Home » sales

The Terms Estimate, Quote, Bid, and Proposal,

The Difference Explained

Estimate, quote, bid, and proposal are all terms used to describe the costs of a project. The differences between the terms are subtle and why the terms get used interchangeably.

How a Project Develops

Home renovation estimate itemized material cost, labor and equipment

The general contractor is contacted by a homeowner, designer, or architect.
- During the initial conversation, the general contractor gathers information about the project and establishes a time and a meeting location to discuss the project further.
- The general contractor discovers if other general contractors will be competing for the project during initial meetings.
After the first meeting, the general contractor may have enough information to assemble an estimate or quote.
- Large projects may require plan revisions before the presentation of the quote or estimate.
- When general contractors compete against each other to make a presentation, the general contractor is provided a bid package. The bid package is a set of documents with specifics defining the work scope, drawings, specifications, and general conditions.
The general contractor calculates the time and materials anticipated for the project.
- They will request quotes from material providers and subcontractors on certain portions of the project.
- The general contractor may reach out to several subcontractors for the same portion of work, putting subcontractors into a bidding round. There are many reasons to make multiple bid requests. Often it is to get the best competitive price, but it could be because of the current subcontractor’s skill set, availability, or performance issues.
After the general contractor has collected enough information about the project and made calculations, the contractor writes an estimate or quote to present to the homeowner.
For a finished presentation, the contractor assembles the paperwork in a professional-looking package known as a proposal.

Types of Estimates

Estimating is the process of forecasting the cost to complete a project. Several estimating techniques may be used to calculate an estimate, such as looking back historically based on similar projects and finding quantities based on take-off measurements. General contractors may also use software estimating calculators to compare similar projects in specific geographic areas.

Estimates detail the scope of a project and may include a timeline, exclusions, and contingencies. It may consist of alternatives or upgrades as well. Several types of estimates may be provided to the homeowner, depending on the nature of the project.

Ballpark Figure

The contractor may provide an initial ballpark figure to determine if the project will be feasible or to get a starting point for budgeting. The ballpark figure is often referred to as a “guestimate.” The number is a rough estimate. It’s a guess. The ballpark figure may be offered as a lower and an upper range, with very little time spent on calculations.

This starting point may be the basis to proceed with a feasibility study. Feasibility estimates are more common for commercial rather than residential projects. There may be many versions of estimates for a large project with plans.

Preliminary Estimate

The preliminary estimate begins as a roughly prepared document. It starts with a general scope of work and develops as information becomes available. A preliminary estimate is also a design estimate or budget estimate. The most common purposes of a preliminary estimate are creating a budget and financing.

There are two approaches to working with estimates: bottom-up and top-down.

A bottom-up estimate calculates each “stick” and is very accurate for each item in the project. Individual items within the project are added together to get a total cost. A takeoff is a process of making calculations from plans to find material quantities. An architect scale is a ruler with six measuring units. The ruler is used to measure linear and square footage taken from plans.

A top-down estimate starts with the budget and breaks major building components down into smaller ones. Top-down estimates can be instrumental at the beginning of a project. The top-down estimate can provide an overview of the cost and helps determine which areas of the project to adjust or eliminate to meet the budget.

Intermediate Estimate

As selections are made and specified, estimates are revised. Contractor grade pricing based on minimally accepted products may serve as a placeholder until final decisions are made. An amount, known as an allowance, is designated for items that are not specified, such as flooring, cabinets, and countertops. An allowance allows the homeowner to make selections according to the budget or pay the difference for an upgrade.

A substantive estimate is comprehensive and includes contingencies and profit margins based on almost finalized plans. Although some decisions may not be final, a substantive estimate can provide enough information to evaluate a budget and be used for bidding.

Final estimate

Once numbers and decisions are solidified and locked in, the final estimate is essentially a quote. A quote establishes a fixed price and is usually valid for a limited time. Once agreed upon, any change to the contract is out of scope. When changes to the project are requested, a change order is written and approved to authorize the changes. A change order is a formal agreement to additional work outside the original agreement. Change orders for the extra work are essentially an estimate or quote. Some contracts don’t allow change orders.

Quote

Quotes are written when the project’s specifics are known and are unlikely to change. Like an estimate, quotes break down anticipated costs of a project; however, a quote is either accepted or declined. While an estimate allows for flexibility, a quote is for a specific amount and unchangeable.

Bid

Bid indicates there is competition for a project. Since bids represent a final number, general contractors typically present them in person rather than through mail or email. This allows for discussion and clarification and enables the customer to ask questions.

Proposal

A proposal is a written offer to perform specified work. A well-written proposal is thorough and detailed. Because this is your opportunity to make an impression, a proposal needs to be visually appealing with accurate spelling and correct grammar.

