Pricing jobs and the cost card

The hourly rate from Chapter 8 is the price of an hour; a customer wants the price of a job. Turning one into the other means estimating how many hours the job will take, what materials, consumables and outside services it needs, and what markup to add to each, then comparing the estimate with what the job actually took, so that the next estimate is better. The early manuals built this around a cost card: Dunham and the Imperial handbook both printed one, and Willis advised that a cost card be kept for every job, both as a record in case of a dispute and, after a few months, as a history of many different jobs that would help in pricing the next.

This chapter builds a quote for one of Mara’s farm trailers, sets the materials markup and the minimum charge for small repairs, explains the choice between quoting a fixed price and charging time and materials, and shows how the cost card turns each job into better estimates.

The parts of a price

A fabrication job’s price has five parts:

• labour, the estimated hours at the shop rate;
• materials, the steel, parts and hardware bought for the job, at cost plus a markup;
• consumables and gas, the wire, electrodes, gas, discs and tips the job uses, estimated from its arc time;
• subcontract work, such as galvanising, painting, machining or bending done by others, at cost plus a markup;
• travel and delivery, for site work and for delivering finished jobs.

The markup on materials and subcontract work covers the cost of finding, ordering, collecting, storing and handling them, the waste and offcuts, the risk of price changes between quote and purchase, and the money tied up in them until the customer pays. Mara set an illustrative markup of 15% on materials and 10% on subcontract work. Steel prices move, so her quotes are valid for a stated period, usually thirty days, and large quotes say that steel will be priced at the date of order if the customer delays.

Quoting a farm trailer

This is an illustration. A farmer asks for a 6 m flat-top trailer with a single axle, drop sides and lights. Mara estimates the work from her experience and from the trailers she built in her old job, stage by stage.

Figure 1Mara's quote for a 6 m farm trailer

	Basis	A$, excluding GST
Labour	22 hours at A$130	2,860
Steel	A$1,800 at cost plus 15%	2,070
Axle, hubs, coupling, lights and hardware	A$1,600 at cost plus 15%	1,840
Consumables and gas	about 5 arc hours	204
Painting, subcontracted	A$600 plus 10%	660
Total quote	—	about 7,634

The consumables figure comes from about 5 hours of arc time at an illustrative 3.2 kg of wire an hour at A$7 a kilogram, about 0.9 m³ of gas an hour at A$9, and about A$5 an hour of tips, nozzles and discs, plus the 15% markup, about A$204 in all. Mara rounded the quote to A$7,650, excluding GST, and stated on it what was included, what was not, the delivery time, and that GST would be added.

Estimating the hours

The hours are the hardest part of the quote and the part most often wrong. A good estimate breaks the job into stages, estimates each from experience or records, and adds them up, rather than guessing the whole at once. Arc Welding by the Numbers shows in its chapter on arc time and operator factor how welding time can be estimated from the weld length and the arc time per metre, and Welder Training by the Numbers how the first of a new design takes longer than later ones. For a jobbing shop, the most valuable estimating tool is its own record of how long similar jobs actually took.

The cost card

The cost card of the early manuals recorded, for each job, the gas used, the filler and flux, the preheating fuel, the labour and the overhead, and Dunham’s and Imperial’s versions both showed how to work out the gas from the oxygen gauge readings at the start and finish of the job. Their purpose was the same as a modern job card: to know what each job actually cost.

Figure 2Mara's job card

• Avoid: Customer, job, quote number and priceincluding or excluding GST stated
• Avoid: Hours by person and by stagecutting, fitting, welding, finishing, fit-out
• Avoid: Materials and parts usedwith supplier invoices attached
• Avoid: Consumables and gasestimated from arc time, or measured for heavy jobs
• Avoid: Subcontract work and travelwith invoices
• Do: ? Estimate against actualhours and cost, with a note on why they differed

Willis’s two reasons for keeping the card still hold. In a dispute, the card shows what was done and what it took. And after a few months, the cards become a history of jobs that makes the next estimate far more reliable than memory.

The first trailer

This is an illustration. Mara’s first trailer took 26 hours instead of the estimated 22: the drop sides needed more fitting than she had allowed, and the wiring took longer in the new shop without the jigs of her old employer. At the shop rate, the extra 4 hours were worth A$520 that she could not charge, because the price was fixed. At the cost of a billable hour, about A$117 (Chapter 8), the 26 hours cost about A$3,040 against A$2,860 charged for labour, so the job’s labour lost about A$180 instead of earning its margin, although the materials markup kept the job as a whole profitable.

The job card showed where the hours had gone. Mara’s next trailer quote allowed 25 hours, and she built a simple jig for the drop sides, which brought the third trailer in at 21 hours.

Fixed price or time and materials

A fixed quote gives the customer certainty and puts the risk of overrunning on the shop; time and materials, charging the actual hours and materials, puts the risk on the customer. Fabrication work that can be defined in advance, such as a trailer or a gate, is usually quoted at a fixed price. Repair work, where the extent of the damage is unknown until the part is opened up, is usually charged on time and materials, often with an estimate and an agreement to call the customer if the cost will exceed it. Mara’s rule was to quote fixed prices for work she could define and had done before, and to charge time and materials, with an estimate, for repairs and for work she had not done before.

