Housing Giants 2005

August 31, 2006

Professional Builder publishes a list of the top 400 Homebuilders annually. The 2005 list is the 39th annual study called Topping Out? Or Just a Pause?

Purchasing Best Practices

A ton of great ideas about improving the purchasing and subcontracting process for any contractor - Spotlight on Ellen Knorring: On-Track Mind

Labor Productivity & Cost Cutting

Scott Sedman makes some great points in his article titled Your Choice in Cost Control about where a contractor should choose to attack costs. Attacking overhead is fairly simple but will not always yield the intended results.

The article ran in Professional Builder magazine and was geared towards a home builder's cost structure. For subcontractors that have direct-hire labor the points about inefficiency during construction are even more prominent as shown in the chart below.

With the cost of labor being up to 70% of the total project costs for subcontractors working on improving the amount of time spent actually installing the work can have a huge impact on the bottom-line. Project Pre-Planning is one way to help minimize this non-installation time.

NHQ - Handbook For Winning

Professional Builder magazine recently published a great summary of all the builders who won the National Housing Quality award along with their best practices.

While these are all homebuilders many of the best practices are applicable to every contracting business. You will have to create a one-time login account to view the content but it is well worth it. I would recommend using one article for each of your next few executive or management meetings to spark some ideas.

NHQ - Handbook for Winning

Construction Material Escalation Management (Great Idea!)

Barry Kindt of SECCO Inc. had a great column in this month's IEC Insights magazine with an interesting strategy on dealing with pricing of material escalation for contractors.

Unfortunately IEC does not have an online version available but the basic strategy was to update one of the user fields in your estimating database to include the weight in pounds for various materials - copper, steel, aluminum, etc.

This will take some work to do up front looking to see how much say #12 THHN copper wire weighs per foot and setting up the database but after this exercise is complete you can then summarize your bid based on X Pounds of metals.

Once you get your pricing complete you can then add a clause to your scope that says something similar to:

"Our bid is based on a copper (steel, aluminum, etc) price of $ ##.## per pound based on the price listed in the Wall Street Journal as of the date of this proposal. We have listed the weight as a point of reference only. When actual procurement takes place a additive or deductive change order will be processed based on this weight and the price of materials at that point in time."

I really wish we could provide a link to the full article but this is such a good idea that it just has to get out there. Hope you find it helpful.

Safety For Contractors

Chip Macdonald of Best Safety wrote a fantastic article called Observe, Act and Verify in the current issue of Walls & Ceilings. The safety ideas in this article are very well laid-out and applicable to any contractor.

In the same issue Charles E. Vasconez followed up with another great safety article highlighting real-life challenges of implementing a safety program for small contractors - Build a Defensible Construction Safety Program.

Improving Productivity From The Trenches

August 27, 2006

Tom Rooney, the CEO of Insituform had a fantastic idea to improve productivity. They setup a contest for all field crews about who would have the highest level of productivity for the quarter. The winning team would get a week off and would be replaced by the executive team.

Personally I can not think of a much better way to motivate the crew or to help the executive team understand the challenges faced in the trenches every day by field crews.

The full article called CEO in the Ditch from the July / August CEO Magazine. Definitely worth a read.

Job Cost Variables (What Your Reports May Not Show)

August 21, 2006

Generally speaking the management of job costs involves four un-related variables – or profit levers.

Most job costing and budgeting systems show only the summary of these four levers which does not tell the whole picture nor does it provide the critical feedback between operations and estimating so that the entire system can be fine-tuned.

If the project team is only focused on the bottom-line job costs there is a huge opportunity for improvement in profitability as the entire project team begins to understand each of these levers and how they individually relate to job costs. We will dive briefly into a discussion of these four critical levers and how they relate to job costs.

Method: The method chosen for installation – for example, when trenching you could choose benching, sloping or using shoring. You may also choose a trenchless (directional drilling) installation. Each method has different production levels and costs associated with it. During the estimating phase specific installation methods are chosen for each activity. During the pre-planning of the project adjustments to these methods may be made. Production target rates and the project budget are based on the method. Changing methods may lower or increase costs but a change in method should not be considered the same as a production increase or decrease.

Procurement: The amount actually paid for a product or service. Getting pipe for $2.50 per foot versus $3.10 per foot is an example of procurement management. Average labor cost increases or decreases are also examples of procurement. Though these will lower costs they are distinct from quantity or production variables. Even if the procurement leads to securing a piece of equipment cheaper than estimated this is still not considered a production management item.