Components of a Proposal

Names of Owners, Contact Information, Project Address
Scope of the project
Written total price
Schedule
Payment terms
Visual aids – sketches, samples

The contract incorporates components of the proposal. A contract is a legally binding document based on the final version of the estimate or quote. Contracts for a simple project may be as short as one page. Large projects may have five or more pages but shouldn’t exceed over 20 pages. Consult an attorney to determine the language for the contract. Some states require contract-specific language.

Some elements to a contract:

Scope of Work
Plans, Specs
Clauses
Terms and Conditions
Timeline, Start and End Date
Quality Standards
Warranty Information
Lien Paperwork
Dispute Resolution
Contract Price
Signatures
Down Payment

For the presentation, a general contractor must put on their sales hat. There is only one opportunity to make a first impression. Arrive for the presentation on time and clean. Keep paperwork neat and in order. A 2-pocket folder comes in handy for this. Branding on the materials in the proposal package is a plus.

Presentation Tips

Role play and practice the presentation
Establish creditability by being professional and respectful
Don’t talk about yourself
Focus on what the customer wants
Stay within the allotted time frame
Follow-up after the presentation

How architects, contractors, and subcontractors use the terms estimate, quote, bid, and proposal depends on several factors. The term used depends on who uses the term and how the information is presented. The success of a project relies on the general contractor’s ability to communicate the costs to the homeowner and fulfill the contract on time and within budget.

Home » sales

Establishing Hourly Rates

To establish an hourly rate, a contractor needs to know they are charging enough to cover the bills. Establishing hourly rates is quite complicated with employees. The bottom line is, whether you prefer to use a fixed price contract or a time and materials contract, it is critical to make enough to cover expenses.

Researching local hourly rates by talking to other contractors is the primary way hourly rates are established. There isn’t a set of rules for establishing hourly rates, and there are many methods and reasons behind how an hourly rate is determined. Many factors go into establishing hourly rates. The type of jobs, experience level, and local market conditions are just a few.

Let’s dig a bit deeper to see if your hourly rate is adequate. The break-even point is the minimum amount needed to avoid losing money. We look at living expenses, operating expenses, and company labor costs to find the break-even point, which can help establish an hourly rate.

Living Expenses

Simply put, living expenses are the costs for day-to-day living. The easiest way to calculate these expenses is to make a list of everything you pay throughout a month, then add them up: rent, utilities, food, credit card, etc. Include business vehicle expenses with business operating expenses. Don’t forget property tax and insurance that are paid less often.

Finding your monthly living cost is a good starting place to determine the break-even point for the hourly rate.

Example: What is the hourly if living expenses are $2,000 a month?

1. Find the weekly living cost. Divide the monthly living expenses by four to find the weekly living cost. For simplification, we are using four weeks in a month.

$2,000 ÷ 4 = $500/week

Living expenses are $500 a week.

There are 51.142 weeks in a year. Use 13 months (52 weeks) to convert to yearly figures.

$500 x 52 = $26,000/year

$2,000 x 13 = $26,000/year

Living expenses are $26,000 a year.

2. Reduce living expenses to an hourly rate. Divide the weekly living cost by the weekly billable hours to find a break-even point for living expenses. If 30 hours are billed, what is the hourly amount?

$500 ÷ 30 = $16.67/hour

The break-even point for living expenses is $16.67.

Operating Expenses

Costs unrelated to a project are called operating or indirect expenses. These expenses include insurance, office expenses, licensing, office employees, rent and utilities, vehicle expenses, tools, etc.

An Income Statement, also known as a Profit and Loss Statement, shows monthly operating expenses. If an accounting system hasn’t been established, start by making a list of all your operating expenses.

Example: A contractor bills 30 hours a week, and the monthly operating expenses are $1,000. What is the hourly cost for operating expenses?

1. Find the weekly operating cost. Divide the monthly operating expenses by four to determine the weekly operating costs.

$1,000 ÷ 4 = $250/week

Operating expenses are $250 a week.

$250 x 52 = $13,000/year

Operating expenses are $13,000 a year.

2. Reduce operating expenses to find an hourly rate. Divide the weekly operating cost by the weekly number of billable hours. If 30 hours are billed, what is the hourly amount?

$250 ÷ 30 = $8.33/hour

The break-even point for operating expenses is $8.33.

Break-even Point Before Taxes

Add the hourly break-even points for living and operating expenses together to find the hourly rate before taxes.

$16.67 + $8.33 = $25.00/hour

The combined hourly living expenses and operating expenses are $25.00 per hour.

	Billable Hours	Hourly Break-Even Point	Weekly Expenses
Living Expenses	30	$16.67	$500.10
Operating Expenses	30	$8.33	$249.90
Total Expenses		$25.00	$750.00

Weekly living expenses are $500 a week.
Weekly operating expenses are $250 a week.
Total living expenses and operating expenses are $750 a week.

