sale value.


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Determining a minimum sale value for a quotation

The value of a quotation must include all direct costs, and a gross profit margin.


labour hours

labour cost

materials cost

direct costs to perform the work

margin to cover overheads, based on the labour hours in the job

margin for nett profit

gross profit expressed as a margin, added to provide allowances for overheads and nett profit

sale price or amount

trading conditions and offer of alternatives, etc

consideration of what margins the market will allow

quote offered to the client

CONTRACT

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OVERHEADS

The overheads are those operating costs of a business that cannot be directly attributed to a specific job, but must be covered by all jobs, over the current financial year.

In order to ensure that the overheads are covered, a portion of the overheads must be covered by each job. The simplest way to achieve this is to determine a set amount, in dollars per productive working hour that is required to cover the total overheads.

Overheads include items such as:

phone/fax costs wages for supervisory staff wages for administrative staff rent of premises accountancy costs advertising insurance (public liability, fire, theft, etc.)

Note that workers compensation insurance is not an overhead. It is a component of the ‘on cost’ part of labour costs.

Research has demonstrated that poor management of overheads is a common contributor to failure of small business in Australia.

In order to determine the amount of cost to allow for overheads, on an hourly basis, determine :

(a) the total annual overhead costs(b) The total number of productive hours

Hourly overhead burden = Total Overhead Costs_ Annual Productive Hours

Example – for a small contracting operation that has total overheads of $23,000, and 1150 productive hours per year, the overhead burden is :

$23,000 = $20 per productive hour 1150


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EXERCISES

Exercise 1Determine the hourly overhead cost for an electrical contracting business that has the following characteristics -One full time manager, with an annual salary of $ 80,000 plus 35% on cost = $ ……………………One part time clerical person, with an annual salary of $26,000 plus 35% on cost = $ …………………………

Two vehicles, each with annual operating and lease costs of $15,000.

Annual telephone costs of $ 4800

Annual insurance costs (public liability, fire, theft etc) of $4000

Annual rental costs of $20,000

All other costs $ 10000

Total overheads =

Labour resource - seven full time workers, each working 44.6 productive weeks per annum, and 36 hours per week.

Total productive hours =

Hourly overhead cost = annual overhead costs annual productive hours

= = $ per hour


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Exercise 2Determine the hourly overhead cost for an electrical contracting business that has the following characteristics -One owner/operator, with 30% of an annual salary of $ 75000 plus 35% on cost being connected with non productive work = $ ……………………

One vehicle, with annual operating and lease costs of $15000

Annual telephone costs of $ 3000

Annual insurance costs (public liability, fire, theft etc) of $2000.

All other costs $ 5000

Labour resource - working 44.6 productive weeks per annum, and 26 hours per week.

Hourly overhead cost = = $ per hour

Exercise 3Determine the hourly overhead cost for the same contracting business as in Exercise 2, but where the labour hours have been increased by the addition of a full time worker –

One owner/operator, with 30% of an annual salary of $ …………………. plus 35% on cost being connected with non productive work = $ ……………………

One vehicle, with annual operating and lease costs of $……………….

Annual telephone costs of $ ………………

Annual insurance costs (public liability, fire, theft etc) of $………………..

All other costs $ …………………

Labour resource - working 44.6 productive weeks per annum, and 26 hours per week for the owner, and 36 hours per week for an employee.

Hourly overhead cost = = $ per hour


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MINIMUM HOURLY RETURN FOR A CONTRACTING BUSINESSEvery contracting business needs to establish a minimum hourly return to cover wages and overhead costs.Profit from material sales can be used successfully to off set overheads costs, allowing the business to be competitive on the open market. Most successful contacting businesses use profit from materials sales for this purpose.However, minor domestic work, or most service work, does not provide the required materials sales to allow this practice. Consequently income from labour must be priced to support both wages and overhead costs.

MINIMUM HOURLY RATE FOR A SOLE TRADER The following sample calculation shows the process required to determine a minimum hourly rate for a sole trader operating in the local area, performing a combination of service work and small installation jobs. The rate is developed to allow for low sales of materials.

For this example, it is assumed that the contractor operates the business from home, and has no unnecessary overhead commitments. It is assumed that the contractor is able to achieve a productivity that allows 30 hours per week as chargeable work, with the remaining 8 hours lost on non chargeable tasks such as traveling, preparing quotes, bookwork, etc. This 8 hour non productive time becomes an overhead. On costs are assumed to be 38%, which reflects a common value for many contracting operations.The contractor has chosen to aim for a wage of $35.00 per hour.

Labour cost per hour = $35.00 + 38% = $48.30 per hour

Overheads are as followsVan = $15,000.00 per annum (includes all running, insurances and depreciation)Telephones (mobile and land line) = $3,000.00 per annumInsurances (public liability, fire, theft) = $2,000.00 per annumAccountancy fees = $1,500.00 per annumAdvertising, petty cash, entertaining, etc = $100.00 per week or $5000.00 per annumTool replacement = $1,500.00 per annumNon productive hours = 8 hours x 44.2 weeks = 353.6 @ $48.30 = $17,078.00

Total overheads = $28,000.00 + $17,078.00 = $45,078.00

Hourly overheads = total overheads = $45078 = $34.00 per hour productive hours 44.2 x 30hrs

Therefore the minimum hourly rate, to achieve a wage (without profit) is$48.30 + $34.00 = $82.30 per hour

If this is not available in the market, the contractor should not continue to trade, or should change the area of trading.


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Exercise 4For the sole contractor detailed on the previous page, determine the minimum charge out rate that is required if the contractor employs an apprentice. The apprentice contributes 37.4 working weeks (allowing for attendance at TAFE), with 36 hours per week. For simplicity, the charge out rate is based on the contractors wage rate of $35.00 per hour, with 38% on costs. Would this adjusted minimum charge out rate make the contractor more viable in the market, assuming that he can produce enough work to keep the apprentice fully occupied?

Exercise 5What effect on minimum charge rate would occur if the contractor provides a van for the apprentice to use on a full time basis? (Allow $15000 for annual costs for the van)


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NOTES


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ANSWER TO EXERCISES

Exercise 1 OVERHEADS ANNUAL PRODUCTIVE HOURSTotal Overheads = Manager $80,000 plus 35% = $108,000 Clerical person $26000 plus 35% = $35,100 Two vehicles = $30,000 Telephones = $4,800 Insurance = $4,000 Rent = $20,000 All other costs = $10,000

Seven workers @ 44.6 weeks, 36 hours per week

= 7 x 44.6 x 36 hours = 11239 productive hours

TOTAL OVERHEADS = $211,500 TOTAL PRODUCTIVE HOURS = 11239Hourly overhead costs = $211,500 = $18.82 per hour 11239 hours

Exercise 2 $47.75 per hour





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SECTION 5

PROCESSES FOR DEVELOPING A BID PRICE TO BE OFFERED TO THE CLIENT

Developing the final price to be offered to the client includes allowing for all direct costs, overheads and profit margins.

Sale value = direct costs plus gross profit marginGross profit = overheads plus nett profitNett profit is the profit remaining after all costs are covered.

SALE = DIRECT COSTS + OVERHEADS + NETT PROFIT

GROSS PROFIT MARGINThe gross profit margin is expressed as a percentage of the sale value (not as a mark up on the costs). This allows easy comparison to the final result of the job, where actual costs determine the resultant gross profit margin, when compared to the sale value. Actual gross profit margins are compared to estimated gross profit margins and costs during the job cost reconciliation process that should occur for each project.

Sale value - direct costs = gross profit percentage Sale value

NETT PROFITThe nett profit is the final profit, after all direct costs and hourly overhead costs for the project have been deducted from the sale value.


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GROSS PROFIT EXPRESSED AS A MARGIN FOR THE PURPOSES OF RECONCILLIATION OF ESTIMATED VALUES TO ACTUAL OUTCOME VALUES

Definitions :

Margin – an amount expressed as a percentage of the sale valueMark up – an amount expressed as a percentage of the cost

Margin = profit (in dollars) sale value

Mark up = profit (in dollars) value of costs

To add a margin to a cost the method is

Sale value = direct costs 100 – margin% Gross profit – a profit margin that must include funds to cover overheads, plus nett profitNett profit – the profit realised after all costs, being direct costs and overheads, have been coveredFor the purposes of project management it is best to determine the anticipated profit as a margin to allow easy reconciliation of estimated profit to actual profit at the end of the project.

Reconciliation is the comparison of estimated profit to the actual profit produced at the end of the project. This project is vital in order to provide feedback to the estimator on the accuracy of estimates. It also allows easy reference to the sales budget requirements for the time frames covered during the progress of the job.

.

Further study in both business and project management is recommended if you wish to pursue a career in contracting management or self employment.

The process to allow reconciliation of an estimated margin to an actual outcome margin is shown in the following flow chart.


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FLOW CHART SHOWING THE PROCESS THAT LEADS TO RECONCILLIATION BETWEEN ESTIMATED COSTS AND ACTUAL COSTS FOR A PROJECT.







SALE VALUE

CONTRACT







MARKET INFLUENCES ARE CONSIDERED

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Margin versus mark up

Mark up, where a percentage profit is expressed against the costs is unsuitable for the reconciliation process.

Margin – an amount expressed as a percentage of the sale valueMark up – an amount expressed as a percentage of the cost

Example 1

If a job is won with costs of $1000 and a mark up of 20%, the sale value is :

$1000 + 20% = $1200

The gross profit is therefore $200.

If the costs came in exactly as estimated, the gross profit will be $200, for the sale value of $1200.

Comparing the gross profit to the sale :

_200 x 100 = 16.6% margin, making it difficult to reconcile the outcome to the 1200 estimated 20% mark up

Where the profit is added as a margin, for the same 20% gross profit, the direct costs will be 80% of the sale. (Sale = Direct Cost + Gross Profit)

Therefore, 1% of the sale will be = direct cost 80 sale = Direct Cost x 100 80

= 1000 x 100 = $1250 80

The gross profit is 1250 – 100 = 250

The gross profit % = 250 x 100 = 20% of sale which is easily reconciled 1250 to the estimated gross profit margin.


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Example 2

A project is estimated with direct costs of $20,000.

If a mark up of 15% is used, the sale value will be $23,000 ($20,000 + 15% = $23,000).

If the cost come in as estimated the gross profit will be $23,000 - $20,000 = $3000.

Comparing the actual gross profit to the estimated 15%

Actual gross profit % = 3000 x 100 = 13% which is difficult to compare to the 23000 estimated 15% mark up

Calculating gross profit as a percentage margin :

GP% = 15% costs = 85%

Sale = Direct Cost x 100 85

= $23530

if costs come in at $20,000, profit = $3530

Gross profit % = 3530 = 15% = estimated margin 23530Therefore, when determining gross profit, with direct costs as the basis, calculating the gross profit as a margin (rather than a mark up) is preferable for the purposes of reconciliation.

Examples of adding a margin to direct costslabour estimated values direct cost

of labourdirect cost of

materialsdesired gross profit margin

sale value

100 hours @ $30.00 plus 38% on costs

$4140 $3400 20% $9425


$1625 $8560 15% $11982


$7948 $450 35% $12920


$1523 $15,500 10% $18915

At a later point in this book, you will find that material intensive jobs can be profitable at lower margins than labour intensive jobs (see page )


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The Reconciliation Process

Where the gross profit outcome of a project is not the same as the estimated value, the estimator should compare the estimated materials and labour values to the actual values, using the take off sheet and costs records.

The reconciliation process allows the estimator to identify the areas of inaccuracy in the estimating process.

Questions

1. Where the final materials costs exceed the estimated values, what are the likely causes?

2. Where the labour hours and costs exceed the estimated values, what are the likely causes?

3. Where the labour hours come in close to the estimated value, but the labour cost is less than the estimated value, what are the likely causes?


ESTIMATEDLABOURHOURS

AND COSTS

RECORDEDON THE

TAKE OFFSHEET IN

A SEQUENCETO MATCH

THE EXPECTED PROGRESS

OF THEWORKS

ACTUALLABOURHOURS

AND LABOURCOSTS

RECORDEDAS THEWORK

PROGRESS

ACTUALMATERIAL

COSTSRECORDED

AS THEWORK

PROGRESS

ESTIMATEDCOSTS

FORMATERIALSRECORDED

ON THETAKE OFFSHEET IN

A SEQUENCETO MATCH

THE EXPECTED PROGRESS

OF THEWORKS

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Consider the following reconciliations of estimated costs against actual outcomes.

Exercise 1ESTIMATED COSTS ACTUAL OUTCOME

Material Costs Labour Costs Material Costs Labour CostsAll materials = $1800.00

72 hours @ $30.00 plus 38% on costs= $2981

$2150.00 32 hours @ 14.00 plus 58% (apprentice)40 hours @ $30.00 plus 38% (tradesperson)

Total costs = $4781 Total costs = Sale value with a margin of 25% added to estimated direct costs = $6375.00Estimated gross profit = Actual gross profit =

In order to determine why the variation occurred between the estimated and actual costs for this project, what questions would you direct to the person that did the work?




$3150 80 hours @ $30.00 plus 38%

Total costs = $ Total costs = Sale value with a margin of 20% added to estimated direct costs = $Estimated gross profit = Actual gross profit =


Exercise 3Where an estimator has a history of accuracy against actual outcomes across a wide range of jobs, with different workers, it is reasonable to suspect unacceptable site outcomes as the reason for imbalances in the reconciliation process.

If a specific worker consistently exceeds the estimated hours on work that is done, what is the first line of assumption?

If the above worker is praised by the clients for neatness and punctuality, and requested for further work, what assumptions can be made?

Where a worker is honest, punctual and reliable, preferred by the clients, but too slow to meet the estimated hour target to allow competition in the market, what would you do?

If a specific worker consistently exceeds the estimated materials on work that is done, what is the first line of assumption?

If a worker performed extra work for a client, as variation to the contract work, but forgot to pass this information on to the contractor, what effect would this have on the reconciliation process?

Exercise 3Where the labour component on estimates is consistently lower than the actual outcomes, across a range of jobs, what is the first line of assumption?

Exercise 4Where the material component on estimates varies regularly when reconciled to the actual outcomes, across a range of jobs, what is the first line of assumption?