Quantity: This is a huge variable and feedback to the estimator is very important because variations have big effects on profitability but are also relatively simple to fix through take-off methods. It is very dangerous to lump quantity into production. These are two very distinct parts of the estimate process and feedback must come back separately in order to truly refine the process. The key is looking at a task and figuring out a common unit to view as a quantity. For some tasks such as trenching this may be simple (linear feet) but for other tasks such as electrical branch rough-in this may be more challenging because of all the different sizes and types of conduit involved. It is on these tasks that are more difficult (such as electrical branch) that it is even more likely that the quantity take-off process can be refined to be more in-sync with operations.

Production: The actual rate a crew produces at. For example getting a backhoe crew to completely install 300 feet of 4” sewer laterals in an 8 hour day is better than having the same crew installing 250 feet in the same 8 hour day. There are a lot of variables involved in making this comparison so it is important to eliminate as many variables as possible. The first variable we eliminate is cost variations by establishing average labor and equipment rates based on the estimate and inclusive of a standard mobilization charge spread over 5 days. Whether this cost number is a little high or a little low it will allow comparison between days. The second major variable is in the work complexity. The laterals on one day may be deeper, shorter or the ground may be harder than those done on the next day. Production tracking is the most challenging of the variables but also the one with the biggest opportunity for increased profitability (or losses.)

When systems are put in place to monitor each of these variables separately and when your project team starts discussing these four profit levers while pre-planning the project, during construction and in the post-job review your overall profitability will increase significantly.

Why Track Production?

Can you imagine an NBA game without the fans in the stands, cheerleaders on the floor or a scoreboard?

This seems unimaginable yet these are the circumstances we typically work with every day in the construction industry.

Could you imagine playing basketball for 8 hours and not having some way to keep track of how many baskets your team scored? Most construction crews go to work and their only clearly defined goals are start, finish and break times.

Could you imagine playing basketball for 8 hours against another team and only knowing how many baskets your team had scored? For the few crews that go to work everyday and can actually tell exactly what they accomplished even fewer have a way to compare whether their production was good or not.

Could you imagine playing basketball everyday for months without knowing the score? That is exactly what construction crews are doing when they are relying on job costs and budgets to tell them whether they are over or under budget (winning or losing).

Could you imagine a coach letting their team play basketball for several months with little feedback and then just showing up and telling them that they were way behind the other team? That is what happens in many companies when the project manager finally sees the results of daily production on the job cost reports.

Could you imaging a coach trying to lead his team to victory by defining plays, setting strategy, making player decisions, etc. all based on his “gut” feeling without knowing what the score was or what the other team was doing? Many superintendents and foremen are forced to work in this environment – sometimes their “gut” pays off and sometimes it does not.

Could a coach pull together all the diverse personalities and egos necessary to win and make them work together effectively if they were each focused on different aspects of the game rather than the common goal of getting the ball in the basket? Many project teams function like this each and every day with each person focused intently on what they think their individual responsibilities are or should be without looking at what they could do RIGHT NOW to facilitate getting the ball in the basket.

For the construction crew production tracking can provide that scoreboard and unite the team. Production tracking is significantly different than job costing because it is done daily, even hourly.
Production tracking can be used to set daily goals with hourly milestones.

Production tracking creates a competitive environment where the crew is competing against and trying to beat the budgeted production, their past production or the production of other crews within the company.
Production tracking creates a common language within the company that can be shared by everyone from the apprentice laborer up through the operations manager.

Production tracking creates a common measurement (dollars) so that activities can be prioritized within in the project team. EVERYONE on the project team should be focused on the activities that will generate the most money every day.

Learn about how production tracking is different from job costing.

5 Mistakes In Business (Seth Godin)

An excellent quick list of the top 5 mistakes Seth Godin sees when it comes to entrepreneurs and marketing. I don't think these points could be said any clearer - pay special attention to #3.

Preventing Service Callbacks

August 18, 2006

There is nothing that will kill profits in a service business faster than callbacks and most problems are so incredibly simple it is a shame that we don't prevent them.

Vince Difilippo did a great article on callbacks and some prevention ideas. Though the article is geared towards HVAC contractors the ideas are very relevant to any contractor.

Perfecting Your Presentation

Making a presentation is some of the most important work you do in your career whether it is a pitch for a big customer or a pitch to your boss for a new set of responsibilities.

Business Week had a great article called The Pitch Coach about David Rose with a lot of great tips about business presentations.

Is it the People or the System?

Whether the business goal is Project Managers doing better projections or a Foreman being better with their production it is often the people that get blamed when in fact many times the problem is the system.

People can improve the performance of a system - but only slightly. A well designed system will produce a relatively narrow range of performance variations across the entire team.

A poorly designed system will produce wide variations across the samem time.

