Material estimate variances, job costs, usage reports, invoices, inventory and the actual cost of the sheet metal can result in lost income for sheet metal contractors.
Just how much income is at risk?
For this example, assume that 22 percent of the average bid represents the cost of sheet metal, 47 percent represents labor, 23 percent is slotted for shop burden and overhead costs, and 8 percent represents profit.
On a $100,000 job estimate, sheet metal would represent $22,000. If 61,111 pounds of 24-gauge sheet metal with a nominal thickness of .0276 inches, weighing 1.156 pounds per square foot and priced at 36 cents a pound were required, the estimated cost would be $ 22,000.
However, if the 24-gauge material was purchased on actual weight and delivered with a real thickness of nominal plus 10 percent, the delivered weight would be 67,222 pounds and cost $24,199. This $2,199 excess represents a loss of more than the $1,760 of estimated material profit and loss of 27 percent of the predicted total job profit.
But if the materials were purchased using the "theoretical minimum" method and the materials were delivered at minimum thickness, then the estimate would again reflect a material cost of $22,000, but the real cost for the material actually delivered would only be $16,430.
This $5,570 savings raises profits to $13,500. That's the good news. The bad news is that $13,500 also represents a profit of 13.5 percent, which will virtually eliminate your chances of winning the bid in a market with average profits of 8 percent.
The solution to this problem is to establish a base-purchasing unit and the cost per unit for estimating, shop-ticket material usage, job costs and invoices.
The first step is to determine the most accurate and consistent base unit. Since no industry-wide standard has ever been established, each software system uses its own approach. The material-cost systems in all departments and computing systems should use a common standard to figure their calculations. It should be the real purchasing unit, such as theoretical pounds, actual pounds or square feet.
To understand real purchasing units and real purchasing-unit costs, it helps to know the three most commonly used methods for purchasing sheet metal, and the advantages and disadvantages of each.
‘Theoretical nominal'This method is based on the assumption that the thickness of all sheets or coils is halfway between the minimum and maximum allowable thickness for the given gauge. The advantages are that the weight per square foot is theoretical, because the thickness of sheets to be used is as well. The values in the cost-estimating systems will match the nominal thickness weight per unit. All purchases will be based on this weight per square foot.
The disadvantages of this system is that the actual weight per square foot at delivery can vary up to 34 percent, which can effect the shipping costs. However, shop-usage tickets, job-cost totals, estimates and invoices will be common and accurate, in theory.
The odds are not good that the vendor will have exact nominal thickness material in stock. The vendor will have the following choices:
- Send the equivalent pounds of thinner metal and more square feet of it for the theoretical, nominal total price quoted, but using the quoted cost per pound.
- Send more pounds of thicker metal with the same square footage for the theoretical, nominal total price quoted but discounting cost per pound.
Such a scenario can cause buyers to purchase too many square feet of material.
‘Theoretical minimum'For this method, assume that the vendor will not always have minimum thickness you want in stock every time you order.
In those instances when minimum thickness metal is not available, the vendor has no choice but to quote thicker material. If the vendor has the minimum thickness material you're looking for, it ensures that you will be using the least pounds required to perform the job.
However, the vendor may charge a "tolerance" premium for any deviations. Another problem is that estimates will be inaccurate if they use nominal-thickness figures.
Actual weight (without thickness limits)There are no obvious advantages in purchasing sheet metal based on actual weight. The only negotiable factors available to purchasers are the prices per actual pound.
The disadvantages are numerous, however. The job may require more pounds than estimated, which will affect billings for time and materials.
Some people wonder why they can't simply order on theoretical minimum thickness to ensure receiving the thinnest gauge. But the problem with that idea is some vendors charge a premium for lighter-gauge metal. If your vendor charges a premium for 26-gauge metal, they also might add charges for thin metal within the gauge.
Also, if your vendor does not have any minimum-thickness material in stock, is he going to simply assume that you will not accept anything else? And if your vendor has some inventory he could sell you at a better price, if it doesn't meet your minimum thickness, he may not even offer it to you.