Recheck by dividing the weekly hours billed by the total weekly expenses.

$750 ÷ 30 = $25.00/hour.

To recap: Billing 30 hours a week, the hourly rate is $16.67 to cover living expenses plus $8.33 to cover operating expenses; the hourly rate is $25.00 per hour.

Break-even Point with Taxes

Using the hourly rate of $25.00 per hour and 30 billable hours, find the hourly rate after taxes.

1. Find the weekly income to cover expenses.

$25 x 30 = $750/week

The weekly amount is $750 before taxes.

2. Calculate the weekly self-employment taxes. Determine tax costs by multiplying the weekly amount by 15.3% (12.4% for social security and 2.9% for Medicare) for self-employment taxes.

$750 x .153 = $114.75.

Weekly self-employment taxes are $114.75.

3. Find the hourly self-employment tax rate. Divide the self-employment taxes by the billable hours to find the hourly self-employment tax rate.

$114.75 ÷ 30 = $3.83

The self-employment taxes are $3.83 per hour.

4. Find the hourly breakeven point. Add the hourly self-employment tax rate to the hourly rate.

$25.00 + $3.82 = $28.83.

The hourly breakeven point after taxes is $28.83.

Labor Rate

The employee labor rate includes base pay, overtime, taxes, benefits, and paid time off and allowances. If the weekly hours worked are inconsistent, a more accurate picture would be to look back historically and average a more extended period. For instance, look at three months to find a weekly average.

Let’s use this simplified example to illustrate how the total hourly rate for employees is found.

Example:

A construction company has two full-time employees; one is paid $16 per hour, and the other is paid $18 per hour.
The state unemployment rate is 3.7%.
Workers’ compensation insurance rate is $3.00/hour.
The company offers a Simple IRA, matching the employee’s 3%.
The insurance premium is $400 for each employee, and the company pays 50% of the cost.

Hourly health insurance calculation: The employer portion is $200 per month, $50 per week. A full-time employee works 40 hours per week. Divide the monthly amount by 4 to get the weekly insurance cost. Then reduce the weekly cost to an hourly rate.

$200 ÷ 4 = $50.00/week

$50 ÷ 40 = $1.25/hour

Insurance would cost the employer $1.25 per hour per employee.

Add together the base pay rate, the tax amounts, and the benefits to determine the total hourly wage rate.

Base Pay Rate	FICA 7.65%	FUTA .06%	SUTA 3.7%	Workers’ Comp	Retirement Plan 3%	Health Insurance	Total Hourly Rate
$16	1.22	0.01	0.59	3.00	0.48	1.25	$22.55
$18	1.38	0.01	0.67	3.00	0.54	1.25	$24.85

The Hourly Rate with Employees

Calculations with employees can quickly become complicated. Many variables must be taken into consideration. As employees are added, the contractor’s labor shifts from the job site to providing management and oversite. As the company grows and wages are raised, the cost for some positions may be higher than the hourly rate.

The math is pretty straightforward for a contractor who works on the job site and has one or two crew members. We determined the breakeven point is $28.82.

We can see we have a breakeven point of $28.82 and two hourly rates of $22.55 and $24.85. Let’s see what happens when we round up slightly using $30.00 for the hourly rate

	Rate	Wage	Difference
Owner	$30.00	$28.83	$1.17
Employee #1	$30.00	$22.55	$7.45
Employee #2	$30.00	$24.85	$5.15
Hourly Profit			$13.77
Daily Profit			$110.16

The hourly labor profit is $13.77 per hour.

What happens when employee #1 takes the day off?

	Rate	Wage	Difference
Owner	$30.00	$28.83	$1.17
Employee #2	$30.00	$24.85	$5.15
Hourly Profit			$6.32
Daily Profit			$50.56

The hourly labor profit is $6.32 per hour.

$110.16 – $50.56 = $59.60

The daily labor profit drops by $59.60.

Non-Billable Hours

Consider that the actual employee billable hours each day does not always equal the hours worked. Productive work time and payroll will fluctuate due to several variables. Some can be planned for, and others are unknown.

Variables:

Downtime.
- Power outages
- Broken tools
- Material shortage, wrong materials
Warranty work
Training time
Travel time
Company and safety meetings
Paid time off

Conclusion

Understanding costs is the best guide to establishing the hourly rate. Finding the hourly rate for a business owned and run by one person is pretty straightforward. The formulas used to determine an hourly rate can become quite complicated with employees. Finding the minimum rate helps to establish a break-even point. Any less would result in a loss to the business.

Ultimately the hourly rate needs to be competitive and high enough to provide a living for the owner; with planning, the hourly rate will allow the company to be profitable and grow. An accountant can provide better information to help establish hourly rates.