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Answers




$2150.00 32 hours @ 14.00 plus 58% (apprentice)40 hours @ $30.00 plus 38% (tradesperson)

Total costs = $4781 Total costs = $ 2363.84Sale value with a margin of 25% added to estimated direct costs = $6375.00Estimated gross profit = $1594 (25%) Actual gross profit = 1861.16 (29%)





$3150 80 hours @ $30.00 plus 38%

Total costs = $ 6198 Total costs = $6462Sale value with a margin of 20% added to estimated direct costs = $ 7748Estimated gross profit = $1550 (20%) Actual gross profit = $1286 (16.6%)


Exercise 3Where an estimator has a history of accuracy against actual outcomes across a wide range of jobs, with different workers, it is reasonable to suspect unacceptable site outcomes as the reason for imbalances in the reconciliation process.

If a specific worker consistently exceeds the estimated hours on work that is done, what is the first line of assumption? (Poor attendance, slow worker, mistakes, ... or poor estimating)

If the above worker is praised by the clients for neatness and punctuality, and requested for further work, what assumptions can be made? (works too slow, makes mistakes, .... or poor estimating)

Where a worker is honest, punctual and reliable, preferred by the clients, but too slow to meet the estimated hour target to allow competition in the market, what would you do? (allocate the worker to do and charge work, service work, etc)

If a specific worker consistently exceeds the estimated materials on work that is done, what is the first line of assumption? (misappropriating equipment, or careless with stock)

If a worker performed extra work for a client, as variation to the contract work, but forgot to pass this information on to the contractor, what effect would this have on the reconciliation process?(excess costs would show up in the reconcilliation process – indicating a bad outcome or unpaid work)

Exercise 3Where the labour component on estimates is consistently lower than the actual outcomes, across a range of jobs, what is the first line of assumption? (the estimator does not have a good understanding of the group work productivity, or the group work productivity must be improved, or both)

Exercise 4


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Where the material component on estimates varies regularly when reconciled to the actual outcomes, across a range of jobs, what is the first line of assumption? (poor estimating)


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EXERCISES - CONVERTING AN ESTIMATE TO A BID PRICE

The following exercises are designed to demonstrate the importance of developing a quote price for each project, on an individual basis. Each of the following scenarios uses the same overhead burden, and the same gross profit margin, but produces a range of nett profit results. For the same contracting operation, operating at the same gross profit margin, the nett profit varies with each job, depending on the value of materials and labour.

Exercise 1Determine the minimum price (break even) for a commercial fit out project that has been estimated with the following characteristics -Material costs = $5,400.00Labour cost = 150 hours with an hourly cost of $23.30 + 37% on costHourly overhead cost = $9.90 per hour

Where the general market rate for this work is a gross profit percentage of 20%, what nett profit would occur if the project is won at market rates?

For this exercise, the ratio of material to labour cost is


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Exercise 2Determine the minimum price (break even) for a commercial fit out project that has been estimated with the following characteristics -Material costs = $2100.00Labour cost = 250 hours with an hourly cost of $23.30 + 37% on costHourly overhead cost = $9.90 per hour




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Exercise 3Determine the minimum price (break even) for a hazardous location (“flameproof”) project that has been estimated with the following characteristics -Material costs = $6600.00Labour cost = 24 hours with an hourly cost of $23.30 + 37% on costHourly overhead cost = $9.90 per hour




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Exercise 4Determine the minimum price (break even) for a routine maintenance project that has been estimated with the following characteristics -Material costs = $250.00Labour cost = 250 hours with an hourly cost of $23.30 + 37% on costHourly overhead cost = $9.90 per hour




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Enter the outcomes for exercises 1,2,3 and 4 in the table below, to provide an overview of the effect of material/labour ratios on nett profit, where projects are priced at a constant margin.

Exercise No.

Hourly overhead burden

Assumed market

rate

Material to labour

ratio

Nett profit Labour hours required

Use of fixed resource

1 $9.90 20%2 $9.90 20%3 $9.90 20%4 $9.90 20%

The results of this table show the impact on profit of the ratio of material to labour, where a contracting operation submits bids using the same gross profit margin, (20% in this example) for all projects.

CONCLUSION – each project must be evaluated on it’s ability to cover the hourly overhead, and an acceptable margin determined to provide a nett profit.

Where the market rate enforces an unrealistically low margin, it is important to maintain an acceptable margin, and avoid losing money. ie. Pass the job to someone else!

Sitting on the beach is much better than operating a business at a loss!!!


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Exercise 5Determine the minimum gross profit margin that must be applied to labour only work for a contracting operation with the following operating characteristics.Cost of labour = $33.00 per hour plus 40% on costsHourly burden for overheads = $27.00 per hour

Exercise 6Determine the minimum gross profit margin that must be applied to a job with the following estimated values, where a contracting operation has an hourly overhead burden of $17.00 Estimated labour = 40 hours @ $32.00 per hour, plus 38% on costsMaterials = $4,500.00




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ANSWERS TO EXERCISES - CONVERTING AN ESTIMATE TO A BID PRICE

Exercise 1Determine the minimum price (break even) for a commercial fit out project that has been estimated with the following characteristics -Material costs = $5,400.00Labour cost = 150 hours with an hourly cost of $23.30 + 37% on costHourly overhead cost = $9.90 per hour

Labour cost = 150 x 23.30 x 1.37 = $ 4789Material cost = = $ 5400Overhead cost = 150 x 9.90 = $ 1485Total = $ 11674.00


Direct cost x 100 = 4789 + 5400 x 100 = $ 12736 80 80

Nett profit = 12736 - 11674 = $ 1062.00


5400 : 4789 = 1.13 : 1

Exercise 2Determine the minimum price (break even) for a commercial fit out project that has been estimated with the following characteristics -Material costs = $2100.00Labour cost = 250 hours with an hourly cost of $23.30 + 37% on costHourly overhead cost = $9.90 per hour

Labour cost = 250 x 23.3 x 1.37 = $ 7981Material cost = $ 2100Overhead cost = 250 x 9.90 = $ 2475Total = $ 12556


Direct cost x 100 = 7981 + 2100 = $12602 80

Nett profit = 12602 - 12556 = $ 46.00


2100 : 7981 = 1 : 3.8


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Exercise 3Determine the minimum price (break even) for a hazardous location (“flameproof”)project that has been estimated with the following characteristics -Material costs = $6600.00Labour cost = 24 hours with an hourly cost of $23.30 + 37% on costHourly overhead cost = $9.90 per hour

Labour cost = 24 x 23.30 x 1.37 = $767.00Material cost = $ 6600.00Overhead cost = 24 x 9.90 = $ 238.00Total = $ $7605.00


Direct cost x 100 = 767 + 6600 = $9208.00 80

Nett profit = 9208 - 7605 = $1603


6600 : 767 = 8.6 : 1

Exercise 4Determine the minimum price (break even) for a routine maintainence project that has been estimated with the following characteristics -Material costs = $250.00Labour cost = 250 hours with an hourly cost of $23.30 + 37% on costHourly overhead cost = $9.90 per hour

Labour cost = 250 x 23.30 x 1.37 = $7981Material cost = $250Overhead cost = 250 x 9.90 = $2475 Total = $10706


Direct cost x 100 = $10289 80

Nett profit at 20% margin = 10289 - 10706 = nett loss of $417.00


250 : 7981 = 1 : 32

Exercise No.

Hourly overhead burden

Assumed market rate

Material to labour ratio

Nett profit Labour hours required

1 $9.90 20% 1.13:1 $1062 1502 $9.90 20% 1:3.8 $46 2503 $9.90 20% 8.6:1 $1603 244 $9.90 20% 1:32 - $417 LOSS 250


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Exercise 5Hourly cost of labour = $33.00 plus 40% on costs = $46.20Sale value must include overhead loading = $27.00 per hour. therefore minimum hourly sale value = $46.20 + $27.00 = $73.20Minimum margin = $27.00 = 37% $73.20Therefore, any margin above 37% will produce a nett profit. However, as this project ties up labour and does not provide a profit from materials, the margin would need to be substantially above the minimum in order to make it attractive.

Exercise 6Direct costs Labour = 40 hours @ $32.00 plus 38% = $1767.00Materials = $4500.00total estimated direct costs = $6267.00overhead allowance = 40 hours @ $17.00 = $680.00Minimum sale value = $6947.00Minimum gross profit margin = $680 = 9.8% $6947Therefore, any margin above 9.8% will produce a nett profit

Exercise 7Direct costs Labour = 120 hours @ $32.00 plus 38% = $5299.00Materials = $5500.00total estimated direct costs = $10,799.00overhead allowance = 120 hours @ $17.00 = $2040.00Minimum sale value = $12,839.00Minimum gross profit margin = $2040 = 15.89% $12,839Therefore, any margin above 15.89% will produce a nett profit

Exercise 8Direct costs Labour = 100 hours @ $32.00 plus 38% = $4416.00Materials = $3500.00total estimated direct costs = $7,916.00overhead allowance = 100 hours @ $27.00 = $2700.00Minimum sale value = $10,616.00Minimum gross profit margin = $2700 = 25.5% $10,616Therefore, any margin above 26% will produce a nett profit


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NOTES


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SECTION 6

PREPARING A QUOTE TO BE OFFERED TO THE CLIENT

The quotation to be offered to the client includes the bid price and all the trading conditions that apply to the contractors’ offer.The following pages provide guidance in the formulation of a quotation to be offered to a client.The items detailed in these pages do not, and cannot cover the infinite number of variables that occur in day to day contracting. Therefore, it is essential that you develop your own, or use professionally developed quotation forms, such as those available through NECA.For major jobs purpose designed contacts, such as “AS 2545 Subcontract Conditions” should be used.Part 2 of this book addresses the use of contacts during the formation of the agreement and the ensuing progress of the work.

By definition, a contact is based on the acceptance of an offer, which means that a poorly constructed offer leads to a weak contract, leaving the contractor vulnerable to non payment.

OFFER + ACCEPTANCE = CONTRACT

While the majority of clients are reputable, and seek a good job for a just payment, there remains a significant number of clients that will avoid payment of claims if the option is available.In many cases, large clients such as major building companies take the view that non payment, or prolongation of payment, is simply good business practice. The company can make good use of the trading capital that holding sub contractors funds can provide.

As the contracting industry operates on small profit margins, the impact of non payment by any customer has a significant effect, leading to a considerable amount of further trading to recover to the financial position that existed before the job was commenced.


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The quote or offer to the client

The following pages contain an example of quotations that may be provided to a client.

The quote should include at least the following items :

the price in words and numbers the clients name, company, title etc. the date of the offer a description of the works details of drawings, plans etc., including plan and revision numbers from which

the quotation has been derived items specific to the work, especially variations to the plans and specification reference to the standard conditions of tender, ensuring that they become an

integral part of the contract name of the contracting operation, with address, phone, fax etc. provision for a signature by the contractor

For smaller projects, where the quotation may be used as the contract, provision must also be made for :

the clients name and title the client company name (if applicable) the date of signing signatures of all parties to the contract

Note that NECA has a pro forma quotation document, in triplicate pad format, available to members at an economic rate. These are suitable for small to medium jobs, as well as service work. Standard conditions of trading are detailed on the rear of each form.


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USING A STANDARD FORM OF QUOTATION

A standard quotation form can be developed, for use with most quotations, thereby reducing the work and time required to formulate the offer to the client.Since the quotation (or offer) to the client is likely to become the basis of any contract formed between the contractor and the client, the document must include all items designed to provide a safe trading environment for the contractor.

Items that must be included in the offer include at least the following –

the contractors name and details (address, license number, phone numbers etc) the clients name and details the date of the offer a description of the work to be performed under the contract the price, in both words and figures reference to trading conditions such as those in a standard conditions statement any variations between the offer and plans/specifications belonging to the job a date fixing the duration of the works, where the offer is a fixed price sales wording, designed to promote the offer to the client

A sample of a standard letter, to be used as a quotation is supplied on the following page. This offer is provided as a quotation for the electrical work associated with the building of a group of town houses, for which the client has provided a set of plans and specification.The contractor has established that the project is expected to commence in March, and be completed by the end of October of the same year. A fixed price has been requested by the client. As a consequence, the contractor has allowed to cover until the end of the following month, but requires adjustment should the project take longer.Reference is made to the standard conditions of tender, ensuring that they become a component of any contract based on this quotation.Details specific to the job are included, such as the use of different light fittings to those specified.Note that the contractor has not allowed to supply the ranges or water heaters, transferring the responsibility to the client for the supply and delivery of these expensive items. This reduces the on site risks for the contractor in a work area where the items may be stolen or damaged during the work period.Note that the contractor has used the requirement for RCD protection as a chance to promote the offer to the client.


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DESTRUCTION ELECTRICS PTY LTD1 Bankruptcy Place, Richville 8266

Phone 89666 666LICENCED ELECTRICAL CONTRACTORS

Lic No. EC 999

To : Amazing Developments Date : 2nd Feb 20103 Affluence StreetLootville 8222

Attention : The ManagerRe : Town House Development, Crowd Street, Crampedville

Dear Sir,

Please find below our bid price for the electrical installation work to be carried out at the above project. The bid covers that work detailed in the plans and specification supplied, with the following notations :

(a) The bid is based on the information detailed on plans 1 and 2, no issue number.(b) We allow for Alto Cat No. XYZ exterior lights in lieu of the specified Acme Outsider fittings, which

appear to be unavailable at the time of tender.(c) We allow to use TPS cabling, as per AS/NZS3000 Wiring Rules and standard trade practice, in those

areas not requiring conduit for cable installation. Where used, conduit shall be PVC with PVC cabling, as per specification.

(d) We allow, at no extra cost, to use DIN style safety switches on all light and power circuits. This will allow the residents simple resetting in the event of misuse or overloads, and also allows for a neater, more compact switchboard in the individual units. We remind you that a suitable location will need to be provided for the switchboards within the kitchen cupboards.

(e) We include for the following items :(i) All light and general power installation(ii) Connection to, but not supply of ranges and water units etc.(iii) Approved telephone block cabling system(iv) Balanced colour television aerial system(v) Overhead mains connection to the installation

Our bid price for this work is FOURTEEN THOUSAND NINE HUNDRED DOLLARS - $14,900.00.

