Understanding Contractor Bid Estimates

by Tim Carter | Sep 16, 2013

DEAR TIM: I need a new flow-through humidifier installed on my furnace. I got several bids and they were all within $30 with the average of $580.00. I went online and discovered the humidifier can be purchased for $165.00. It seems outrageous to me that the contractor is going to make over $400.00 for installing this piece of machinery. All of the contractors indicated the job should only take about an hour. Should I get into the HVAC business? It sure seems profitable. Chuck E., Detroit, MI


DEAR CHUCK: I can understand your frustration, but I am pretty sure you are not going to like my answers. For starters, forget about getting into the Heating, Cooling and Air-Conditioning (HVAC) business unless you have 15 - 20 years of your life you want to invest. HVAC is by far the most complex aspect of residential home construction. You would be astonished to learn how steep the learning curve is to successfully design, install and service HVAC systems.

Sure it takes an hour or so to install this humidifier. But what about the cost of his tools, the cost to produce the estimate, gasoline for the truck, insurance, office costs, uniform costs, laundry expenses, blah, blah, blah. PHOTO BY: Tim Carter

Sure it takes an hour or so to install this humidifier. But what about the cost of his tools, the cost to produce the estimate, gasoline for the truck, insurance, office costs, uniform costs, laundry expenses, blah, blah, blah. PHOTO BY: Tim Carter

Before I started my writing career, I operated my own home-building business for 20 years. I didn't go to business school, but I can tell you that it didn't take long to learn that it costs quite a bit of money to operate a small business.


Small business owners have to pay all sorts of bills each month. Accountants often sort these by hard and soft costs, but at the end of the month, these expenses need to be shared by of all of the jobs the contractor does. These pass-through expenses are often allocated to each job as a percentage of the projected total sales for the month. By doing it this way, each customer pays her or his fair share.


For example, I'll wager you that each of those HVAC contractors had general liability insurance coverage, hidden matching payroll taxes, health insurance coverage, tool expenses, fuel for the service truck, payments on the truck, utility expenses for the office, lease payments, office staff, phone bills, professional fees to accountants and attorneys, office equipment and supplies, etc. I'll bet I could list 50 separate costs with very little effort.


But it gets more complicated. Contractors don't always get every bid they produce. Some progressive contractors actually charge you for a bid. Those that don't have to absorb the cost to send someone to look at your job and actually calculate the cost and deliver it to you.


Don't forget the time the contractor has to spend to go pick up the humidifier from the supply house. Or, if he does stock it at his business, he needs to charge you some money for tying up his working capital.


It is also fair for the contractor to add a small amount of money for his skill level and accumulated knowledge. Make enough phone calls and you might find an HVAC contractor who will do the job for $400.00. But you may be calling this person again and again when the humidifier doesn't seem to work all of the time.


Finally, there is the ugly P word. Yes, the contractor deserves a profit. It should not be excessive, but it should be there. This profit allows the smart business owner to reinvest in his business and grow it. You want this to happen. You want the contractor to be there in the future if something does go wrong. Those contractors that plow profits back into a company are there when you need them.


Many years ago, I learned a trick that increased my sales closure rate by 300 percent. To make a very long story short, I simply started showing my customers all of my costs. The first time it happened I was the high bidder on the job and I showed the numbers to the prospect in an act of desperation.


What I learned is that showing the numbers built trust. The customers quickly saw that the total cost of the job or the quote was often a long list of much smaller numbers that simply totaled the big number.


Imagine how you would react if you were presented with a bid quote that showed you the grand total, but then showed you perhaps ten other sub-categories of areas of cost that actually exist and must be passed on to you? My guess is that you will be impressed and might give this contractor's quote a little more of your attention.