Accurate estimating and bidding is the most important part of your business. Without it, you’re dying. Or you’re already dead. Here’s the problem – too many business owners and operators DON’T know that they have estimating/bidding issues. Until it’s too late. And even when they DO know they have estimating/bidding issues, there’s no solution. Why? Because they can’t isolate the variables that’s causing them to miss out on jobs or lose money. 

Without precision bidding, you’re going to lose one way or another. If you bid too high – you’ll never win the job. If you bid too low, you’ll end up hemorrhaging cash on every job until you’re out of business. 

That’s why businesses that rely on flawed estimating and bidding systems are perpetually at risk. When your job costing isn’t rooted in data, you’re not making as much money as you should be – or worse. You might even be operating at a loss. 

If you have an estimating/bidding system that works for you – that’s great! But chances are there’s hidden costs you’re missing.  If you’re unsure if your system works, you can find out for free here. For everyone else, we created this post to define 3 commonly used job costing systems: Single Overhead Recovery System (SORS), Dual Overhead Recovery System (SORS) and Multiple Overhead Recovery System (MORS), which is also known as Activity Based Costing (ABC). We’ve also outlined the flaws in each system.

Single Overhead Recovery System (SORS) Defined

SORS is a method used to allocate and recover a business’s overhead costs. It involves the use of a single predetermined rate to apply overhead expenses to services. For example, all of your direct costs would be marked up by the same percentage.

Here’s how SORS typically works:

1. Calculate Total Overhead Costs: The first step is to determine the total overhead costs incurred by your business during a specific period. Overhead costs can include items such as rent, utilities, depreciation, insurance, administrative expenses and indirect labor.
2. Identify a Cost “Driver”: A cost driver causes or influences overhead costs. For example, labor hours, machine/equipment utilization, vehicle usage or the amount of material used are all common cost drivers.
3. Determine the Overhead Rate: The overhead rate is calculated by dividing the total overhead costs by the estimated or actual amount of the cost driver. For example, if the total overhead costs are $100,000 and the estimated direct labor hours are 10,000, the overhead rate would be $10 per direct labor hour ($100,000 / 10,000 = $10/hr).
4. Apply Overhead to Services: Once the overhead rate is determined, it’s applied to an individual activity or service based on their usage of the cost driver. For example, if a service takes 5 direct labor hours to complete, the overhead cost allocated to that service would be $50 (5 hours x $10 per hour).
5. Calculate the Total Cost of Services: The overhead cost allocated to each service is added to the direct material and direct labor costs to determine the total cost. This total cost includes both direct and indirect expenses, which should give a more accurate representation of the service’s true cost.
6. Evaluate Profitability: By including overhead costs in the total cost calculation, you can assess the profitability of each service or job. This information can be used for future pricing decisions, cost control measures and evaluating the financial impact of different service offerings.

SORS can simplify the allocation of overhead costs by using a single rate, rather than multiple rates for different cost drivers or departments. While it might be the path of least resistance to arrive at an estimate – it’s flawed for a few reasons. We’ve met a bunch of landscaper owners/operators that apply a Tier System for bidding based on project square footage. This is another example of SORS, in practice. For example, jobs from 0 – 999 square feet are in one pricing tier, jobs that are 1,000 – 4,999 square feet are in another, and so on. With this system, you might be making GREAT profit margins are the jobs that are 1,000 square feet. But you might eek out a meager profit for the jobs closer to 4,999 square feet. Or worse, you operate at a loss depending on the square footage of the job.

Flaw #1 – SORS relies on manual estimates and data entry, which can be rife with error. Or worse, it relies on “gut feel” or “just knowing” how much jobs should cost. Way, way too many business owners and operators fall victim to this trap.

Flaw #2 – SORS can’t capture the nuances of individual cost drivers accurately. And when you can’t accurately capture your cost drivers you’re at major risk of bidding inaccurately. If you use SORS, just because you got the job doesn’t mean you’re actually making money.

Dual Overhead Recovery System (DORS) Defined

DORS is a method used to allocate and recover overhead costs based on different cost drivers. With DORS, not all overhead costs are incurred equally for different activities or services, so overhead expenses are assigned multiple rates.

Here’s how DORS typically works:

1. Identify Different Cost “Buckets”: The first step is to identify and categorize the overhead costs into different “buckets” based on what they are. Examples of these buckets could be based on department or function, like administrative overhead or common operating costs like rent or insurance.
2. Determine Appropriate Cost Drivers: You have to understand your cost drivers for each “bucket” and how often that cost driver is used. Common cost drivers are labor hours, machine/equipment utilization, vehicle usage or the amount of material used are all common cost drivers.
3. Calculate Overhead Rates: Divide total overhead costs in each “bucket’ by the estimated or actual amount of the corresponding cost driver. For example, if the labor overhead costs are $100,000 and the estimated labor hours are 10,000, the labor overhead rate would be $10/hour ($100,000 / 10,000 = $10/hour).
4. Assign Overhead Costs to Activities or Services: Apply the overhead rates to the relevant activity or service based on usage. For example, if a service requires 2 labor hours and 2 equipment hours, the overhead cost allocation would be calculated by multiplying the labor hours and overhead rate by the equipment hours and overhead rate.
5. Calculate the Total Cost of Activities or Services: The overhead costs assigned to each activity or service are added to the direct material and direct labor costs to determine the total cost. This provides a more accurate representation of the true cost of each activity or service.
6. Analyze and Evaluate: DORS allows for a more detailed analysis of overhead costs when compared to SORS, because it considers different cost drivers and their impact on various activities or services. This information can be used to identify areas of high overhead consumption, evaluate profitability by activity or service, and make informed decisions regarding resource allocation and pricing strategies.