Small jobs and the minimum charge

Small repairs raise a problem the early writers knew well. Dunham observed that it could be hard to persuade a customer that fifteen minutes of welding was worth a couple of dollars, and suggested that the welding outfit be out of the customer’s sight, so that the customer did not see how little time the weld took and need not be told that the gas, rods and flux were part of the cost as well as the labour.

A modern shop has a better answer than hiding the work: a posted minimum charge. Every small job, however short, needs time to receive the part, talk to the customer, write the job card, set up the machine, clean up, invoice and take payment. Mara found that a small bench repair took about 15 to 20 minutes of unbillable handling on top of the welding, so she set a minimum charge equal to half an hour at the shop rate, A$65, plus materials, and displayed it at the counter. Most customers accepted it without question once they could see it was the shop’s standard charge. Being open about the charge, rather than hiding the work as Dunham suggested, also built trust: customers could see exactly what they were paying for.

Site work and call-outs

Site work adds travel and set-up. Mara charges a call-out fee for each site visit, covering the time to load the ute, travel to the site and back within a set distance, and set up, plus the site rate for the time on site, plus kilometres beyond the set distance. Customers who want a quick repair on a broken machine in a paddock usually value the visit far more than the hours suggest, and the call-out fee ensures the shop is paid for the half-day that a “ten-minute” site repair often takes.

Contingency and risk

Every estimate is uncertain, and some jobs more than others. A trailer of a design the shop has built five times can be estimated closely; a one-off stair to a builder’s sketch, on a site the shop has not seen, cannot. Mara added a contingency to her labour estimate according to the job’s uncertainty: nothing for repeat work, about 10% for work similar to jobs she had done, and 20% or more for new or poorly defined work, or she quoted it on time and materials instead. The contingency is not padding; it is the price of the risk the shop takes on by fixing the price, and the job cards show over time whether the allowances are right.

Measuring estimating accuracy

The job cards also let Mara measure how good her estimates are. Each month, she compares the estimated and actual hours for every fixed-price job and calculates the ratio. Over the first six months, her trailers averaged about 1.08, taking 8% longer than estimated, her gates about 0.95, and her structural jobs about 1.25. The numbers told her to raise her trailer and structural estimates and to stop worrying about her gate quotes. An estimator who never compares estimates with results never improves; one who does gets steadily better, which is the learning curve applied to quoting.

Pricing for value

Cost-based pricing sets the floor. Some work is worth more to the customer than its cost, and can be priced accordingly: an urgent repair that gets a harvester back into the field the same day, a site call-out on a weekend, a job that no other shop nearby can do. Mara charged a premium for urgent and after-hours work and did not apologise for it. She was careful not to go the other way, pricing below cost to win work she hoped would lead to more, because the hoped-for work often does not come and the low price becomes the customer’s expectation.

Deposits and payment terms

A fabrication job ties up the shop’s money in materials and labour until the customer pays. For large jobs, Mara takes a deposit, typically enough to cover the materials, before ordering them, and invoices the balance on completion, before the job leaves the shop. Regular business customers get thirty-day terms after a credit check; private and new customers pay on collection. The bad debts allowance in Chapter 8 is a reminder that some customers will not pay, and the deposit is the cheapest protection against it. Invoices go out the day a job is finished, not at the end of the month.

A failure: the bracket that was “only five minutes”

This is an illustration. In the first week, a local contractor brought in a broken bracket, waited while Sam welded it in about five minutes, and was charged the minimum A$65 plus a few dollars of rod. He objected that it had only taken five minutes, and Mara, keen to keep a new customer, halved the charge.

Over the next month, the same contractor brought in six more small jobs and expected the same discount each time. Mara calculated that the seven jobs had taken, with handling, nearly three hours of the shop’s time, about A$390 at the shop rate, and had been charged about A$230. She explained the minimum charge to the contractor, showed him the posted sign, and offered to batch his small jobs and charge them together by the hour. He accepted, and became one of the shop’s regular customers, on terms that paid.

Exercise: price a repair

A farmer brings in a cracked loader bucket. Mara estimates 3.5 hours of grinding out, welding and building up, 1.5 kg of hardfacing electrode at A$28 a kilogram, about A$15 of discs and gas, and no subcontract work. Using the shop rate and the materials markup in this chapter, estimate the price on time and materials. If the job turns out to take 5 hours, what will the invoice be?

The estimate is labour 3.5 × 130 = A$455, plus consumables of 1.5 × 28 + 15 = A$57 at cost, which with the 15% markup is about A$66, a total of about A$521, excluding GST. Mara gives the farmer this as an estimate on time and materials, with an agreement to call if it will exceed about A$600.

If the job takes 5 hours, the labour is 5 × 130 = A$650, and the invoice is about A$716, excluding GST, after Mara has called the farmer to explain that the crack ran further than it appeared. The time and materials basis, with a call before exceeding the estimate, keeps both the shop and the customer from an unpleasant surprise.