Estimating Fundamentals Reference

Why this matters

Estimating is the math that turns a service-business owner from cash-flush in summer to broke in February. Underestimate labor, forget overhead, skip waste factors, and your shop loses money on every job while looking busy. The fundamentals are not complicated - labor + materials + overhead + profit - but each line has hidden multipliers that are easy to miss. Getting the math right is the difference between a sustainable business and a slow bleed.

The basic formula

Job price = (Labor cost × 1.3 to 1.45 burden) + Materials cost × (1 + handling fee) + Overhead allocation + Profit margin

Each component:

• Labor cost: tech's wage × hours
• Burden multiplier: payroll taxes (FICA, Medicare, FUTA, SUTA = ~10%), workers' comp (varies wildly by trade - 4% for low-risk, 25%+ for roofing), health insurance (5-15%), benefits (PTO, holidays, sick = 4-8%), training, uniforms, vehicle allocation. Total burden adds 30-45% to base wage.
• Materials: actual cost from supplier
• Materials handling fee: 10-20% on materials, covers truck stock management, parts run costs, returns, etc.
• Overhead allocation: office rent, software, dispatch labor, insurance, marketing, owner salary if any
• Profit margin: 10-20% target after all costs

Markup vs margin (the most common math mistake)

These are NOT the same:

• Markup = % above cost. Cost 100 units, markup 50% = sell for 150 units.
• Margin = % of selling price. Sell for 150 units, cost 100 units = margin = 50 / 150 = 33%.

A 50% markup yields a 33% margin. A 100% markup yields a 50% margin. A 25% markup yields a 20% margin.

To achieve a 30% margin, you need a 43% markup.

Many shops "mark up parts 30%" thinking they're at 30% margin - they're actually at 23% margin, often below what overhead requires.

Labor burden - real numbers

Many small shops pay a tech a given base wage, assume the tech costs them only that wage, and price labor at roughly 2× - then wonder why they're broke.

Real burdened cost of a tech (as % of base wage):

• Base wage: 100%
• Payroll taxes: ~10% added
• Workers' comp (varies; assume 8% for HVAC): ~8% added
• Health insurance: ~8-10% added
• PTO (10 days / year): ~5% added
• Training, uniforms, tools, vehicle: ~10-15% added
• Total burden: roughly 40-50% on top of the base wage

Charging 2× the base wage on a tech whose true burdened cost is closer to 1.4-1.5× the base wage gives you a gross margin on labor of only about a third - before overhead and profit. Looks great until you realize overhead alone is typically 25-30%.

To achieve a 20% net profit margin on burdened labor:

• Tech burdened cost: ~1.5× base wage
• Overhead allocation (25%): additional cost on top
• Profit (20%): additional margin on top
• Sell labor at: roughly 3-4× the tech's base wage for skilled trade service

Materials pricing

Base markup approaches:

Why markup higher on small parts:

• Trip to supply house + dispatch + tech-stocked truck inventory all cost money
• Small parts have higher handling cost per dollar of part
• Customer perceives small parts as cheap (and they are at the supply house) but the all-in cost to deliver them is high

Why markup lower on big components:

• Customer can price-compare easily on a big-ticket water heater; high markup loses bids
• Big-ticket margins are made up in labor (the 8-hour install is where margin lives)

Hidden costs to remember

• Vehicle costs: fuel, insurance, depreciation, maintenance, parts run time → typically a meaningful per-hour allocation
• Office labor: dispatcher, bookkeeper, owner administrative time → typically a meaningful per-hour allocation
• Marketing: website, ads, lead generation → typically 5-8% of revenue
• Insurance: general liability, vehicle, errors & omissions → typically 1-3% of revenue
• Tools & equipment: purchase, maintenance, replacement → typically 1-3% of revenue
• Bad debt / non-payment: 1-3% of revenue depending on collection process
• Software / billing platform: 0.5-2% of revenue
• Continuing education / training: 1-2% of revenue

Sum these into "overhead." Allocate per labor hour or per job.

Allowances and contingencies

A bid for an open-scope project (renovation, retrofit) should include contingency:

• Drywall opening: if you find rotted framing, who pays?
• Hidden conditions: old wiring code-grandfathered until you touch it
• Permit changes: AHJ inspection requires changes mid-project
• Customer-driven scope creep: "while you're here, can you also..."

Either:

• Add 10-15% contingency to the bid
• Quote "time and materials beyond X scope" with hourly + materials at the same markup
• Quote scope-locked with explicit "change orders required for additional work"

Don't eat unexpected costs out of margin - the bid was for the scope, not for whatever was found.

Common bidding mistakes

• Forgetting drive time in labor hours. A 1-hour job 30 minutes away is actually 2 hours of paid labor.
• Forgetting punch-list and customer-handoff time - typically 15-20 minutes per service call.
• Forgetting cleanup and disposal of old equipment. Hauling fee, disposal fee, sometimes hazardous-material handling.
• Using last year's labor rates without adjusting for wage increases.
• Skipping the 10% sanity-check buffer that experienced estimators add. The estimate that "looks tight" usually IS tight; reality runs over.
• Estimating from memory of "similar job." Last similar job was different in 5 ways you forgot.
• Quoting verbally on the phone. Customer remembers the lowest number, dispute later.

Estimating tools

• Service business software (Manuall, Housecall Pro, ServiceTitan, Jobber): built-in price book with markups, labor times, customer-facing quotes
• Trade-specific cost catalogs: RSMeans, Craftsman National Construction Estimator
• Industry flat-rate price books: Profit Rhino, Service Roundtable's price book, Callahan Roach
• Excel / Google Sheets if you're just starting and learning the math

Flat-rate vs hourly

Flat-rate (book pricing):

• Customer sees fixed price for the service
• Predictable revenue
• Customer doesn't haggle on hours
• Top performers exceed book time, bottom performers fall behind
• Used by most well-run service businesses

References

• "Profit First" (Mike Michalowicz) - owner-friendly accounting framework
• "Service Business Numbers Made Easy" (Ellen Rohr) - trade-specific
• RSMeans cost data and Construction Estimator price books
• IRS Publication 535 (business expenses; treatment of overhead categories)
• State workers' comp rate sheets (each trade's classification varies)