This price may be considered as a fixed price up until 30/11/2010 after which we reserve the right to claim variation to the price, based on rise and fall as per NICAP building industry indices.

We trust that you find the above to be to your satisfaction, and remain most willing to respond to any further enquires you may have.

Yours faithfully,

I. MadillManager(This tender is subject to our attached standard conditions of tender).


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Standard conditions of tender

There is a wide range of variables or “what if” conditions that can have a serious impact on the costs to perform contract works. These include, but are not limited to :

asbestos or other hazardous materials on site possible changes to GST or other taxes changes to wage rates/labour cost changes to employment conditions/labour cost non compliance of existing installation wiring, switchboards etc. industrial action changes to costs related to supply authority requirements

Considerations such as those above, and many others, apply to most contract jobs, and can be addressed by developing a “standard condition of tender” that applies to all quotes issued by the contracting operation. This greatly reduces the time and effort required in developing quotations.

The importance of a well detailed contract cannot be over emphasised.

A fully detailed contract is the first line of defense against non payment by a client.

Unfortunately, there are a significant number of clients that will attempt to avoid payment for work, often by fabricating a dispute as the reason for non payment. In other cases, the client may have insufficient funds to pay all contractors on site, resulting in those with a strong case being paid in preference to others.

Other customers (such as large building contractors) may simply try to keep the sub contractors money for as long as possible, using it as trading capital or investment funds.

Consider this anecdotal storyKenny, an electrical contractor, observed that his mate Smithy seemed to be in serious financial trouble. Smithy was a great salesman, who had gone into business selling cleaning chemicals to the contract cleaning industry. Unfortunately, Smithy had sold large amounts of stock to cleaning contractors that could not or would not pay their debts, leaving Smithy unable to pay his suppliers.

When Kenny said to Smithy “I guess you mustn’t sleep at night with all these problems” Smithy replied “what problems”? I owe them money and can’t pay it – they are the ones with the problems!.

Smithy said – “That’s Murphy’s Golden Rule – whoever has the gold, rules”.

i.e. the person that owes the money is in charge of the situation.


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Without a correctly detailed contract, the contractor is at the mercy of the client.

In NSW, the Office of Fair Trading has established a maximum value for work that can be done without a written contract.

This amount is $ ___________ (available from the internet) at .........................................................................................

As a contract cannot contain an illegal act, where a contractor does work for a value greater than that above, without a written contract, the customer is under no obligation to pay for the work.

Consider this anecdotal storyRay, an electrical contractor and air conditioning installer went to the home of a wealthy client to install a window mounted air conditioner. He did the job without a written contract. When he had completed the work the client congratulated him on the job, and said “While you are here, I will get you to do some more work, such as ....”This resulted in Ray returning each day for the next week to do more jobs in the premises. Each day Ray provided an update of the costs.When all the work was completed, Ray presented a carefully detailed invoice for the work, which the client casually tore in half, handed back, and said “Thanks for a good job, pity that I wont pay you for it. You should have got me to sign a written contract.”

Another consideration for most work is that materials, once delivered to site, become the property of the client, regardless of payment. i.e. materials cannot be removed from site in the event of non payment.

Obtaining progress payments as the work proceeds is an effective method of minimising the impact of non payment. The contractor has effective bargaining power while the work remains incomplete, but only the power of the contract once the work is complete. Note that it is a breach of law to over claim (claim for work not yet performed). However, contractors are permitted to ask for advance payment for some types of work, but only for a small part of the contract value (see Office of Fair Trading site).

Further study of contracts and related issues it is recommended if you are considering a career in electrical contracting. The following page contains samples of clauses that may occur in specifications.

Following from that are samples of clauses that be used in the formulation of a “Standard Conditions of Tender”


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TYPICAL CLAUSES FROM SPECIFICATIONS, AND THE POTENTIAL IMPACT ON PAYMENT.

Below are some typical clauses that appear in specifications associated with electrical contracting work, and their potential impact.Note that where the client makes a deduction from the contractors’ claim, the deduction(s) often occur from the final claim, after the works have been completed, and the contractor has minimal bargaining power.TYPICAL CLAUSE FROM A SPECIFICATION OR CONTRACT

IMPACT ON TRADING FOR THE ELECTRICAL CONTRACTOR

1 All work is to be carried out in a neat and orderly manner, to the satisfaction of the architect or his appointed representative. Any work deemed to be of a sub standard nature shall be repaired or replaced to the satisfaction of the architect at no cost to the client

If the customer intends to use a condition of dispute to avoid or prolong payment, this contract condition provides an opportunity. A mechanism for appointing an independent arbitrator is essential, to force resolution of the dispute, and payment.

2 It shall be the contractors responsibility to ensure the works comply with all relevant standards and authority requirements. No claim for additional costs through authority requirements will be allowed.

What if there is an increase or new fees for supply authority work, such as mains connection, inspection fees, etc.What if there is an increase in GST or other taxes and fees.

3 All work shall be carried out by qualified tradespersons, under the employ of the contractor

This excludes the use of apprentice or trades assistant labour resources. It also excludes the use of sub contractors

4 The contractor shall maintain competent tradespersons on site at all times during the progress of the works

This means that tradespersons must be on site, regardless of availability of useful work. The contractor becomes liable for unexpected costs incurred by the client that may have been avoided if the contractor was on site

5 The bid submitted shall be a fixed price not subject to variation without the written authorisation of the architect or his representative

The contractor is unable to claim costs where the project goes on for an unexpected length of time

6 The contractor shall be liable for the repair of any damage to any surfaces for the duration of the project

The client is in a position to deduct money from the contractors’ payment for any damage, without proof of the source of the damage

7 This contract shall include all items included in the specification and plans, and all other items deemed obvious, but not necessarily detailed

The contractor is placed in a position of being required to pay for items that have occurred through omissions in the design, etc.

8 The contractor shall provide for all site storage and amenities required in the performance of the works

The client can deduct money for the use of toilets, car parking, lunch rooms, and for the provision of a first aid person or equipment, temporary power supply, scaffolding, hoists etc.

9 The contractor shall co-ordinate with the works of other trades, and will be liable for costs incurred through delays to the works

The contractor will need to be in constant contact with all other trades, relieving the client of the responsibility to co-ordinate and run the job, and become responsible for delays caused by other trades or other circumstances

10 All materials and installation practices shall be in conformity with appropriate standards and regulations, and this specification

Where the specification calls for an item that is not available or impractical, and the contractor provides a similar item without written consent of the client, the contract is incomplete, resulting in


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a possibility of non payment.


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TYPICAL CLAUSES FOR A “STANDARD CONDITIONS OF TENDER”

DESTRUCTION ELECTRICS PTY LTDSTANDARD CONDITIONS OF TENDER

Unless specifically stated otherwise, the following standard conditions of tender shall apply to this and all other tenders issued by this firm.

This tender is open for acceptance for a period of 30 days from date of tender. After that period we reserve the right to vary the bid in line with our current trading conditions.

This quotation is based on a 38 hour working week. We reserve the right to claim additional costs for works performed outside normal industry trading hours.

Trading terms are strictly C.O.D or 7 day terms from date of invoice. We reserve the right to suspend works or cancel further works without jeopardising the claims due should payment of claims become overdue.

It shall be the responsibility of the client to provide a safe workplace for the employees of this firm. Where hazards such as toxic materials or unsafe working environments exist, this firm shall be paid additional costs, and reserves the right to suspend the works until such time as the hazards are removed.

Where this bid includes trenching, it shall be for excavation works in soft soil only. Works involving rock or heavy rubble excavation shall constitute a variation to the bid price.

While every attempt to conform to the works schedule will be made, this firm does not accept responsibility for delays caused through suppliers inabilities to provide required materials, or through the action of parties outside the direct control of this firm.

This bid is subject to variation in conformity with the adjustments to material and labour costs specified under NICAP building industry conditions. The base indices shall be those ruling at the time of tender.

This firm reserves the right to claim variation to the bid in the event of changes to statutory costs such as sales tax, authority fees, etc.

Works will be performed under the supervision of suitably licensed tradespersons, to the standards of normal trade practice, and to the satisfaction of the appropriate supply authority. We reserve the right to use apprentice or other trained labour resources, as per normal trade practices. We allow to maintain staff on site only at those times that suitably productive work is available.

The bid allows for the supply and use of all tools and equipment required under normal electrical trade practices. It does not allow for the supply of site facilities such as toilets, meal rooms, electricity, scaffolding, hoisting, parking and storage. It is reasonably assumed that such items will be supplied by others.

In the event of dispute, this firm reserves the right to claim arbitration through a third party. Unless otherwise agreed, the third party will be a person appointed by NECA. Where resolution of dispute results in costs, those costs will be born by the client.

NOTE THAT THIS LIST IS AN INDICATION OF THE TYPE OF TENDER CONDITIONS THAT MAY BE ADDRESSED USING A STANDARD CONDITIONS OF TENDER. IT IS NOT A COMPLETE LIST AND SHOULD NOT BE USED IN TRADING.


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NECA produces a range of pro forma contracts, at a nominal cost for members, with standard conditions on the reverse side.

NECA also provides contract and legal advice to its members, including assistance with debt recovery etc. Members are alerted to difficult clauses that appear in contracts within the industry, and advised of procedures to work with various forms of contract.

An example of trading conditions is available on most delivery dockets from electrical wholesalers (TLE, Turks, L & H etc.). As these are usually available to non managerial staff, such as site personnel, it is recommended that you ask for access to the delivery docket, and read the conditions on the reverse side.


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NOTES


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SECTION 7

ADDENDUM

ANCILLIARY INFORMATION FOR STUDENT EXERCISES

This section provides some information to assist in the student work associated with the learning for UEENEEC003 ‘Prepare quotations for service or installation jobs’

A limited number of labour units for a range of tasks is included, to allow practice with unit rate method estimating.These rates are for exercises only, and must not be used for actual applications in the marketplace. These rates have not been evaluated against actual work.

Fully detailed rates for unit rate estimating are available from the NECA Manual of Labour Units, available through most NECA offices.


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LABOUR UNITS – ADDENDUM

The labour units included below are intended as an addendum to the manual used in the practical part of this course.The labour units specified are not to be used in actual workplace applications without rigorous assessment.No responsibility is accepted for the accuracy of these units.

TASK Unit Labour hours

1 Fit 2x36 watt troffer fluorescent to T bar ceiling. Lights pre wired with flex and plug

ea 0.20

2 Fit 2x36 watt troffer fluorescent with emergency pack to T bar ceiling.

ea 0.83

3 3 pin surface socket, loom wiring above suspended ceiling ea 0.2545 3 channel skirting duct – body (back plate) m 0.46 3 channel skirting duct - cover m 0.17 3 channel skirting duct – internal corner ea 0.38 3 channel skirting duct – external corner ea 0.39 3 channel skirting duct – socket outlet kit ea 0.2101112 4 pr Cat 5 LAN cable m 0.0413 Terminate 4 pr Cat 5 cable ea 0.1714 RJ 45 outlet single jack and plate ea 0.36151617181920

To access a range of researched labour units, refer to the NECA sponsored Manual of Labour Units, available through NECA offices in Australia and New Zealand


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STUDENT EXERCISES

Select the best of the provided answers for the following questions.

Question 1The purpose of estimating is to(a) determine the profit in a job(b) forecast the direct cost of labour and materials for the work(c) forecast the number of items of material in a job(d) allow for overhead costs in a job

Question 2Gross profit margins are best expressed as (a) a percentage of the direct costs of a project(b) the amount of profit, in dollar terms(c) the profit after overhead costs have been deducted(d) a percentage of the sale value

Question 3Gross profit is(a) the profit available after direct costs have been deducted from the sale value(b) the profit available after all costs have been deducted from the sale value(c) an exceptionally large profit(d) the profit after overhead costs have been deducted

Question 4The purpose of reconciliation for estimating purposes is to(a) provide a quicker estimating method(b) compare the labour and material components of a project(c) determine a price to offer the client(d) provide feedback to the estimator

Question 5The most commonly used estimating method in small to medium sized contracting operations is(a) experience based(b) unit rate(c) historical(d) methodic

Question 6The method of labour estimating that uses a manual of time allocations to specific tasks is(a) experience based(b) unit rate(c) historical(d) manual


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Question 7The most commonly used estimating method in large contracting operations, employing full time estimators on large projects is(a) experience based(b) unit rate(c) historical(d) methodic

Question 8In general, for contracting work in NSW the maximum value of work that can be done without a written contract is(a) $1000.00(b) $100.00(c) $5000.00(d) non of the above

Question 9In general, for contracting in NSW, a written contract(a) must be signed by both parties(b) need be signed by the client only for domestic work(c) is not required for domestic work(d) is not required for commercial work

Question 10A contract is based on(a) any payment for services rendered(b) acceptance of an offer(c) any agreement between two parties(d) any agreement between two or more parties

Question 11Estimating of labour in a project is done in ‘hours’ for the purpose of(a) forecasting the labour cost of the project(b) allowing adjustments for productivity influences(c) facilitating a reconciliation process(d) all of the above

Question 12‘On costs’ for labour are calculated as a percentage of wages to(a) allow simple use when estimating(b) avoid recalculation in the event of a change in wage rates(c) avoid recalculation in the event of a change in working conditions(d) line up easily with profit, when expressed as a percentage


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Question 13The direct cost of materials is the(a) actual price paid by the contractor for the materials(b) trade list price for the materials(c) retail list price for the materials(d) value of materials as sold to the client

Question 14Where more than one productivity factor applies to the estimated labour hours the(a) factors are added numerically(b) factors are subtracted from each other(c) factors cancel each other(d) factors are compounded by multiplying

Question 15Productivity factors are applied to the estimated hours by(a) multiplying the hours by the factor(s)(b) dividing the hours by the factor(s)(c) adding the hours to the factor(s)(d) subtracting the factor(s) from the hours

Question 16When estimating labour for a project, using experience based methods, labour is based on the productivity of(a) the slowest employee in the group(b) an employee regarded as ‘typical’(c) the fastest employee in the group(d) an average for the group of employees

Question 17A factor influencing labour estimating is(a) the number of workers on a site(b) multi storey construction(c) temperature(d) all of the above