The best way to buy metal is to solicit multiple quotes and request the cost per square foot from all vendors. This will give them the latitude to give you their most competitive price on whatever material they happen to have in stock at the time.
With this approach, it becomes necessary to divide the total cost of the gauge ordered by total square feet to calculate the cost per square foot. Here's how to do it. Your job cost and inventory software may determine what method you use.
Buying situationsSituation No. 1: Assume material-usage tickets use theoretical nominal weights and actual square footage numbers to supply data to job cost and invoicing software.
In this case, the actual purchase cost for the delivered order of metal must be converted to an equivalent cost per theoretical pound. From the example at the beginning of the article:
61,111 theoretical pounds of 24-gauge steel at nominal thickness, costing 36 cents per pound equals the original estimated cost of $22,000.
Assuming the actual cost of the delivered metal was $19,000, divide it into 61,111 theoretical pounds and you should get 31 cents per pound.
Use the 31 cents per-pound figure in the job cost and invoice formula and you should get $18,944.
Situation No. 2: Purchase material based on the cost per square foot, by gauge, and use square feet in estimating, shop tickets, job-cost figures and invoices.
Situation No. 3: Purchase on a cost per square foot, by gauge, and convert that figure to an equivalent cost per theoretical pound for metal purchased on theoretical nominal thickness. This will be compatible with plasma, estimating, job cost, inventory and invoicing software systems using theoretical nominal thickness and weights per square foot. This will eliminate the need for the interim or "after the fact" cost adjustments as required with Situation No. 1. This is the preferred method.
Any sheet metal shop, small or large, with or without a coil line, can buy sheets or coils using theoretical weights. A common belief is that coil steel can be purchased at a lower unit cost than flat sheets. That's not always true. Discounts associated with purchasing coils are related to volume, not shape. High-volume shops are in a position to negotiate small discounts on annual just-in-time orders, usually no more than one or two cents per pound on multimillion-pound orders.
The steel business is based on high volumes and small margins. In some cases, a price premium is attached, such as with 6-foot-wide coils. One advantage in ordering flat sheets is that some vendors can supply pre-beaded sheets at no additional cost, which can eliminate that step in fitting and duct fabrication. The big advantage of coil stock is in material handling. This is why it is so important to handle sheet stock efficiently.
(Efficiency expert Jim Segroves is the author of Sheet Metal Shop Burden Recovery Guidelines. Contact Jim Segroves Consulting at 712 E. Walnut St., Garland, TX 75040; call (972) 494-6333; fax (972) 272-7062; see www.segrovesconsulting.com on the Internet.)
What to ask for when purchasing sheet metalDon't assume that the sheet metal coils or sheets you buy will automatically meet or exceeds your needs. To ensure quality, ask that your orders meet these minimum requirements:
- Prime galvanized (G-90 or G-60), as requested.
- The gauge is stenciled repeatedly down the sheet or coil.
- No dents or "catfaces."
- Lock-forming quality (LFQ) to Rockwell scale 55-65 copper content.
- Use a bright finish.
- Flat sheets are bundled and on skids compatible with your open-arm forklift-loadable sheet racks and lift capacity.
- Coil weights are compatible with your coil line, crane and forklift.
- Coils are rounded to within one-quarter inch (confirm with your coil spindles). Sixty-inch-wide coils should not be less than 60 inches or more than 60 1/8 inches.
- No fluting or flaking, rust, telescoping on coils, oscillation and the ends of coils must be square.
- Have the commercial steel "Type B" chemical treatment: Dry, no oil. This conforms to American Society for Testing and Materials Standard No. 653.
- Are within the thickness tolerance for each gauge.
- The total lineal feet of each individual coil must be marked with a liquid pencil inside to confirm the actual square feet contained in the coil upon completion of use.
- The coil's identification number, assigned by the steel mill, marked inside the coil for inventory and reference.