Bidding Practices that are Just Good Enough Can Cost Tens of Thousands in Additional Net Profit
Two very distinct aspects of the bidding calculation could be costing your company tens of thousands of dollars. If you were shown a better bidding method, would you allow your pride to prevent you from testing it and, if it works, taking the time to embrace it to improve your company’s bottom line? It is all too often stated, “This is the way we have been doing it for decades, and it is good enough.” Good enough bidding practices may be costing you tens of thousands of dollars in additional net profit.
Your manufacturing has a finite amount of total production time, and the old saying that time is money has never been so true. Net profit is derived using the total gross margin (GM) rather than total sales, so make sure the bids that your company is winning are providing the greatest GM dollars for the least amount of time possible. (Sales Price – Material and Labor Cost = GM)
Time is money, and the labor estimation in the bidding calculation is far more important than just accounting for the labor cost. Too many managers say, “Our labor estimation is good enough because our labor costs average out pretty well.” Instead of spending the time to make the labor time estimation generated by the truss program accurate on the individual order level, most managers believe using monthly averages is good enough. Most CMs have only made small changes to their dollar per unit labor estimation and simply ignored complex individual time factors.
Most companies have about a dozen labor factors in the labor estimation configuration setup that are supposed to adjust for every condition. This is not enough! When you’re serious about understanding the results of your current labor estimation practices, use a spreadsheet to review the actual versus estimated labor time over a given month for each of the individual orders. (Labor time, not labor cost!) Most are quite shocked by how poor their labor estimation is at the individual order level, let alone the individual truss cutting and assembly time.
Too many falsely believe that they can use recordings of historical order labor time to develop their own time standards, which is a flawed method by industrial engineering standards for many reasons. Instead, why not plug proven time standards into your truss labor estimation programs? There are over 120 different factors to choose from based on equipment and material. TDC’s are accurate down to the truss build and cutting activity level. See the Time Standards web page for more information.
Keith Kylmala – Owner
We are an Alpine customer, and all I can say is Todd’s time standards are scary accurate! Once we set up the labor configuration file based on our equipment and practices, our truss software estimates the labor time and cost in a spectacularly accurate way. We love how many options there are to choose from with Todd’s time standards labor document. No more educated guessing for our costing and pricing.
Just because your competition’s pricing may make it seem like they are a bunch of monkeys throwing darts at a wall, this does not mean you cannot improve your bidding methods. It is very simple and can be proven using a spreadsheet and past orders’ actual labor times versus their true GMs. The key to garnering better profits is to win the bids that have higher GMs per man-hour instead of a cost markup.
Each order that you manufacture is essentially renting your company’s production time with GM dollars. Some orders provide greater GMs per man-hour than others. However, most are clueless about this concept because they do not track each order’s actual labor time, let alone on a GM per man-hour basis. Too many are satisfied with monthly averages without ever knowing that some orders are consuming far too many man-hours for the amount of GM dollars earned. These high labor orders with low material cost drastically reduce the total GM for any time period when the cost markup method is used. It is far better to use this simple GM formula:
Yes, I understand that cost markup has been used for decades, but it is a seriously flawed method. Every time people test the GM per man-hours against a cost markup to establish a baseline for the sales price, GM per man-hours wins hands down every time, no exceptions. All who have embraced it swear that it has garnered tens of thousands of dollars in additional net profits.
Now that you understand why accurate time standards are so important, you should find that the purchase price for TDC’s time standards is far cheaper than the flawed methods of trying to derive your own based on historical data or trial and error. TDC’s time standards can easily be proven in the manufacturing area and then quickly applied in the bidding process after confirmation. (Web page - Time Standards)
To summarize, one needs to accurately estimate the labor time for each order and then use it as a baseline to establish the minimum gross margin. Once you pay attention to expected GM per man-hour, it is very easy to understand why it makes perfect sense to lower the GM when your company is only experiencing spare capacity. Your company will begin to earn tens of thousands of dollars in additional net profits using this proven bidding method. For more about this proven bidding method, contact me for a spreadsheet that proves this concept.
Leduc Truss Inc.
Gordon Tober, Co-Owner, and GM
Leduc, AB Canada
This information allowed us to estimate our jobs with a dramatically increased level of accuracy on each project, regardless of its level of complexity. The time standards also gave us the information to measure our production and establish target output for each workstation in our shop.
Todd Drummond Consulting LLC
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Todd Drummond Consulting LLC
© Copyright 2017 Todd-Drummond.com