People adjustments are very important but if you are currently seeing wide performance variations in your results then you should take a harder look at the systems and infrastructure you have in place.

CMO Magazine had a good article related to this subject called Ego Systems - well worth a quick read.

Business Smarts

"It's my belief that industry knowledge can be gained by someone with good thinking skills. If they bring that to the party, they can assess the new environment and get a feel for the business very quickly." - Jack Welch

Chief Executive magazine had a great article discussing Business Smarts and some ideas for finding top management people. The ideas are just as relevant for GE as they are for a 10 person construction company.

Service Guarantees - Good For Customers & Good For Operations

This HVAC company is putting their money where their mouth is when it comes to a service guarantee. They are also loudly broadcasting this claim by putting it prominently on the side of their vehicles.

Guarantees like this are not only good for marketing but they also drive internal operations to be more efficient.

What guarantees could you provide that would serve both of those purposes and help improve your business?

Blue Volt - Online Electrical Training

August 17, 2006

They don't have a lot of California focused courses but do have some good general courses to help keep electricians up to date. Definitely worth a look. www.bluevolt.com

To learn more about building your career in the electrical industry also see Electrical Employment (www.electricalemployment.com)

Construction PM Software For QuickBooks

We have not tried this software out yet but it looks like it has some promise for the smaller contractor who is using QuickBooks and wants a more powerful project management program. Corecon Technologies, Inc.

A Brand Called You - 2006

August 16, 2006

It has been almost 10 years since Tom Peters wrote The Brand Called You for Fast Company magazine - this article had great insights on how to build your career and your company. The ideas are just as valid today as they were in 1997.

Recently on a long plane ride I was reading an issue of Forbes and they had an article about the rapper 50 Cent describing how he turned his life experiences (good and bad) into a clearly defined brand and the steps he continues to take to build that brand. The article is not about rap music - it is very much about business and brand building and is worth a few minutes of your time. Capitalist Rap.

Changing World of Press Releases

Shift Communications is providing some great insights into the new world of public relations and press releases. With the internet and the rise of social networking sites, blogs, etc. it is important for businesses to understand the best way to get the message about their companies out there. Though contracting is typically a little behind the curve on things like this it is very important to at least get a rough primer in these ideas.

On their website they have a great guide called PR 2.0 Essentials that has great information and hundreds of links that let you explore the web and learn about different ways your company can be marketed. It is worth a few hours on a lazy Sunday afternoon to browse through this document and explore the links.

The Future Of Pre-Fab & Construction

It seems like everytime the concept of pre-fabrication is brought up to contractors the room gets divided. There are those that are big believers and those that believe what we build has to many variations to pre-fab. I've had crews argue with me over pre-fabrication of things as simple as cable lengths and labeling saying that there is no possible way it can be done. All I can say is that whether you are a contractor or craftsman if you do not embrace the possibilities you will eventually find yourself non-competitive. Take a look at what this company is doing with complete bathroom facilities - Bathroom as An Appliance

Imagine completing 93 bathrooms in less than a week - what would that do for the schedule? What could that do for leveling out your workforce and not having to supply 60 plumbers during this peak production period? There are efficiencies to be gained by the project owners, general contractors and specialty contractors.

The first step in sparking your team into thinking about pre-fabrication opportunities like this is to get them thinking about how much time is wasted during the average construction day and how pre-planning can significantly improve their processes.

Maintenance Marketing For Contractors

As usual another great article by Adams Hudson - Make More by Marketing Maintenance.

There is a lot of money to be made from both the direct maintenance work as well as the additional work contractors gain just from being present in a facility on a regular basis. Almost any contractor can take advantage of this opportunity including homebuilders, electrical and mechanical contractors. There are industry franchises such as TEGG (electrical) and LINC (mechanical) that focus on structured system maintenance programs and with a little elbow grease almost any contractor can design their own maintenance programs for their customers.

It is not a quick process but building a base of 15-20% of your revenue on recurring maintenance contracts will provide stability through all market cycles. Remember that when people are spending less on new construction and remodels they are spending more on maintenance.

VoIP For Contractors

For a medium sized contractor a good Voice Over IP (VoIP) phone system can provide huge benefits especially because our "workspace" is very dynamic - office one day, jobsite trailer the next, another state the next...

Information Week magazine had a great article summarizing VoIP implementations with good advice for any business. In Depth: Five Things You Must Know About VoIP - News by InformationWeek

A great friend of mine has built a company around providing technology infrastructure solutions to contractors including VoIP. You can learn more about some of his VoIP experience with contractors in this article from Cisco iQ Magazine. Working in partnership to help contractors improve their technology systems D. Brown Management and Span The WAN have teamed up to provide a complete technology audit geared towards contractors.

