As an experienced contractor, you know all about job rating and measurement. And, you know your ability to assess project costs accurately affects your bottom line.
One prevalent method employed for job rating is square foot pricing. This approach involves assigning a fixed price per square foot of the project area. Square foot pricing seems simple, but its flaws can hurt your business’s profits.
Unraveling the Misconceptions of Square Foot Pricing
Firstly, square-foot pricing fails to acknowledge the unique characteristics of each project. Every job has its own challenges, like the materials and the labour needed. Square foot pricing disregards these factors, leading to inaccurate and potentially unprofitable rates.
Secondly, square-foot pricing stifles innovation and creativity. Contractors are less likely to try new construction methods if they have a set price per square-foot. This can hinder your company’s growth and competitiveness in the ever-evolving construction landscape.
First Principles: A Beacon of Accuracy and Profitability
QS’s prefer using the first principles approach instead of square-foot pricing because it has drawbacks. To use this method, you break down each project into its components. Then, estimate the cost of each one separately.
The first principles approach is based on these key components:
- Plant: The cost of renting or acquiring the plant and equipment necessary for the project.
- Labour: The cost of labour, encompassing wages, benefits, and payroll taxes.
- Equipment: The cost of operating and maintaining the equipment for the project.
- Waste: The cost associated with waste disposal, including materials and labour.
- Overheads: The expenses incurred in running your business, such as rent, utilities, and office supplies.
- Profit: The desired profit margin you aim to achieve for the project.
By evaluating each of these components, you can develop a far more accurate rate for each project. Using this approach, you can ensure you cover your costs and earn a fair profit for each job.
First Principles vs Square Foot
Here’s a worked example to illustrate the difference between square foot pricing and first principles pricing:
Project: Renovation of a 1,500-square-foot office space
Square Foot Pricing Approach:
- Square foot rate: €200/square foot
- Total estimated cost: €300,000 (1,500 square feet * €200/square foot)
First Principles Approach:
| Component | Unit Cost | Quantity | Total Cost |
| Plant | €5,000 per week | 2 weeks | €10,000 |
| Labour | €25 per hour | 1,000 hours | €25,000 |
| Equipment | €100 per day | 10 days | €1,000 |
| Waste Disposal | €20/cubic yard | 10 cubic yards | €200 |
| Overheads | 15% of direct costs | €36,200 | €5,430 |
| Profit | 10% of total costs | €41,630 | €4,163 |
Total estimated cost using first principles: €46,793
Comparison:
| Approach | Total Estimated Cost |
| Square-Foot Pricing | €300,000 |
| First Principles Approach | €46,793 |
As you can see, the first principles approach provides a much more accurate estimate of the project cost, saving the contractor €253,207 compared to the square foot pricing approach. This is because the first principles approach takes into account the specific requirements of the project, such as the type of work being done, the materials being used, and the labour costs in the local area.
At first glance, you might think, “sure, I’ll make more money with square foot pricing”. The reality is, if you’re not close to the costs of everything from the tender bid to the final account, you could lose out over the course of the project.
Which approach would win you that next tender and help you negotiate better with the PQS?
Practical Tips for Mastering the First Principles Approach
To use the first principles approach, include these practical tips in your estimating process:
- Create a thorough cost database that includes the prices of materials, labour, and equipment you usually use. Regularly update this database to reflect fluctuations in market prices.
- Tap into your past data to find patterns in expenses and worker efficiency. This valuable information can be leveraged to inform your estimates for future projects.
- If you’re new to first principles estimating, getting expert guidance is a good idea. You have three options when considering pricing jobs this way: outsource the work, consult with a seasoned consultant, or take a training course.
Addressing Misconceptions About Using First Principles
Misconception #1: First principles is too time-consuming.
While first principles may take more upfront time and effort than square foot pricing, it saves time in the long run by reducing costly rework and disputes. Plus, when you’re confident in your rate, it helps predict extras and variations.
Once you’ve developed a detailed cost database and established efficient estimating processes, the time investment becomes minimal compared to the benefits gained in the long run.
Misconception 2: First principles is too complex.
The first principles approach may seem daunting at first, but it’s actually quite straightforward. With practice, you’ll become proficient in breaking down projects into their individual components and estimating costs.
Steering Clear of Common Mistakes
It is important to avoid pitfalls when rating and measuring jobs accurately.
Underestimating Labour
Labour costs often account for the most significant portion of project expenses. Yet, many contractors underestimate the required hours. Therefore, to properly plan for each job, you must carefully evaluate the labour needs. This includes considering the work’s difficulty, required skills, and local labour costs.
Forgetting Overheads
Don’t forget about overhead costs like rent, utilities, and office supplies. They can affect your profits. Don’t neglect to factor in these overhead costs when developing your estimates.
Ignoring Market Fluctuations
Market prices for materials and labour can fluctuate rapidly. Make sure to update your cost database regularly so that your estimates stay accurate.
Failing to Account for Project Complexity
Each project presents its own unique challenges and complexities. Avoid using generic cost formulas. Analyse each project’s requirements to create accurate estimates.
Embrace the First Principles Advantage
Using square foot pricing for job rating and measurement may seem easy, but it has flaws that can make rates inaccurate and hurt your profits. When you use the first principles approach, you can develop more accurate rates. This can enhance your profitability and help your business grow sustainably.
At the end of the day, your rates are unique to your business. Don’t rely on someone else’s idea of the “going rate.” Take the time to break down each project into its components and estimate each component’s cost separately. This will help you ensure you’re paid fairly for your work.
Because of the software and tools we use at Carroll Estimating, our rates are always accurate and up to date, helping you measure and rate accurately so you can build confidently. Give us a shout for your next tender and share the burden of project cost management on all your builds from start to finish.