Question 18The type of project that requires the highest gross profit margins to be profitable is(a) work with a high materials content(b) work with a low materials content(c) labour only work(d) work with a low labour content


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Question 19The purpose of a ‘standard conditions of tender’ is to(a) reduce the amount of effort required when formulating an offer to the client(b) allow compliance with Australian Standards(c) ensure the tender complies with standard conditions(d) detail the clients requirements and specifications

Question 20The body that regulates electrical contracting in NSW is(a) Standards Australia(b) NECA(c) Consumers Advocacy(d) Office of Fair Trading


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CALCULATION BASED QUESTIONS

Exercise 1An installation job has been estimated to have the following components –Direct costs – materials -$4200 labour – 40 hoursThe trading structure of the company has labour cost - $28.00 per hour + 38% on costoverhead burden of $14.00 per working hourDetermine the nett profit available from the job if it is won at a gross profit margin of 20%


Exercise 3An installation job has been estimated to have the following components –Direct costs – labour – 60 hours (no materials)The trading structure of the company has labour cost - $28.00 per hour + 38% on costoverhead burden of $18.40 per working hourDetermine

(a) the nett profit available from the job if it is won at a gross profit margin of 20%(b) the margin required if the job is to produce a nett profit of $600.00



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ESTIMATING EXERCISE

Estimate the cost and develop the direct cost to a bid price for the following project -

A three phase supply, comprising consumers mains and main switch board is to be installed to a factory.The mains cables are to be installed in Cat A conduit in an underground run of 25 metres (cable length), from a kiosk type substation, with a prospective fault level of 22K amps at the sub station terminals.The estimated maximum voltage drop in any sub circuit within the installation is –12 volts in three phase circuits, and 8 volts in single phase circuits.Maximum demand of the installation is 400 amps per phase. The maximum single phase load on any phase is 80 amps. A significant part of the three phase load involves electric welders and computer controlled (CNC) machines.The sub circuit arrangements in the factory include -10 x three phase circuits, with a maximum loading of 60 amps on any circuit15 x single phase circuits, with a maximum loading of 20 amps on any circuit

The best price for supply of a cubicle type switchboard, from Cataclysm Switchboards, is $15200.00The switchboard includes all equipment, including 15 spare pole spaces on the circuit breaker panel, for future expansion.The switchboard will be located in a main switch board room, with a lockable door.

Direct cost of labour is $25.00 plus on cost of 38%The hourly overhead burden of the electrical contracting business is $16.20 per hour

Determine the projected nett profit for the project, if the project is priced on the following market parameters -Margin on main switchboard (supply only) = 10%Margin on all other parts of the project = 20%

Where time permits, profit enhancing alternatives to the specified installation method should be investigated.


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ESTIMATING EXERCISE INDUSTRIAL SUB MAINS SUPPLY

An electrical contractor, Destruction Electrics Pty Ltd, has been asked by a prospective client, Dodgipay Pty Ltd, to tender on the installation of a set of 300 amp per phase sub mains.The cabling is to be installed on a 35 metre run of cable tray, fixed directly to the underside of a concrete slab, at a height of 2.4 metres. The cables, with a total length of 40 metres, are to be fixed to the tray with heavy duty cable ties. Cabling may be multicore or SDI cables, copper conductors, with a maximum three phase voltage drop of 6.0 volts.The cable tray route involves twelve changes of direction, which can be achieved by the use of sire manufactured bends, or overlapping of the cable tray, butting lengths, etc.The cables are to be lugged and fitted to existing switchboards at each end of the route.

The trading structure of Destruction Electrics is as follows –

Total overheads, including regular time lost by the owner/operator on non productive work of $60,000.00 per annumTotal annual productive hours of – two tradespersons, each with 44.6 weeks, 36 hours per weekOne owner/operator, with 44.6 weeks, 24 hours per week

Direct cost of labour = $25.00 per hour, plus 36% on costs

Step 1 - determine the cable size and tray size that provides the most economic outcome

Step 2 – Estimate the job, using the experience based method, ensuring that each part of the job is costed in a manner that follows the chronological sequence of the project.Total the labour hours and material costs on the take off sheet.

Step 3 – Using the same material costs, re estimate the labour component using a labour units book

Step 4 – Check the variations that may occur in the labour hours determined in the above steps.

Step 5 – Determine a ‘break even’ price for the project, using a minimum hourly return method.

Step 6 – Determine a sale price, to be tendered to the client that has a gross profit margin of 20% (expressed as a percentage of the sale price)Step 7 – Determine the expected nett profit from the project


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PART 2

CONTRACTS,PROJECT

MANAGEMENT AND

FINANCIAL CONTROL

FOR ELECTRICAL

WORK


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Part 2 of the book addresses operating the business, covering areas such as managing each job as an individual project, involving

establishing a contract using a written contract to form an agreement organising and planning labour purchasing and supply of materials costing of labour and materials management of contracts variations and associated claims progress and final claims management of sub contractors management of penalty areas such as liquidated damages retention and other deductions reconcilliation of actual costs to estimated costs assessment of estimating accuracy and job productivity compliance with sales targets

Other areas covered in this part include developing sales budgets, taxation requirements, business structures, management of overheads, etc.


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CONTENTS

Section 1 Forms of contract Page 136Section 2 Contents and use of contracts Page 145Section 3 Managing projects - Overview Page 161

Managing projects - Labour PageManaging projects - Materials PageManaging projects - Claims PageManaging projects - Liquidated damages PageManaging projects - Variations Page

Section 4 Business operation - Sales Budgets Page Section 5 Page Section 6 Page Section 7 Page


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SECTION 1

FORMS OF CONTRACT

A contract occurs when two or more parties agree to perform tasks or provide a service for reward.- a contract occurs when a party accepts the offer of another party to perform a service foe a specified reward.

OFFER + ACCEPTANCE = CONTRACT

The purpose of a contract is to formalise the agreement between two or more partiesthat involves the provision of a service for payment.

For electrical contracting, as with most other contracting trades, the agreement usually involves the creation of a functioning new installation, or the repair of an existing installation.

In small jobs or service work the details of the work are generally arrived at by verbal discussion, where the contractor and the client each state their requirements, and a mutually acceptable agreement is formed.Larger jobs generally involve the client developing documents that detail the required work, and the contractor developing an offer based on the documents and any other details sourced from the client.In building work the contract is usually between the builder and the sub contractor, and is entirely unconnected to the contract that is made between the builder and the head client.

The contract between the builder and the head client is independent to the contracts The head client is not liable for payments owed by the between the builder and the sub contractors builder to the sub contractors.


HEAD CLIENT

BUILDER

SUB CONTRACTOR SUB CONTRACTOR

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Larger building projects may involve many parties.

EACH SET OF ARROWS INDICATES A CONTRACT THAT IS COMPLETELY INDEPENDENT OF OTHER CONTRACTS

Failure of contracts at the top of the arrangement will impact on the contracts formed between those parties at the bottom of the arrangement.Failure of the head client to provide payment to the architect will necessitate cessation of the work, causing a flow on to all other parties. Many contracts address this situation by including a clause termed ‘force majeur’ or ‘termination by frustration’.This relates to circumstances outside the control of either party to the contract.


HEAD CLIENT

ARCHITECT

BUILDER

ELECTRICAL CONSULTING ENGINEER

MECHANICAL CONSULTING ENGINEER

SUB CONTRACTOR SUB CONTRACTOR SUB CONTRACTOR

SUB CONTRACTOR

FINANCE SOURCE (BANK ETC)

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Contracts may be verbal, involving a spoken agreement between the parties where each party describes the component of the contract that they require, and the agreement to provide the component required by the other party.In electrical contracting work the agreement involves an understanding of the service required, and the amount to be paid for the service. Where all parties state agreement, a legally binding contract can be formed.However, because there is no fixed record of the details of the agreement, enforcement of the agreement is rarely practical should one or more parties fail to fulfill the required obligations.From the electrical contractors perspective, some problems that may arise due to the use of a verbal contract are –

The client misunderstands or forgets the value of money required. The person that makes the agreement with the electrical contractor is not

authorised to do so, and payment cannot be obtained from the person in charge of finances. This is a common risk in multi domestic situations when work is required in the communal areas, and also occurs in large commercial and industrial sites.

The client cannot see value for the service supplied, and disputes the sum required. In many electrical jobs most of the work is concealed in order to produce a neat job, leaving the client with little physical evidence to justify the cost.

The client rejects the hourly rate as too high. Many clients are unaware of the effects of overheads and on costs on the minimum hourly return required by the contractor.

The client has no intention to pay, and intends to obtain the contractors work without payment.

Without the availability of an impartial witness disputes in verbal contracts cannot be resolved through legal channels.

Once the job is finished, the contractor is wholly reliant on the goodwill of the client to secure payment for the work.

An old saying in the contracting industry is –“A verbal contract is not worth the paper it is written on!”

In short, for the purposes of professional trading, verbal contracts should not be used.


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Written contracts cover a wide spectrum of size and complexity. For small jobs a simple single sheet contract remains viable and cost effective. For jobs of increasing size the time frame introduces complexities such as multiple progress claims, variations to contracted work, changes in costs, liquidated damages and other penalties, etc. and requires a more complex form of written contract.

Since the purpose of a written contract is to protect each party against failure of the other party to perform the required function, the contract must be suitable for use as a legal document in the event of dispute. It must include at least the following parts –

The names of all parties to the contract The signatures of all parties to the contract The date on which the contract is formed Details of the service to be provided Value of monies to be paid All conditions associated with the offers of all parties (refer to Section 6 Part 1)

In addition to the basic components listed above, contracts may also contain items such as –

Time frames for completion of the works Fixed or cost variation adjustable price Provision for variation to the contracted work Use of sub contractors Retention monies Public liability insurance Provisional sums Site requirements OHS requirements Working hours Details of documents forming part of the contracted works (drawings and

specifications, etc.) Defects liability Liquidated damages Method of progress claims Payment schedules Method for dispute resolution Liability for damage to areas outside the work.


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As a general rule, the complexity of a contract reflects the complexity and time frame of the work.

Small jobs have a lower risk value, and can be usually performed using a simple single page contract. Where the job has a relatively low financial impact, and is to be completed in a relatively short time frame, the added expense and time consumed in the development of a complex written contract may not be justified.

Suitable single page contracts can be developed by an electrical contractor, or as an alternative are available through NECA as a service to their membership. The contracts developed by NECA are in pad form with duplicate copies, so that copies are provided for both the client and the contractor. These contracts include ‘standard conditions’ on the reverse side of each copy, and are a product of long term development.Some stationery suppliers sell compact work order books that can be used as simple contracts for small jobs. These are suitable for those contractors that restrict trading to very small jobs where the risk of non payment or dispute is known to be negligible.

Large jobs, which usually cover longer time frames, require more detailed contracts. Many large building companies have engaged legal staff to produce contracts suited to their business. As a sub contractor to these building companies, it is wise to ponder the reasoning behind the (expensive) development of customised contracts, and the fairness that this may imply.If required to enter into a trading relationship based on this style of contract, it is essential that the contract is thoroughly perused prior to signing. Where possible advice on the usage of these contracts should be obtained. The following section of this book provides some guidance in this matter. As a service to its members NECA provides guidance on contracts developed by large builders, with specific guidance on clauses that may disadvantage the contractor.

An alternative to using contracts developed by building companies is Australian Standard AS 2545 – Subcontract conditions. This is a well laid out, thorough contract that protects the interests of both parties equally.Where a fully detailed contract is deemed desirable, this contract can be used for most electrical contracting jobs.Time spent in obtaining and carefully reading one of these contracts is a good investment for any existing or prospective trade related contractor.


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Service work, and ‘do and charge’ or ‘cost plus’ work should not be undertaken without the use of a written contract that details the agreed rates of charge, and the rate at which materials will be supplied by the contractor to the job.

This sector of the market is often a source of non payment or dispute between the client and the contractor.Many clients are unprepared for the costs that accrue during the period covered by this type of work, just as many contractors view the work as being of low value and payment risk. Detailing rates before the work commences, and obtaining written agreement greatly reduces the risk of dispute.

Unfortunately there is a small number of potential clients that can be termed ‘professional debtors’. These clients will engage the services of a contractor, with the intention of disputing the account, and not paying. In general, when presented with a written contract for signature, they will attempt to avoid signing the document. Where the client refuses to sign the contract, it is best to consider the risk and not to commence work.In general, materials can be sold at a rate that is ‘trade price plus 20%’. This reflects most other industries that supply materials as part of trading.Note that ‘trade price’ is the published list price of suppliers, and not the discounted purchasing price that is offered by many suppliers to their contractor clients.A contract used for service work, or ‘do and charge’ work should include at least the following details –

The names of all parties to the contract The signatures of all parties to the contract The date on which the contract is formed Details of the service to be provided Rates at which labour will be supplied (there may be variables for out of hours

work, service charge, apprentice labour, etc.) Rate at which materials will be supplied (generally ‘trade list price plus ....%) Payment schedules (COD, 7 days, 30 days) All conditions associated with the offer of the contractor (a ‘standard conditions

of work’, on the reverse side of the contract is suitable in most cases -refer to Section 6 Part 1)


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NOTES


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SECTION 2

CONTENTS AND USE OF CONTRACTS

PURPOSEThe purpose of this section is to provide details of contract components, and precautions that should be considered when undertaking to use a contract that includes those components.Due to the myriad complexities of contracting work, and the associated contracts, there will be some items that are not covered in this section.

Why use a written contract? To comply with regulations such as those legislated by Office of Fair Trading in

NSW To reduce the risk of dispute between the parties To reduce the risk of non payment by the client To provide a structured method for dispute resolution To provide a mechanism for the legal recovery of outstanding funds To enhance the professionalism of the contractor

Which two of the above items would an electrical contractor rate as most important?

In the event of non payment, the contractor must begin procedures for the recovery of the outstanding funds. Since few contractors are competent in the intricacies of debt recovery and the associated legal requirements, in many cases the contractor is best advised to enlist the services of a mercantile agent (debt collector) to recover the funds. The success of this process depends heavily on the quality of the written contract that has been used.Where the documentation is of sufficient quality the costs for the collection are levied against the contractors client, and interest is claimed for the duration of the non payment period.There are a number of clients that will avoid payment where possible (termed ‘professional debtors’) who are aware of legal processes and the penalty cost risks associated with those processes.Where the contract is suitably professional, the issue of a letter of demand by the contractor or collection agent regularly results in a quick payment of the debt, and avoids court costs for the threatened party.

