 Jim Huston |
“I use the DORS (dual overhead recovery system) method to bid my commercial installation work. However, my pricing has been consistently too high to get any work. Will using your OPH (overhead per hour) method help me be more competitive in the current market?”
The DORS estimating method is one of six estimating methods commonly used in the green industry. It was popularized by Frank Ross’ “Pricing for the Green Industry,” which was published in the early 1990s. Basically, you determine the amount of general and administrative (G&A) overhead in a bid by marking up your material and labor costs by two different overhead weighting factors (OWF). One factor is used to mark up your material costs and the other marks up your labor costs. The two OWFs are obtained from a chart in the manual that supposedly takes into account your material-to-labor ratio and the OWF.
Without getting into the involved mathematics of the DORS method, let me state categorically that DORS has at least three problems with its arithmetic.
First, it uses factors or percentages to allocate G&A overhead to jobs being priced. Whenever you multiply your direct costs (material and labor in this case) to determine the G&A overhead to put into a bid, you’re making the false mathematical assumption that G&A overhead is a factor of direct costs. This simply is wrong. If you have three jobs that require your entire field-labor force for one month and your G&A overhead cost is $20,000 per month, you obtain three different amounts of G&A overhead for a job lasting one month. Figure 1 shows how it works using an OWF of .85 on labor and .332 on materials.
Conclusion: Your G&A overhead should calculate to be $20,000 for each job. For a one-month job using your entire field-labor force, DORS is almost accurate for Job A. However, jobs B and C are drastically under-priced. And in a competitive market, guess which jobs you win? The jobs that you under-priced!
Second, DORS puts equipment costs in G&A overhead. This averages equipment costs in your pricing. Rather, you should calculate the amount of equipment costs to put in a bid as the bid requires. This false mathematical assumption causes your labor-intense jobs to be bid too high and your equipment-intense jobs to be bid too low. And, once again, which jobs are you going to win? Yes, the ones that you under-priced!
Third, DORS is simply too complex. I helped a contractor in Indiana by first creating his 2010 estimating budget. We then bid some of the jobs that he had lost using my OPH method. His price for one job in particular was about $115,000. My price with 10 percent net profit was $96,000. DORS consistently priced this contractor out of his market. And yes, the OPH method is much more accurate than DORS and it will price your work much more consistently.
Final comments: All estimating systems that use factors applied to direct costs (materials, field labor and burden, equipment and subcontractor costs), make a critical mathematical error. The inaccuracy in the MORS (multiple overhead recovery system), SORS (single overhead recovery system) and materials-factoring methods can easily be demonstrated by varying the material costs on a job with a set labor amount. G&A overhead costs are not proportional with the direct costs in a bid. Rather, they are primarily determined by a time unit (man-hours, crew-days, etc.) – the duration of the job.
This article was adapted from Jim Huston’s books “A Critical Analysis of the MORS Estimating System” and “How to Price Landscape and Irrigation Projects.”
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