By utilizing DORS, businesses can better allocate overhead costs based on the specific activities or products that drive those costs. DORS recognizes the differences in overhead expenses and provides a better understanding of cost behaviors, allowing for more accurate decision-making and cost control measures. DORS is a superior estimating system compared to SORS, yet, it’s still flawed.

Flaw #1 – You still need to manually calculate your ‘mark-ups’ which should be based on your total budget. You can’t just make these numbers up, or you’ll definitely be losing money. This can be really difficult (read: impossible) to figure out, because you’d need to consider a bunch of factors, and weigh them all differently. For example, each piece of equipment has a different price, different utilization amount, different lifespan and different maintenance costs and requirements. Manually calculating all of these actual costs is nearly impossible.

Flaw #2 – With DORS, all of your equipment costs are placed in the same “bucket.” For landscapers, a job may require mowers, blowers, trimmers, a truck and possibly a trailer, to name a few. This is a problem because you’re likely to underbid on jobs where you use a lot of equipment and overbid on ‘simpler’ jobs that need less equipment to complete. So, you’re either not making enough money or not even winning the job – either way, you’re putting yourself and business at risk by relying on the DORS estimating system.

P.S. Momentum automatically captures and calculates your overhead costs for all vehicles, trailers and equipment. That means you’ll have all of the costs you need to consider at a glance. You can use this for precision bidding. Better bidding = more jobs + profitable jobs.

Multiple Overhead Recovery System (MORS) Defined

MORS is a method that assigns overhead costs to specific activities, services or cost drivers by using “industry average” mark-ups for equipment and materials. This differs from DORS. Remember, DORS bases mark-ups off of your own budget for the job. Additionally, with MORS not all overhead costs and proportionally incurred across all activities or services. That means that you will still have to understand if/when “industry average” mark-ups are enough for the job to be profitable.

Here’s how MORS typically works:

In a MORS system, the steps involved are similar to those in the DORS system. Steps 1 – 5 are the same.

1. Identify Different Cost “Buckets”
2. Determine Appropriate Cost Drivers
3. Calculate Overhead Rates
4. Assign Overhead Costs to Activities or Services
5. Calculate the Total Cost of Activities or Services
6. Analyze and Evaluate: Like SORS, MORS allows for detailed analysis and evaluation of overhead costs, because it also considers different cost drivers and their impact on various activities and services. MORS provides a clearer picture of the costs associated with different activities or services, which should help inform decision-making and cost control efforts.

Implementing MORS varies greatly depending on your organization and industry. The MORS approach involves careful identification and analysis of all cost drivers, as well as ongoing monitoring and adjustment to ensure accurate cost allocation and improved decision-making.

Flaw #1 – MORS uses “industry average” for mark-ups. That means you need to have a thorough understanding of your real “burden of overhead costs” to adjust your mark-ups accordingly. If you’re not marking up material and equipment costs enough, you’ll lose money.

Flaw #2 – MORS involves careful and detailed identification and analysis of every cost driver. Too often, cost drivers are forgotten completely, overlooked or inaccurately evaluated. It also requires you to monitor changes or fluctuations in cost drivers, like insurance, fuel, labor rates, then adjust accordingly. Doing this manually takes a ton of time, and it’s impossible to accurately factor in every variable.

Don’t Settle For SORS, DORS or MORS. There’s a Better Way To Estimate.

Each system works – or doesn’t – to various degrees, depending on your business. Each job estimating system is ultimately flawed, mainly, because each requires too much detail for too many factors. Don’t settle for any of these systems. There’s a better way.

Accurate Estimating = Winning Bids = Profit-Driving Jobs. Every. Single. Time.

If you’ve ever had any issues accurately implementing SORS, DORS, MORS – or any other estimating system, there’s a solution for you. With Momentum, you’ll be able to bid with precision every single time, calculate your all-in jobs costs automatically, clearly see your estimated vs actual costs and audit every job to ensure you’re as profitable as possible.

All of this happens automatically because Momentum GPS hardware collects data, continuously. Our app then transforms your field activity into dollars and cents. You’ll know precisely how much you made – or lost – on all your jobs AND you’ll win more jobs that are more profitable, moving forward. We call this Jobsite Analytics, and it beats any job cost estimating system, hands down.

With Jobsite Analytics, there’s ZERO waiting period to see your opportunities to improve. You’ll get the information you need to make better pricing decisions, immediately. That’s because Jobsite Analytics will retroactively analyze your past 12-months worth of jobs, then it’ll pinpoint which jobs have been good or bad for your business. It’s instant gratification that’ll put you on-track for a more successful future.

Check out Jobsite Analytics here and try it FREE for 30 days. Use it to make more money on every job.