The following pages cover many, but not all, items included in contracts, with explanatory notes and cautions that apply to each item.Many of these items can be satisfactorily addressed by inclusion in the offer to the client, as standard conditions of tender.


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CONTRACT ITEM

EXPLANATION CAUTIONARY NOTES

Client name This is the name of the party entering into the contract with the contractor. Where this party is a company, the full name of the company is required

The person signing should be identified by both name and signature in the contract document The person signing on behalf of a company or body corporate etc must be authorised to do so. Ask for evidence of this authority.

Contractors name . Where this party is a company, the full name of the company is required

The person signing should be identified by both name and signature in the contract document

Date of the contract This date is the day on which the contract is signed by all parties.

The contract commences from this date, making the contractor liable for the performance of all work after this date. Work performed prior to this date is not part of the contract works unless otherwise specified.Do not start work without a written contract.

Details of the work This specifies the works to be provided by the contractor.Where the contract is for work quoted from drawings and specifications, the details of these documents must be included in the details of the work.

Poorly specified work details are a prime source of dispute, making the contractor vulnerable to payment problems.The exact nature of the work must be specified in order to facilitate dispute resolution and collection of funds.

Documents associated with the contract.

Documents such as drawings and specifications from which a quote has been provided, local site requirements, legislations etc become an integral part of the contract.Conditions specified in a quote are included when the quote is specified as part of the contract.

Where the work is a product of a quote from plans and specification, these must be identified in the contract by drawing number etc. Copies should be sourced for on site use, and the originals safely stored in the job file. As most jobs involve changes to the original details, access to originals is essential when claiming costs for variations.

Conditions of the contractors offer to the client.

Standard conditions of tender, as used by the contractor, or conditions detailed in the contractors offer that are specific to the project.

Ensure that any conditions that are part of the contractors offer are referred to in the contract document as defence against the client arguing that such conditions were not apparent at the time of agreement via the contract signing.

The value of the contract This details the monies due to the contractor for the performance of the work.

Always write the amount in words and in figures, as insurance against mistakes, confusion or alteration. The client will look for the price in figures when first perusing the contractors offer, making the use of figures unavoidable. Detailing the price in words is purely an insurance.


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CONTRACT ITEM


Terms of payment This details the timing of payments for the work.

Where possible negotiate COD payment terms. This should be practical for most small work, and especially for non commercial customers.Where possible, ask for a deposit prior to commencing work (note regulations such as OFT).Specify progress claims for all but very short term jobs.Progress claims should be made as often as possible, for as much as possible, reducing the financial risk to the contractor in the event of dispute or financial collapse by the client.Terms greater than 30 days leads to the contractor paying for materials before collecting from the client, thereby providing trading capital for the client, and requiring the contractor to fund the project for both labour and materials.

Date of completion of the work.

For all but very short term small low risk projects, the contract should include the proposed completion date of the work.

As most electrical contract work is done on a fixed price basis it is essential to guard against the job extending to excessive time without the provision to be able to adjust the price in line with inflation or other cost changes.Never agree to a fixed price that does not have a specified completion time.The method of cost adjustment for times past the contract completion date should be specified in the contract.

Costing for variations to the contract works.

The costing method for work that is performed as variations to the contracted work. Materials costs would typically be trade price plus a margin, and labour at an hourly cost determined by the contractor, or by negotiation with the client.The costs for supervision, claims etc should be included in the agreed hourly rate.

Variations to the contract work are a normal part of electrical work, and one of the greatest sources of dispute/non payment.Variation work should be approved in writing before commencement, and approved immediately upon completion. A tally of all variation work should be maintained and regularly validated by all parties as the work proceeds.All variation work and costs should be approved by the client before the contract works are completed, reducing the risk of dispute or non payment.Always be aware that the contractors bargaining ability reduces dramatically at the completion of the work.The cost for variations should be detailed separately to the contract work, and claimed as part of progress claims where ever possible.


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CONTRACT ITEM


Liquidated damages Liquidated damages is a financial penalty imposed where the contractor causes delay to the progress of the work of the client.This is a common contract component in building work. In most cases it is levied at an amount per day of delay.

Never enter into a contract that includes liquidated damages without the amount of the penalty being specified. ie. never accept unspecified liquidated damages.Where unspecified, the client is in the position of determining any amount to suit, and deducting this from the sub contractors amount payable.The amount of liquidated damages in a sub contract should not exceed that detailed in the main contract.When dealing with large building companies, many inexperienced sub contractors suffer the impact of liquidated damages penalties through poor management of time extension claims.Where ever the work of the sub contractor is delayed through the actions of others, weather, inaccuracies in site drawings, etc. time extension claims should be made, and endorsed by the head contractor. For long term projects, time extension claims are less likely to be disputed in the early to mid stages than in the latter stages of the project By accumulating a bank of time extensions the risk of liquidated damages penalties can be minimised.Liquidated damages penalties are usually applied as a deduction from the sub contractors final claims, when the work is complete, and the sub contractor has reduced bargaining power

Defects liability period The defects liability period is the time frame in which the sub contractor agrees to provide guarantee work at no cost to repair defects to the work.This is typically six months or one year.This is a common component in large jobs.

Defects liability period commences from the time of completion and handing over of the work. For sub contractors whose work is finished prior to handing over by the head contractor, the defect liability period begins at the hand over, rather than the completion on the sub contractors work. Never accept a contract that has an unspecified defects liability period.In general, the defects liability period for a sub contractor should not exceed that applying to the head contractor.Note that OFT regulations apply to guarantees for work performed in NSW in building or specialised contract work. The regulations detail minimum and maximum guarantee periods, where such details are not covered in a contract.


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CONTRACT ITEM


Retention Retention is a sum of money withheld from the contractors payment(s), and held by the head contractor as a guarantee that obligations under the defects liability period will be honored by the sub contractor.Where the sub contractor fails to rectify defects, the head contractor can use these funds to engage another contractor to rectify the work.

Never enter into a contract that includes retention unless the amount and the method of accruing the amount are specified.Retention is often deducted from the sub contractors progress claims at the rate of 10% until the head contractor has acquired a sum that is 5% of the contract sum.This means that the sub contractor does not receive full payment for progress claims made in the earlier stages of the project.It may also allow the head contractor access to monies that can be used for interest free trading capital.Some contracts allow for the retention sum to be reduced to 2.5% after handover, which is after final inspection of the work.The contract should also include a specified procedure of notifications that the head contractor must follow before using the sub contractors funds to perform rectification work. The sub contractor must be provided with reasonable notice of the need for rectification work, and be provided with site access to perform the work.

Rectification work Rectification work is the repair of defective work or replacement of defective equipment.

Since rectification work may be required at any time during the defects liability period, it is essential to establish limitations to the liability.Items such as lamp replacement, and replacement of equipment covered by other guarantees should be excluded at the time of contract negotiation.The exclusion of lamp replacement as warranty work should be covered in the standard conditions associated with the contractors bid.

Bank guarantee Bank guarantee is an alternative to the deduction of retention monies from the sub contractors funds.Under this system, a bank provides a guarantee to fund rectification work up to the value of the specified retention amount in lieu of the head contractor deducting retention.

While banks will provide this service only to contractors with a reputable trading history, and charge a fee for the service, this system is usually preferable to retention, as it frees up trading capital for the contractor.For small amounts of retention, it is not viable due to the fees charged.Bank guarantee is a commonly used method among major contractors.


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CONTRACT ITEM


Timing of claims The contract should specify the time at which progress claims must be lodged. For 30 day trading terms, this usually means the nomination of a date in each month as the latest time that a claim can be lodged.

Many large building contractors require sub contractors to submit progress claims no later than 20th – 23rd of the month. Claims submitted after this date will not be processed until the next claims period, resulting in 60 day trading terms for that claim.Some major clients pay claims based on a statement of all claims for the month of trading. They will not pay on invoices for each job. In many cases, if the sub contractor submits multiple invoices, but no statement, nothing will be said until the sub contractor makes contact to arrange collection of payment. At this time the requirement for a statement will be detailed, pushing payment back a further 30 day minimum.

Trading hours The contract should specify the hours that work will be performed.

Many projects involve a 6 or 7 day week, resulting in sub contractors paying penalty rates for labour.Ensure that the trading hours are established at the time of contract, and that work done outside these hours attracts extra payment to cover wages penalty rates.The price submitted for the work should include any predictable wages penalty rates.

Site access and times Site access details the times that the site will be available for the contractor to work without restraint.

Where site access is impeded or limited in a way that affects the contractors productivity, the contractor should immediately claim an extension of time as a hedge against liquidated damages penalties.Where an increase in cost has been incurred, the contract should have provision for a claim.

Site provisions Site provisions include the supply of temporary power, hoisting, scaffolding, telephones, storage, amenities (toilets and meal facilities), vehicle access and parking.

The contract should detail which party bears the costs for these and similar items.Should a sub contractor not negotiate these items at the time of contract, the main contractor is at liberty to deduct an unspecified sum from the sub contractors funds.In many cases this will occur as a deduction from the final claim, when the work is complete, and the sub contractor has little or no bargaining power.


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CONTRACT ITEM


Safe work place Safe workplace means a workplace free of hazards that may impede the contractor in the performance of the work.

The discovery of hazardous substances, such as asbestos, toxic chemicals etc will impede the contractor in the performance of the work, causing both delay and costs.Provision for extension of time and increased cost claims must be included in the contract.Where the work practices of others also occupying the site results in delays or costs, the same provisions will be required.

Use of secondary sub contractor(s)

This refers to the use of specialist sub contractors or employees of labour hire providers.

The contract should be arranged such that the contractor has the freedom to use sub contractors or body hire labour on the site.Should a contractor engage such persons without provision in the contract, the risk of dispute and non payment becomes a reality.

Termination by frustration

This refers to a situation where the project cannot be completed due to circumstances outside the control of the contracted parties.

Situations such as heritage issues, changes in legislation, local government classifications, etc. that prevent completion of the work, or the inability of a head client to pay the main contractor, and hence the sub contractors should not incur a financial impact on the sub contractors, as their contract is with the main contractor, not the head client. The contract should allow a provision for the sub contractor to claim costs against main contractor.

Arbitration The nomination of an arbitrator and the process for the settlement of disputes is necessary in the event of deadlock between the contracted parties, and an integral part of the legal process involved in the recovery of funds where dispute has led to non payment.

Because of the inherently technical nature of the contracted work, arbitrators form outside trade areas are rarely the best option.If the client is in a position to specify an arbitrator, the arbitrator may not independently address the best interests of both parties. The contract should specify the appointment of a technically suitable independent person. This would generally be an electrical consultant. NECA can provide access to suitable arbitrators.


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CONTRACT ITEM


‘Prime cost item’ (PC item) or ‘separable portion’

This is a sum of money allowed in a specification, tender, offer or contract for the provision of items such as light fittings, cooking ranges, data systems, security systems etc.Where the client has yet to decide on a specific item to be supplied, it is a common practice to ‘pc’ the item as separate part of a quote or contract.

The contractor can incur considerable costs co ordinating the delivery and installation of pc items, and should include a profit margin to cover these costs where possible.Where the profit margin is dependent on the type of equipment that has been ‘pc’, the contract should detail the amount (often as a percentage mark up on the cost) and be agreed to by all parties prior to work commencing.

Schedule of Rates Tender documents often call for a schedule of rates to cover variations to contracted work.A schedule of rates is a fixed price for variation work, generally detailed on a ‘per point’ basis.

Providing a schedule of rates allows for simplistic costing of variations, and can often leave the contractor out of pocket for work that becomes complex due to unforeseen circumstances. If a contractor provides a schedule of rates with high margins built in, it should be remembered that the same rates will apply to variations that involve a reduction in the number of points, etc.

Amendments to standard or pro forma contracts

Pro forma written contracts will often have clauses that do not suit the needs of the parties to the contract. These parts of the contract must be deleted or amended to suit the requirements of the agreement.

Where a part of a contract is to be amended or deleted, the change should be initialed by all parties to the contract. Items to be deleted should be ruled through and initialed. Where a specification has components that are to be amended or deleted, these should be treated in the same manner.

Substantial completion time, and Extension of time for substantial completion

Substantial completion time refers to the projected completion date of the work.Extension of time for substantial completion refers to claim(s) to extend the completion date, made due to circumstances outside the control of either party to the contract.

When dealing with large building companies, many inexperienced sub contractors suffer the impact of liquidated damages penalties through poor management of time extension claims.Where ever the work of the sub contractor is delayed through the actions of others, weather, inaccuracies in site drawings, etc. time extension claims should be made, and endorsed by the head contractor. For long term projects, time extension claims are less likely to be disputed in the early to mid stages than in the latter stages of the project By accumulating a bank of time extensions the risk of liquidated damages penalties can be minimised.Liquidated damages penalties are usually applied as a deduction from the sub contractors final claims, when the work is complete, and the sub contractor has reduced bargaining power


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As a means to helping develop a knowledge of content for written contracts, and as an exercise in considering the use of standard conditions of tender as part of the contract process, consider each of the contract components detailed in the following table, and make decisions on how they can be addressed.Record your decision by putting an ‘X’ in the appropriate part of the table, or writing ‘NA’ where the item is not applicable. In some cases, you may place an ‘X’ in multiple boxes as indicating that the answer has many options.

CONTRACT ITEM

SMALL JOBS LARGE JOBSTo be specifically detailed in writing

Addressed using a standard

conditions of tender

To be specifically detailed in writing



Client nameContractors nameDate of the contractDetails of the workDocuments associated with the contract.Conditions of the contractors offer to the client.The value of the contractTerms of paymentDate of completion of the work.Costing for variations to the contract works.Liquidated damagesDefects liability periodRetentionRectification workBank guaranteeTiming of claimsTrading hoursSite access and times Site provisionsSafe work placeUse of secondary sub contractor(s)Termination by frustrationArbitration


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Answer

CONTRACT ITEM

SMALL JOBS LARGE JOBSTo be specifically detailed in writing



To be specifically detailed in writing



Client name X XContractors name X XDate of the contract

X X

Details of the work X XDocuments associated with the contract.

