Accurate estimating is the foundation of your business. Until you have control over your estimates, anything else you want to do with your company is mostly a pipe dream. You'll find it hard to generate a reliable revenue stream, so you'll lose control of many facets of the business.
You'll be rushing to sign jobs to collect the down payment, rather than taking the time to set them up properly. There will be a constant push to start more jobs than you have the resources to finish, and you may come to rely on an aggressive payment schedule that masks the bleak financial picture of how a project is going. Eventually, you'll probably take a job you know you shouldn't — one that is doomed from the start — and it may sink your business completely.
Keep Good Records
The only way to generate consistently accurate estimates is to compare estimated costs with actual costs on a regular basis, for every job you do, and then apply any lessons learned to subsequent estimates. This is called job-cost accounting, and I know from hard personal experience that until you do it diligently, every price you give for any project will be a leap of faith. Such faith is sometimes rewarded, but more often it's punished; either way, it's an irresponsible way to operate.
I say this not as a business consultant who has no concept of what it's like to run a remodeling company, but as an owner who put a very low ceiling on what I could accomplish with my business for longer than I care to admit — all because I did not treat job-cost accounting as an essential part of the estimating process.
The first step in job-cost accounting is to generate some sort of tangible trail of what went into the estimate to begin with: handwritten notes, spreadsheet entries, estimating-software calculations — anything that enables you to document and remember what your assumptions were going into the job.
Use whatever system you're comfortable with. If you want a recommendation, I suggest you start with a simple, homegrown spreadsheet. Eventually you may want to work up to a more sophisticated, off-the-shelf estimating package, but that's probably the wrong place for most of us to start.
Once you have a documented estimate for the job in place, the second step is to track your costs as they're incurred on the job. Just about any bookkeeping software has the ability to assign job codes to expenses as you enter them. It's pretty easy to assign job codes to invoices from suppliers and subcontractors, particularly if everything on the invoice is for just one job. It's a little more difficult if your invoice contains materials from more than one job, but if you find it's too complicated to split one invoice among multiple projects, then ask for separate receipts at the lumberyard. If the lumberyard balks at that, then buy the stuff for one project, take it out to your truck, and then go back in to buy the stuff for the other project. In other words: Do whatever it takes. There's no excuse for not developing this sort of job-cost accounting discipline.
Simple Is Better Than Not at All
Sooner or later, you'll want to use line-item job codes (to split a job among various phases, such as foundation, framing, electrical, roofing, and so on). But rather than getting bogged down and frustrated in the effort, and giving up on doing any job-costing at all, you can back off from that level of detail when you're getting started. Instead, treat all expenses for the job as one category. If it's too hard, for example, to track "Smith kitchen framing" and "Smith kitchen electrical" and "Smith kitchen cabinets" as separate categories — or you find you're just not doing it — then track "Smith kitchen" as one category of expenses, putting all costs for that job into one category, whether they're cabinet or electrical or flooring costs.
This simpler strategy will still yield essential information. In setting up a new business system, it's tempting to aim too high and accomplish nothing at all as a result. But job-cost accounting is too crucial to let that happen.
However you break down job costs, payroll costs can be hard to assign to particular jobs, because not only do you have to get your crew to fill out timecards, but once again you'll have to split one transaction (that is, each paycheck) among several jobs. Additionally, there are payroll costs on top of wages, like FICA and workers' compensation, that need to be allocated. Some bookkeeping software comes with a payroll module that makes this easier to deal with. Work with your bookkeeper and accountant until you have a system in place that's easy enough to implement.
Don't Forget Your Own Time
Frequently, the hardest cost to track and to assign to projects is the cost of the owner's time. If you think it's hard to get your crew to fill out timecards, just imagine if they had to get you to fill one out. This is less of a problem if the owner doesn't really do anything, which is the model I try to follow (although I do at least try to stay out of my crew's way, unlike many bosses who do nothing).
If you're in the field working in production, it's really important that you track your hours and bill them to the right jobs. Otherwise, your job costs will calculate as artificially low and you'll be lulled into thinking your estimates are better than they really are. Then, when you finally hire someone to replace yourself in the field and that person expects to be paid, you'll be in for a rude shock.
Here's the simple, unavoidable truth: If you're working on the job, your time needs to be billed to the job. It will take some trial and error to figure out the best way to do this. Whatever system you work out for your crew's time should work for you, too, provided you have the discipline to keep a timecard for yourself.
Compare Estimated to Actual
Once you're getting decent data into your bookkeeping program, you should be able to get some decent data back out. You'll be able to print profit-and-loss reports for your jobs that lay out all project-related expenses. The reports may not be easy to generate or to read at first, and you may find data-entry errors, but they're part of an essential process and will get easier over time.
Once you have printed out the profit-and-loss report showing actual expenses, the next step in job-cost accounting is to compare those actual expenses with the originally estimated expenses. Get out the original quote. No matter what format that quote was in, you should be able to pull the actual project costs off of the profit-and-loss report and line them up against the costs that went into the original quote. The discrepancies you find between the actual and the estimated costs represent opportunities to improve your estimating and increase your control over what's going on in your business. Cherish those discrepancies. Don't ignore them or try to explain them away; confront them and deal with them.