X X

Conditions of the contractors offer to the client.

X X X X

The value of the contract

X X

Terms of payment X X XDate of completion of the work.

X X

Costing for variations to the contract works.

X X

Liquidated damages

NA NA X

Defects liability period

NA NA X

Retention NA NA XRectification work X XBank guarantee NA NA XTiming of claims X X XTrading hours X X XSite access and times

X X X

Site provisions X X XSafe work place X X XUse of secondary sub contractor(s)

X X

Termination by frustration

X X X

Arbitration X X X


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PRACTICE WITH THE INTERPRETATION OF WRITTEN CONTRACTS

This exercise is based on the use of Australian Standard AS 2545 Subcontract conditionsTo use this exercise material you will need a copy of the standard. AS 2545 is the product of input from a wide range of industries, and is an excellent example of a well formatted, complex contract that is fair to all parties.If an electrical contractor was offered a substantial job by a builder or client with whom the sub contactor was unfamiliar, the request to use a contract such as AS 2545 should be reasonable to both parties.Where the builder is reluctant to use an independent contract such as AS 2545, and insists on the use of a contract developed by the builder, the sub contractor should be extremely cautious.Many of the large building companies have specialised sub contracts that they have paid to be developed on their behalf by legal professionals. The use of such contracts in place of independently developed contracts is a tactic designed to put the builder in an overwhelmingly strong negotiating position during the progress of the works.

ANECDOTAL TALEKenny, an electrical contractor got a good job with a large building company installing temporary builders supplies on a large site. At the time of starting the job the building project manager told Kenny that the job would span three months, and that they would require an ongoing tally of costs, updated each week, with a single invoice for all the work at the finish.Kenny thought that was okay, and having had a brief look at the contract supplied by the builder, signed it and commenced work.Having supplied the tallies as required, and completed all the work Kenny submitted a well formatted claim at the end of the works period for $18,990.00After delays in payment of 105 days, Kenny finally received a cheque for $6990.00When he contacted the project manager, he was directed to the contract, which stipulated 90 day trading terms, and included a clause that said ‘the contractor shall supply all site storage and amenities for his works’.The builder had deducted $12,000.00 for use of the toilets, rental of space for on site car parking, use of the temporary power, provision of hoists, scaffolding, etc.As Kenny had failed to notice the impact of this clause, and had failed to have such costs detailed in the contract, or had failed to have it removed from the contract, he had no recourse but to accept the values as detailed by the builder.

The following pages contain exercises in the use of contract interpretation, using AS 2545


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EXERCISESAs a means to becoming familiar with the layout and use of contracts such as AS 2545, answer the following questions.

Question 1The details of which party is responsible for the costs associated with temporary builders electricity supply, scaffolding and hoisting are detailed on Page ........ of the contract.

Question 2The amount to be detailed as liquidated damages is detailed on Page ...... of the contract

Question 3Where bank guarantee is used as an alternative to sums held as retention, the written details are provided on Page ......... of the contract.

Question 4The contract provides for the detailing of all clauses that have been deleted or modified. This list of deletions or modifications occurs on Page ......... of the contract.

Question 5In most cases the defects liability period commences at the time of substantial completion.The contract provides for written confirmation of substantial completion on Page ......... of the contract.

Question 6At the completion of the defects liability period, the head contractor is provided with a maximum number of days in which to notify the sub contractor of outstanding defects which require rectification. This number of days is specified as ............... days in Clause 37 of the contract.

Question 7The provision for detailing the amount of the contract sum, either as a lump sum, or a schedule of rates occurs on Page ......... of the contract.

Question 8Each page of the contract must be subjected to what process? (See page 64, approximately mid way down the page)..........................................................................................................................................................................................................................................................................................

Question 9The full details of both parties to the contract are detailed on Page ......... of the contract.

Question 10


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The value of the tender offered by the sub contractor to the head contractor is detailed on Page ......... of the contract.

Question 11The rate at which retention monies are to be deducted from progress claims is detailed on Page ......... of the contract.

Question 12The amounts of public liability insurance required under the contract are detailed on Page ......... of the contract.

Question 13The amount specified for liquidated damages, on a daily basis is specified on Page ......... of the contract.

Question 14The times in which claims must be submitted are detailed on Page ......... of the contract.

Question 15The contract provides for the various parties to require documentary evidence from those parties required to provide public liability insurance under the contract.This is covered in Clause ........ of the contract

Question 16The requirement for the sub contractor to have workers compensation insurance for employees is detailed in the contract.This is covered in Clause ........ of the contract

Question 17Where resolution of a dispute requires the use of an independent arbitrator, the contract provides for an arbitrator sourced from ............................................................................................................................................This is covered in Clause ........ of the contract

Question 18Where a contract cannot be completed due to circumstances outside the control of either party, and must be terminated, the processes are detailed in the contract.This is covered in Clause ........ of the contract

Question 19The contract specifies a maximum time for the lodgment of the final claim by the sub contractor, after the defects liability period has ended. This time frame is ............. days.This is covered in Clause ........ of the contract

Question 20


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Having submitted a claim labeled ‘final claim’, can the contractor submit further claims for any items that may have been overlooked? ...............................................................This is covered in Clause ........ of the contractQuestion 21For the purposes of AS 2545, which party to the contract is responsible for cleaning up the waste material, etc, created by the sub contractor? .........................................................This is covered in Clause ........ of the contract

Question 22Where a sub contractor is required by the main contractor to perform variations to the contracted work, is the sub contractor obliged to perform the work?.........................................................................................................................................This is covered in Clause ........ of the contract

Question 23Where a sub contractor is required by the main contractor to perform variations to the contracted work, is the sub contractor entitled to extra time to complete the works?.........................................................................................................................................This is covered in Clause ........ of the contractUnder what conditions can this be varied? ......................................................................................................................................................................................................................................................................................................................................................

Question 24If, after substantial completion of the works has been achieved, the main contractor requires variations to the work to be performed, is the sub contractor obliged to perform the variation work?............................................................................................................................................This is covered in Clause ........ of the contract

Question 25In respect to breaches of the contract by the main contractor, the sub contractor must provide a claim for costs within a specified period where AS 2545 is used. This time period is ..................days.This is covered in Clause ........ of the contract

Question 26Name at least five things that will permit a sub contractor to claim extension of time for substantial completion..........................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................This is covered in Clause ........ of the contract


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Question 27What is the maximum time permitted under AS 2545 for a sub contractor to provide the main contractor with a claim for extension of time for substantial completion?.......................... daysThis is covered in Clause ........ of the contract

Question 28Where the sub contractor, through failure to perform the works as required under the contract, causes the main contractor to suffer liquidated or other damages, can the main contractor impose penalties greater than liquidated damages on the sub contractor?(see page 35).........................................................................................................................................This is covered in Clause ........ of the contract

Question 29If an electrical sub contractor failed to provide the main contractor with a copy of the relevant Certificate of Compliance, for electrical work performed in NSW, would the sub contractor be in breach of the contract?(See page 20).............................................................................................................................................This is covered in Clause ........ of the contract

Question 30Where the work involves the supply of a major item, such as a machine, light fittings, switchboard, cooking ranges, etc. does AS 2545 provide for the contractor to claim for the goods prior to the delivery and/or installation? (See page 40)............................................................................................................................................What conditions apply to this?.......................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................This is covered in Clause ........ of the contract

Remember – contracts such as AS 2545 are intended to provide a balanced agreement between all parties, and as such allow for penalties to be applied to either party in the event of failure to comply with the contracted works.


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NOTES


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SECTION 3

MANAGING PROJECTS

PURPOSEThe purpose of this section is to provide details of project management methods, contract use and compliance, and precautions that should be considered when undertaking the management of projects as a contractor.Due to the myriad complexities of contracting work, and the associated contracts, there will be some items that are not covered in this section.

The rationale of managing projects is reflected in multiple needs, such as – minimising the costs associated with the project minimising the risk of non payment minimising the risk of incurring penalties developing a rapport with the client as a means of obtaining further work maximising the income produced from the project providing cash flow for operating the contracting business avoiding mistakes on the job and the associated rectification work minimising time used to manage the project

As you can see, all of the above items are directly related to making an income.The primary function of project management has a financial focus.

As detailed in Part 1 of this book, the most precious asset of any contracting operation is time. To optimise profit in a contracting business, time management must remain a significant consideration in all management and production functions.

For a contracting operation, time = money


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Time is the most important of all resources for a contractor. The most difficult of all resources for contracting is time because it is a fixed value that cannot be expanded. Time wasted on duplicating effort or rectifying mistakes is lost forever.For a contractor, time and money are interconnected.The labour resource of a contracting operation is difficult to expand or shrink without problems. Labour time expended on low profit work is time that could be used on other work where acceptable profit margins are available.

Operating a successful contracting business means using the time resource wisely. This means that you should –

avoid low profit work by operating at rates that are viable. If a sector of the industry will not permit acceptable levels of profit, avoid operating in that sector.

know what profit margins are required to allow successful trading. Profit margins need to cover all costs, including overheads, and return a profit.

use the sale of materials to provide profit. Work involving the sale of materials can be rewarding at lower profit margins than those required for labour intensive work.

avoid labour intensive work as this limits the amount of sales/profit that can be achieved in a given time frame. Alternatively, use a charge rate that compensates for the loss of profit from material sales.

use the take off sheet as a tool for planning labour. When estimating, the time required to perform the various stages of a project has been estimated through careful study of plans etc.. Avoid replanning the labour requirements by studying the job plans - use the estimated values.

use the take off sheet as a tool for purchasing materials. When estimating, the materials required to perform the various stages of a project has been estimated. Avoid replanning the materials requirements by studying the job plans - use the estimated values.

use a purpose designed computer program to operate the contracting business. These programs will automatically keep track of costs, sales and profit margins, plus provide a reconciliation between estimated and actual costs to report on the accuracy of estimates. The use of purpose designed computer programs will ensure correct processes within the contracting business, optimising profit while reducing time used on administrative functions.

ensure that a fair contract is used so that the customer is not placed in a position that can disadvantage the contractor

avoid disputes with clients by following all required contract procedures, and keeping the client informed on all aspects of the contracted works. Disputes consume large amounts of time, robbing time from profitable applications.

maintain customer satisfaction, using this as the primary source of work operate to a planned trading structure, including the use of a sales budget,

planned profit targets, management of overheads, etc.


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MANAGING AN INSTALLATION PROJECTThe following flowchart shows the procedure for correct financial management of an individual installation project.







SALE VALUE

OFFER TO THE CLIENT









CONTRACT

WORK PERFORMED

CLAIMS SUBMITTED

MONIES COLLECTED


PROFIT IS DETERMINED AS A MARGIN OF SALE

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USING A CORRECTLY FORMATTED TAKE OFF SHEET AS A PROJECT MANAGEMENT TOOL

A correctly formatted take off sheet will have labour and material requirements detailed for each stage of the project, arranged in a chronological manner. The take off sheet can be used to plan/allocate labour to the job, and to purchase materials as required.This reduces time spent managing the project, providing time for other projects.


costs of both labour and materials are recorded as the job progresses.

material costs are recorded in dollars.

labour is recorded both in hours and dollars

production stage of the work



A correctly formatted take off sheet with materials and labour arranged in a chronological manner to match the job requirements

Time has been consumed during the estimating process to analyse the project in order to predict the labour hours and materials required . Reuse this time effort to manage the project

labour hours and costs recorded

materials costs recorded





labour allocated as required

materials ordered as required





wages paid

wages paid

wages paid

reconcilliation of estimated costs to actual costs, performed on an ongoing basis provides reports on –

cost recovery required for progress claims labour productivity materials usage/wastage etc estimating accuracy possible unrecorded variation work as a cause of

unexpected costs

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Managing small jobs, such as service work or ‘cost plus’ jobs where site time is limited to less than one day is relatively simple when compared to jobs that last many months, with multiple periods on site.The process for managing most small jobs is shown below.


The customer makes contact

Charges, trading and contract conditions are explained to the customer and a verbal acceptance is obtained before traveling to the job

Before commencing any work the contractor provides a written contract for the customer to sign, detailing both labour and material charges. Call out charges and labour rate per hour is detailed, materials charges are detailed as trade price plus a percentage

Work is performed, keeping the customer informed as to progress and accumulating costs.

An invoice is prepared for the customer and presented for paymentThe customer is briefed on the arrangement of costs and provided with a contact number for further work

Payment is collected, either as COD or on the trading terms negotiated at the time of signing the contract

Remember that time is the most important resource for a contracting operation.Most payment disputes arise from misunderstandings of expected costs.Informing the customer of costings, and gaining verbal consent will greatly reduce the chance of rejection of the offered contract. Should the customer reject the contract conditions, the time lost traveling to the job is a serious cost to the contractor.

Never start work without a written contract.A correctly formatted and utilised contract minimises the chances of dispute and/or non payment.Most customers view correct contract procedures as a sign of professionalism by the contractor.

Keeping the customer involved reduces the chance of dispute through the customer being surprised by the cost accumulation

Presentation of the invoice is the final stage of the on site component. It is also a good opportunity to establish an ongoing relationship for future trading.A good rapport with a customer produces work through word of mouth advertising, providing access to a wider trading customer base.

Income is transferred to the contractors financial management system, being reported to the monthly sales budget and stock control system. Stock used from the vehicle is replaced.

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The labour charge rate for small jobs should be established as part of the financial management of any contracting operation before undertaking such work. This rate should be set to allow the business to recover all associated costs and return an acceptable profit.Therefore the rate should include, but be not limited to items such as

direct cost of wages, including on costs cost of overheads, including vehicle use profit

As a general rule, the materials component of minor work, or service work, is small, and should not be relied on as a consistent profit source. Therefore the labour cost for service work should be calculated to provide the profit return required for the time consumed by each small job.An extract from Part 1 of this book is shown below, as an example of the labour rate required by a small contracting operation, operating as a ‘one man band’, doing minor work in the local area.

For this example, it is assumed that the contractor operates the business from home, and has no unnecessary overhead commitments. It is assumed that the contractor is able to achieve a productivity that allows 30 hours per week as chargeable work, with the remaining 8 hours lost on non chargeable tasks such as traveling, preparing quotes, bookwork, etc. This 8 hour non productive time becomes an overhead. On costs are assumed to be 38%, which reflects a common value for many contracting operations.The contractor has chosen to aim for a wage of $35.00 per hour.



Total overheads = $28,000.00 + $17,078.00 = $45,078.00


Therefore the minimum hourly rate, to achieve a wage (without profit) is$48.30 + $34.00 = $82.30 per hourExpressed as a margin of sale, this is $34.00 = 41.3% $83.30

Note that the charge rate determined above provides only a wage to the contractor – profit is not included. Margin on materials would be the sole source of profit. Where a contractor worked for rates less than this, he/she would be much better off working for another contractor, with greatly reduced responsibility and a secured wage income.

As a service to its membership, NECA provides a list of recommended charge out rates, which reflects the myriad of costs that must be included in order for the work to provide an acceptable return.


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MANAGING LARGER PROJECTS

As the size and length of a project increases, so does the level of risk associated with dispute or non payment.Encountering a non payment for a small job is a bad experience – encountering a non payment or a large job is a disaster. Consequently larger jobs require greater attention to management of the job, on an ongoing basis.

Larger projects, unlike small jobs, provide continuity of work, improved cash flow and a better standing within the industry.

The profit margin, as a percentage of the sale value, associated with larger jobs generally reduces as the project size increases. Where a commercial project with 100 hours of labour might be won with a margin of 25% down to 20%, a larger project, say with 1000 hours of labour may require a margin of 15% down to 10% to be competitive in the market place.

Small jobs Medium Large Very large projects and service work projects projects

However, where a contractor takes on a larger project without expanding the overhead burden of the operation, the relatively low profit margin of a larger project remains a profit, in addition to providing work continuity and improved cash flow.In most cases, all but the smallest contracting operations require some larger projects to provide a pool of work, from which labour can be drawn to carry out the smaller jobs, while providing continuity for the pool of labour.Reliance on small work for trading results in erratic trading volume, poor cash flow, and loss of labour time at those times that insufficient work is available.


Grossprofitmargin 50%

40%

20%

10%

5%

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Successfully managing larger projects involves a set of procedures, including but not limited to –

organising the delivery of materials as required for the work organising labour as required for the work monitoring costs as the job progresses tracking and claiming variations as the job progresses making progress claims as the job progresses monitoring profitability by reconciling actual costs to estimated costs as the job

progresses attending site meetings throughout the time span of the work monitoring the time path for the project gaining time extensions as each cause warrants a claim, as the job progresses

ORGANISING MATERIALS FOR THE WORKMaterials should be delivered to site as needed, using a ‘just in time’ method, to avoid stockpiling on site, and thereby reduce the risk of loss through theft or spoilage.An efficient method is to use the quantities detailed on the take off sheet to order materials directly from the appropriate supplier, using an ordering system that integrates the job number.This allows simple transfer of costs to the job costing system via the priced details drawn from the suppliers invoice.Ordering materials for more than one job on the same invoice requires breaking the various components of the pricing up into each job. Where a separate order is used for each job, the supplier provides the costing for the job materials via the priced invoice.

Using stock from the work vehicle for larger projects greatly increases the effort associated with costing the work, as it not only requires tracking the material costs for the job, but also requires restocking the vehicle.

Carrying stock should be avoided where possible. Carrying excess stock results in a loss of trading capital, weakened cash low, increased spoilage and loss through theft.

Ask yourself – “If I have only one box of socket outlets in the van, how many am I likely to lose? – “If I have three boxes of socket outlets in the truck, am I more likely to lose some?”or - “If the job needs nine socket outlets, and I supply ten, will the surplus outlet be recovered and secured into general stock, or is there a good chance it will be lost, stolen, or damaged?”or – “If the job requires 30 metres of cable, and the site staff are supplied with a 100metre roll, will the remaining cable be returned, or will the job costing show the discrepancy, and the site staff be impressed when questioned why the costs blew out?” “Will this reduce pilfering of materials from the costed jobs?”or – “If the job is not costed, will I know that materials have been pilfered or lost?”


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Think about this –A counter staff at a supplier, who is not scrupulous, needs some drinking money, and steals a box of socket outlets from work, selling it at a discount cash price to a mate who is in the trade. Having done it successfully, he now needs to repeat the process. However, due to the inventory system used by his employer he feels that the risk of discovery is too high. His solution is to add single items to the pick ups of the poorly managed contractors, comfortable in the knowledge that their filing system is on the floor of their van, and at the end of the month, when they get their statements, they will have no idea of what they picked up several weeks ago.As there is no order to correlate to the invoice, the contractor has no recourse to dispute the statement (if he has any recollection of the materials picked upon the day)

Think about this –An employee of a poorly managed contracting operation, when picking up materials for a (non costed) job, adds some cable and socket outlets for a weekend job that he is doing.If he keeps the amounts relatively small, will the employer detect the losses? Could this go on for a long time?

Think about this –A poorly run contracting operation maintains an account with a supplier that has branches in several suburbs. Another contactor goes to a branch where the staff are not familiar with the account holder, and purchases a modest mount of materials on the account. He does not make a large purchase, in order to avoid questioning about identity. Later, the operator of the contracting operation identifies that materials have been purchased by someone else and disputes his statement from the supplier. Is he liable for the debt, where it can be shown that he purchases without a requirement for identification, or order number? The answer is that he is liable for the debt.

ORDERING MATERIALSA typical example of a poorly run electrical contracting business is an everyday event at most suppliers, where electricians turn up on most mornings to pick up materials required for the days work. Many of these businesses do not use an ordering system, operating accounts spaced over a wide geographic area, picking up on an ad hoc basis with little or no planning or accountability.These contractors not only lose valuable trading time, but are at risk of loss through incorrect billing by the supplier, plus the inconvenience of finding that the supplier does not have sufficient stock on hand to meet the contractors immediate needs.

Ordering materials from the take off sheet, using a purchase ordering system, several days in advance of the expected job time allows for –

greater time on the job, with increased profit reduction of time lost through unavailability of specific items, as the supplier is

given time to source materials that are not held in stock, or offer alternatives where items are not available

free delivery by the supplier to site, or to the contractors office reduction of risk through incorrect billing by the supplier reduction of losses through pilfering or theft

Ordering materials with an ordering number system, and avoiding ordering for multiple jobs on the one order, greatly simplifies the transfer of materials costs to the job costing file.


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A simple system of using the job number as a prefix to the order number means that all materials on that order can be costed to that specific job. As the supplier provides the costings with the invoice it is a simple matter to transfer the cost of that delivery to the job.Example All purchases for job No 12345 have purchase order numbers starting with 12345 Eg. 12345/1 12345/2 12345/3When the costed invoice for each purchase arrives from the supplier, the cost is easily recorded to the job file. In this way the supplier does the job costing for the contractor, freeing up the contractors time for profit producing work.

REMEMBER THAT THE MOST IMPORTANT ASSET OF A CONTRACTOR IS TIME. Avoid consuming time on tasks that can be done by others.


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MAKING CLAIMS FOR PAYMENT

Consider these anecdotal tales –ANECDOTAL TALE – Kenny, an electrical contractor had been doing a range of work for a customer over a period of more than twelve months, when he won a five month job with the customer. As the job was scheduled to finish in July, Kenny decided to under claim on each of the progress claims, leaving as much money as possible in the job for the final claim. In this way he planned to move the income into the following financial year, minimizing his taxable income for the current year.Kenny’s mate Reg the plumber claimed as much as possible with every claim, leaving very little in the job for the completion stage.At the end of June the customer went into liquidation, leaving Kenny a great deal out of pocket. Reg, having collected as much of the funds as possible by the astute use of progress claims suffered only minor financial damage. Not for the first time, Kenny was left wondering why plumbers are smarter than electricians.

ANECDOTAL TALE – Kenny, an electrical contractor got a good job with a large building company installing temporary builders supplies on a large site. At the time of starting the job the building project manager told Kenny that the job would span three months, and that they would require an ongoing tally of costs, updated each week, with a single invoice for all the work at the finish.Kenny thought that was okay, and having had a look at the contract supplied by the builder, signed it and commenced work.Having supplied the tallies as required, Kenny was careful to get each tally endorsed in writing by the client. At the completion of all the work Kenny submitted a well formatted claim at the end of the works period for $18,990.00After delays in payment of 105 days, Kenny finally received a cheque for $6990.00When he contacted the project manager, he was directed to the contract, which stipulated 90 day trading terms, and included a clause that said ‘the contractor shall supply all site storage and amenities for his works’.The builder had deducted $12,000.00 for use of the toilets, rental of space for on site car parking, use of the temporary power, provision of hoists, scaffolding, etc.As Kenny had accepted a contract that excluded progress claims, failed to notice the impact of this clause, and had failed to have such costs detailed in the contract, or had failed to have it removed from the contract, he had no recourse but to accept the values as detailed by the builder. The job was completed and any bargaining position had been surrendered.

RULE No 1 – Claim as much as possible, as often as possibleWherever possible negotiate the use of progress claims for all but the shortest jobs. It is prudent to claim as much as possible with each claim, being mindful that it is illegal to claim more than is due to cover the work and profit margin completed. In some circumstances it is possible to negotiate a deposit, or advance, payment prior to


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commencing work. Note that there are a range of regulations and limitations to the use of advance payments in the consumer protection legislation of most Australian states.

RULE No 2 – Once the job is complete the bargaining power of the contractor is greatly diminished.Once the work is complete the contractor is wholly reliant on the clients attitude toward payment of claims. The enforceability of the contract and the ethics of the client become the crucial elements in the chances of payment to the contractor. Claiming as much as possible during the progress of the work minimizes the amount outstanding at the completion of the work, thereby reducing the contractors risk and the incentive for the client to engage in dispute or withhold payment.

RULE No 3 – Claim for variations as they occurAvoid leaving the claiming of variations until the completion of the work (remember Rule No 2). Claim for variations performed to date with each progress claim.

RULE No 4 – Discuss the value of the progress claim with the client prior to formulating the claim.The majority of clients are reputable in their dealings with contractors, but often have a poor understanding of the sequence that costs will incur in electrical work. By advising the client of the nature of a progress claim, and justifying it prior to submission, disputes are much less likely.

RULE No 5 – Submit all claims on or before the date specified in the contract.Most large building contracts will specify that the subcontractors must submit claims by a set date (usually 20th – 24th of the month). Claims submitted after the specified date are transferred to the following month, impacting on the sub contractors cash flow.

RULE No 6 – Ensure that the claim is in a format to suit the client.Many large businesses will process claims based on a ‘statement’ rather than invoices. A statement is a summary of all invoices submitted to the client for the specified period (usually monthly). Many electrical contractors have submitted multiple invoices for various jobs to a large business (bank, shopping mall, large builder, government department etc) only to find that after waiting the specified time (30 day terms etc) the claim has not been processed because a statement was not supplied. Once the statement is supplied, a further 30 day terms are imposed prior to payment.


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COMPONENTS OF A CLAIM

For a short time frame project, where progress claims are not used, the claim should include at least –

the client name and address details of the work performed (location and description of the work) the contractors name and address the date of the claim the method of payment of the claim terms of trading (COD, 7 days, 30 days etc) the amount of the claim

For projects where progress claims are used, the claim should include at least – the client name and address details of the work performed (location and description of the work) the contractors name and address a declaration that it is a progress claim (not a final claim) the date of the claim the period of work covered by the claim details of variations covered by this claim details of all variations claimed to date the amount of the claim the total of claims to date the method of payment of the claim terms of trading (COD, 7 days, 30 days etc) a summary of all claims for time extension where the work has been held up

through circumstances beyond the contractors control (to minimize the risk of imposition of liquidated damages)

For projects where retention is applied, progress claims should also include – retention to be deducted from this claim (note that retention does not necessarily

apply to the costs associated with variations. This should be detailed in the contract prior to undertaking the work)

total retention deducted to date

The final claim for work on a project that has used progress claims should include – the statement that it is the final claim the claim for release of retention (commonplace contracts allow for 5% retention

of the contract value up to the final claim, at which time retention is reduced to 2.5% for the duration of the defects liability period)

all details relevant to the previous progress claims, including variations.

At the completion of the defects liability period a claim is made for release of retention funds. This is a separate claim to the ‘final claim’, and is worded accordingly.


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MINIMISING THE RISK OF LIQUIDATED DAMAGES PENALTIES‘Liquidated damages’ is the financial penalty imposed by the client on a contractor where the contractor causes the progress of the work to be delayed.In most cases, the penalty is detailed in the contract, usually as a set value per day of delay. The amount of liquidated damages penalty varies with the size of the project, and can range from values as low as $100.00 per day, up to millions of dollars per day!

Mechanisms for reducing the impact of liquidated damages include – never accept a contract that has unspecified liquidated damages. Where the value

of the penalty is not specified, the contractor is at the mercy of the client should delay occur. The client can nominate an amount and deduct it from the contractors funds, with little or no recourse available to the contractor.

ensure that an acceptable sum is agreed upon for liquidated damages at the time of negotiating the contract agreement. This is generally detailed as $??? per calendar day, or per working day. Note that where it is per calendar day this will include weekends, public holidays etc, when the contractor does not necessarily have access to the work site and is unable to continue the work.

claim extension of time at all opportunities throughout the contract period. At every occasion where the contractors work is held up through the actions of others, or through weather etc, an extension of time claim should be made. In this way the contractor can accumulate a ‘padding’ of time which may be required at the completion phase of the job in order to evade the imposition of liquidated damages.

maintain a summary of accumulated extension of time claims, summarized with each progress claim as the work proceeds. Ensure that the client ratifies this summary, with the processing of each progress claim.

where a delay of several hours is caused by the actions of others (such as other contractors on the site) the claim should include time lost to re establish or relocate, and would typically be a whole day.

remember that time extension claims are easier to have accepted during the earlier parts of the project time frame, rather than the latter parts where all and sundry are conscious of the impending finish date.

the effect of wet weather delays, that affect all site contractors are generally dealt with by the head contractor by extension of the completion date, rather than the granting of time extensions. Ensure that such changes to the completion date are notified in writing by the head contractor.


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In the construction industry it is conventional for the project manager (the builder) to provide a detailed critical path analysis, in the form of a bar chart, to each of the contractors involved in the project.As the project progresses, the bar chart is updated on a regular basis (weekly or monthly) to provide each contractor with the information required to co ordinate with other trades, and to act as a basis for the application of liquidated damages.The time frames specified for each contractor are adjusted to allow for the effects of weather delays etc. as the work progresses.

The bar chart shown below is an example of a chart for a project involving the construction of a small single level shopping mall, to be completed over a time frame of eighteen weeks.The bar chart shown would be the initial chart, to be followed with adjusted time frames to allow for weather delays, delays caused through the inability of specific contractors to comply with the construction schedule, etc.Where the contract includes liquidated damages, the most recently issued bar chart is used as the basis for the imposition of penalties.

Week 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18ExcavatorConcreterPlumberCarpenterBlock layerElectricianRoof fixerGlazierPlasterboardPainterAir cond/ventLandscaping

The work for the electrician detailed in this chart is –Weeks 2&3 – install underground conduits, cables etc.Weeks 5&6 – install conduits in concrete slabsWeeks 13 to 18 inclusive – install wiring and fit out the installation.


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CRITICAL PATH ANALYSISPrior to a project being commenced the contractor should plan the sequence of the work using a structured method that will allow all parties to understand the sequencing of each task, and the time importance of each component of the project.

This structured method is generally termed a ‘critical path analysis’

An example of a critical path analysis is shown below for a project involving the installation of photovoltaic panels in a grid connect PV project.

Where a project such as this is detailed on a bar chart, for a period of six weeks, the bar chart would be as shown below.

Week 1 2 3 4 5 6Sales approachEstimatingContract signedPaymentsMaterials organisedLabour allocatedInstallation


Initiate sales approach to the prospective client

Formalise contract for the work

Complete design process

Estimate costs

Develop an offer to the client

Organise materials for the work

Allocate labour for the work

Install and commission panels

Collect final payment

Obtain deposit payment prior to commencing work

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SECTION 4

BUSINESS OPERATION –SALES BUDGETS

A sales budget is an essential tool for monitoring the financial viability of an electrical contracting business.Using a sales budget to monitor the ongoing profitability of a business allows the operator to determine the function of the operation as a successful, or unsuccessful business.Where a business is achieving the required results as detailed in the sales budget, the operator is able to continue with the existing trading methods. However, where the business is not achieving the outcomes specified in the sales budget, the operator must undertake a change in trading methods, or follow a path to eventual business failure.

Many small contracting businesses trade for approximately two years before the operator is forced to confront failure. In most of these cases the operator has not set a sales budget prior to commencing trading, and continues in the market place unaware that the return from the business is not sufficient to pay for overheads, tax, etc. This shortfall in necessary income may be very small, but is an accumulating debt.Eventually a process of ‘robbing Peter to pay Paul’ becomes necessary to pay urgent debts, with the gap between income and accumulating debts steadily expanding. At some point a debt crisis arises that is too great for this process to forestall, and business failure occurs.In many of these cases the operator is forced to seek finance or to liquidate fixed assets, such as the family home, to pay the debts.

July August September October November December January February March April May June


actual gross profit result

required gross profit result

ever increasing gap leads to business collapse

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SETTING A SALES BUDGET

A sales budget is the sales and gross profit required for successful operation of a business over a prescribed period, which is usually a twelve month period.

SALES = DIRECT COSTS + GROSS PROFIT = (Direct cost of labour and materials) plus (overheads and nett profit.)

For a ‘break even’ situation, giving no nett profit, gross profit = overheads.

Example 1For this example, it is assumed that the contractor operates the business from home, and has no unnecessary overhead commitments. It is assumed that the contractor is able to achieve a productivity that allows 30 hours per week as chargeable work, with the remaining 8 hours lost on non chargeable tasks such as traveling, preparing quotes, bookwork, etc. This 8 hour non productive time becomes an overhead. On costs are assumed to be 38%, which reflects a common value for many contracting operations.The contractor has chosen to aim for a wage of $35.00 per hour.



Total overheads = $28,000.00 + $17,078.00 = $45,078.00


Therefore the minimum hourly rate, to achieve a wage (without profit) is$48.30 + $34.00 = $82.30 per hourExpressed as a margin of sale, this is direct cost = $34.00 = 41.3% sale value $83.30

From the above example the contractor must operate at an average margin of 41.3% of all sales to simply make the equivalent of a wage of $35.00 per hour.

In the case detailed above, annual sales must be 44.2 weeks x 30 hours x $82.30 = $109129.80 at a margin of 41.3%That is Sale x gross profit percentage = overheads or $109,129.80 x 41.3% = $45,078.00 = overheads

The following page has a further example, where the effect of including profit from material sales is considered.


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Example 2In this example a contracting operation identical to that used in Example 1 is used, with the additional consideration of using profit from materials to offset overhead costs.The annual sales budget required for a small contractor that trades with an average gross profit margin of 30% can be determined by considering that the gross profit must equal the overheads.Therefore, if the small contractor has overheads, including 8 hours lost time per week, of -

Van = $15,000.00 per annum (includes all running, insurances and depreciation)Telephones (mobile and land line) = $3,000.00 per annumInsurances (public liability, fire, theft) = $2,000.00 per annumAccountancy fees = $1,500.00 per annumAdvertising, petty cash, entertaining, etc = $100.00 per week or $5000.00 per annumTool replacement = $1,500.00 per annumNon productive hours = 8 hours x 44.2 weeks = 353.6 @ $48.30 = $17,078.00

Total overheads = $28,000.00 + $17,078.00 = $45,078.00

the gross profit (which is 30%) must equal $45,078.00.Therefore 30% of annual sales must equal $45,078.00.

Therefore annual sales = 45,078.00 x 100 = $150,260.00 at a margin of 30% 30The number of trading hours per annum is 44.2 x 30 hours = 1326 hours

Therefore the sales per hour, being combined labour and material = $150,260.00 = $113.32 per hour 1326This value is a combination of materials and labour, and relies on a gross profit margin of 30%

For the same overhead burden, if a gross profit margin of 20% is used, the hourly sales value is

Annual sales = 45,078.00 x 100 = $225390.00 or $225390 = $169.98 per hour 20 1326

From the above gross profit margins, if the contractor charges labour at $82.00 per hour, for a gross profit margin of 30% he must sell ($113.32 - $82.00) = $31.20 of materials per hour of trading. This could be seen as achievable. If he decides to charge labour at $60.00 per hour, the sales of materials must be $53.32 per hour, which is unlikely to be achieved.

However, for a gross profit margin of 20%, while charging $82.00 per hour for labour, the contractor must sell ($169.98 - $82.00) = $87.98 of materials per trading hour, which is highly unlikely for a small contracting operation. At $60.00 per hour, material sales per hour must be $109.98, which is not practical.

From the above example, a small contractor cannot operate at an average gross profit margin of less than 30%, while maintaining a charge out rate of $82.00 per hour for labour, and selling $31.20 of materials per hour.


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Exercise 1Using the example detailed on the previous page, where it has been determined that the contractor must sell $113.20 per hour (being a combination of labour and materials) with an average gross profit of 30%, the contractor can then develop a sales budget for the financial year.The contractor should take a range of trading variables into account, depending on the area of business in which the bulk of trading will occur, and allocate sales values to each calendar month.

This approach recognises the inevitable variations in trading activity throughout a calendar year, rather than assuming the contractor will always achieve a specified number of trading hours per week.

Complete the following table, using your personal estimation of the trading activity that the contractor detailed in the previous examples is likely to encounter.The annual sales of the contractor must be 44.2 weeks x 30 hours per week @ $113.32 per hour, with a 30% gross profit margin

Annual sales = 44.2 x 30 x $113.32 = $ 150,262.00 with a GP% of 30%Divide this amount across each of the months detailed in the table, allowing for the variations in trading activity for each month.

MONTH MONTHLY TRADING STRUCTURE SALES @ 30% MARGIN

DIRECT COSTS

ACTUAL GROSS PROFIT

July 31 days per month, no public holidays. Medium trading activity

August 31 days per month, no public holidays. Medium trading activity

September 30 days per month, no public holidays. Medium trading activity

October 31 days per month, 1 public holiday. Busy trading activity

November 30 days per month, no public holidays. Busy to very busy trading activity

December 31 days per month, multiple public holidays, many businesses closed Christmas – new year. Very busy trading activity

January 31 days per month, two public holidays. First half of the month is very low trading, second half is medium trading activity

February 28 days per month, no public holidays. Medium trading activity

March 31 days per month, no public holidays. Medium trading activity

April 30 days per month, three public holidays. Medium trading activity

May 31 days per month, no public holidays. Medium trading activity

June 30 days per month, no public holidays. Medium trading activity

TOTALS $150,262.00 $105,183.00 $45,079.00


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Example 3This example looks at the sales budget target for an electrical contracting operation that has two managers and a crew of on site tradespersons.The managers have decided to trade in the area of commercial fit out work, heavy industry and solar panel installations. This decision is based on the trading characteristic that material sales will be equal to labour sales, and both can be used to generate profit.In addition to the decision to trade in material intensive areas, the managers are confident of achieving an annual gross profit of 18% by staying in small to medium sized projects, and avoiding very large projects where the available profit percentages are low.Wages for each of the managers will be $140,000.00 per year, including on costs, being a total overhead of $280,000.00

overheads are predicted to be as follows –2 vans @ $15,000 pa each $30,000.00telephones $10,000.00rent for a small factory unit $20,000.00accountancy costs $2,000.00insurances $6,000.00wages for two managers $280,000.00all other overheads $10,000.00Total overheads = $360,000.00

For a break even trading outcome (no nett profit) gross profit = overheads = 18% of annual sales

Therefore if overheads are $360,000.00, and are 18% of sales, sales = $360,000.00 x 100 = $2,000,000.00

Annual sales of two million dollars seems daunting until the necessary trading requirements are analysed –

Sales are comprised of 50% materials, and 50% labour.Therefore sales from labour are $1,000,000.00.The annual cost of labour for each employed tradesperson @ $30.00 wages per hour = $30.00 plus 38% on cost = $41.40 per hour is$41.40 x 38 hours per week x 44.2 weeks per annum = $69535.44Adding an 18% margin, the return per annum from the labour sales per person = $69535.44 x 100 = $84,800.00

Therefore the number of field staff required to support the two managers is $1,000,000.00 = 11.8 persons.

ie A staff of twelve full time tradespersons is the minimum number required to support this business.

However, this relies on the sales of materials of equal value to labour to support the business, while maintaining a gross profit margin of 18%.This means that the operators must avoid work that has low materials sales components, such as minor domestic work, telephone cabling, service work, home units, etc. and trade in projects of a small to medium size, avoiding very large projects with the associated low gross profit margins.

Remembering that a gross profit margin of 18% = overheads = $360,000.00, and that 1% = $20,000.00 if the managers are able to trade at a gross profit margin of 20%, or 2% above the budget 18%, this would result in a nett profit of $40,000.00 for the trading year.Equally, a trading year that produces a gross profit margin of 16% will result in a loss of $40,000.00.

The following page provides the opportunity to examine the effects on the trading structure and profitability of a range of variables to 50% materials, 50% labour, and a gross profit margin of 18%.


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Exercise 2For the electrical contracting business detailed on the previous page, complete the following table to show the effects of variations in the ratio of labour to materials sales.

For this contracting business overheads are $360,000.00Sales for labour per person, prior to adding the gross profit margin = $69,535.00

Annual gross profit

percentage

Total annual sales

Sales ratio of labour to materials

Total value of labour annual

sales

Annual sales for labour per

person

number of field staff required

18% 40% labour18% $2,000,000.00 50% labour $1,000,000.00 $84,800.00 1218% 70% labour18% $2,000,000.00 100% labour $2,000,000.0015% 40% labour15% 50% labour15% 70% labour15% 100% labour10% 60% labour10% 40% labour10% 100% labour22% 40% labour22% 50% labour22% 70% labour22% 100% labour25% 50% labour

Using the results detailed in the table above, which of the trading structures are unlikely to be achievable?

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Answers for Exercise 2

Annual gross profit

percentage

Total annual sales

Sales ratio of labour to materials

Total value of labour annual

sales

Annual sales for labour per

person

number of field staff required

18% 40% labour18% $2,000,000.00 50% labour $84,800.00 1218% $2,000,000.00 70% labour18% 100% labour15% 40% labour15% 50% labour15% 70% labour15% 100% labour10% 60% labour10% 40% labour10% 100% labour22% 40% labour22% 50% labour22% 70% labour22% 100% labour25% 50% labour


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The effect on the trading structure of labour to materials in sales can be shown on the figurative graph below.

number of field staff required for the business to achieve sales budget target

The effect of the change in gross profit percentage margin on the volume of sales required by a business can be shown in the figurative graph below.


100% labour

50% labour50% material

100% material

zero maximum

high gross profit percentage

low gross profit percentage

minimum volume of trading maximum

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Exercise 3Using the example detailed on the previous pages, where it has been determined that the contractor must sell two million dollars of work per year, trading in commercial fit out work, heavy industry and solar panel installations, complete the table below, using your personal assessment of the trading activity that would be available at the months shown. This approach recognises the inevitable variations in trading activity throughout a calendar year, rather than assuming the contractor will always achieve a specified number of trading hours per week.

MONTH MONTHLY TRADING STRUCTURE SALES @ 18% MARGIN

DIRECT COSTS

ACTUAL GROSS PROFIT

July 31 days per month, no public holidays. Medium trading activity

August 31 days per month, no public holidays. Medium trading activity

September 30 days per month, no public holidays. Medium trading activity

October 31 days per month, 1 public holiday. Busy trading activity

November 30 days per month, no public holidays. Busy to very busy trading activity

December 31 days per month, multiple public holidays, many businesses closed Christmas – new year. Very busy trading activity

January 31 days per month, two public holidays. First half of the month is very low trading, second half is medium trading activity

February 28 days per month, no public holidays. Medium trading activity

March 31 days per month, no public holidays. Medium trading activity

April 30 days per month, three public holidays. Medium trading activity

May 31 days per month, no public holidays. Medium trading activity

June 30 days per month, no public holidays. Medium trading activity

TOTALS $2,000,000.00 $1,640,000.00 $360,000.00


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