From Wharton To War

August 14, 2006

From Wharton To War is a fantastic article about teamwork. Pay a lot of attention to the part about making beds and ask yourself how well you or your team would perform - I wasn't that pleased with my answer but it gives me a lot to work on.

Successful Work Habits

Fortune magazine started a great series called Secrets of Greatness and the first in the series was called How I Work which profiled 12 successful people and really goes to show what a wide variation there is between all people when it comes to work habits. This is why you are better off defining the results you expect from people and giving them the tools to monitor their own progress rather than trying to define actual work methods.

Read through the interviews - fantastic ideas!

Controlling Fleet Costs For Contractors

Control the Cost of Your Fleet

Some great tips for keeping the cost of your fleet down including discussions about lease vs. purchase and use of your vehicles for marketing.

The Profit "Process"

Creating a profit is a process - not a function. Too many individuals think it is about a single person or department. The reality is that the best estimator in the world is not going to be as effective as they can possibly be if they are not in-sync with the operations group and there is no system in place for rapid feedback and communication.

Profit comes from the rapid feedback and constant corrections required to get everyone in sync. This process is no different than the cycle described in this article on plant maintenance: Asset Management - Realizing The Benefits Of Design, Operate, Maintain

The High Cost of Sick Days

Absence-Minded - CFO Magazine - Human Capital Special Issue 2006 - CFO.com

Some good ideas - not all of the applicable to contractors but it is something all contractors deal with on a weekly basis. Reducing just a few absences will have a positive impact on the bottom-line.

Compensation Is Challenging

It is nice to know that even very large companies with sophisticated systems, dedicated staff for bonus and compensation programs not to mention the best consultants around still make compensation mistakes that either drive the wrong behavior or hurt the bottom line. Makes you feel a little better if you are just a normal sized contractor and can't seem to get your compensation system "perfect."

Sins of Commission - Topline - CFO.com

Why Can't Contractor Applications Talk To Each Other?

XBR-What? - CFO Magazine - August Issue 2006 - CFO.com

XBRL is Extensible Business Reporting Language and it is taking some time to take hold in the financial world. Sure will be nice when there is a construction version available and all the various applications we use including Excel, accounting, project management, estimating, scheduling, etc. will all be able to talk to each other. Imagine not having to re-type in RFI's from one contractor to the next. Imagine not having to synchronize data between a project management program, a scheduling program and accounting when there are change orders associated with that RFI.

So, are any of the software companies out there working to develop some standards and truly save some money for contractors or are they all trying to keep thing proprietary and rush to develop their view of a "integrated" system?

Wireless For Contractors

Wireless Advantages Come in Loud & Clear

You should be watching out for opportunities to streamline your business with the various wireless applications out there. Even if they are not perfect today they will become the standard tomorrow for the construction industry so you should start the learning curve today. At a Sacramento CFMA meeting we recently discussed the many opportunities that technology provides for contractors. You can download the slides about construction technology here.

Technology Systems For Contractors

The Joys Of Implementation is a great article and describes how to use normal project management processes when it comes to the implementation of new technology systems for contractors.

Additional resources can be found on our website including a white paper on contractor IT architecture and a IT analysis for contractors.

Marketing 101 For Contractors

Make Sales Goals Attainable with The Marketing Funnel provides some great advice for contractors when it comes to proactively managing their sales and marketing efforts. Contractors typically spend a lot of time focused on their craft but not nearly enough time focused on refining their sales and marketing.

I recently wrote an article regarding how to manage construction change orders the same way sales efforts are managed. This is where a little sales management training can help project managers become substantially better at the change management process.

Contractors & The Internet

The Internet Imperative is a fantastic article discussing all the ways contractors can be using the web for both marketing and streamlining. Many contractors are still simply using the web as a copy of their printed marketing materials and that completely misses the point of what the web is all about.

For additional information about marketing of your website for contractors see our summary of the Search Engine Strategies conference in 2005.

Top Specialty Contractors in California

August 09, 2006

California Construction magazine just published their list of the Top Specialty Contractors in California though it looks like a lot of contractors were too busy to respond this year so the list is definately missing a few contractors.

Myths in Management

August 06, 2006

ACCAbuzz ? Blog Archive ? Myth Busters

Some great points about management myths and how they cause managers to make the wrong decisions. There are some great points about financial incentives (programs need to be designed right) and a great one about work / life separation.

The Ultimate In Construction Pre-Planning!

August 05, 2006

Imagine having a 3D model of the building that contained all the detailed information about construction allowing you to clearly see problems and progress; allowing you to see opportunities to save time and money; seamlessly tied together with scheduling and cost control systems; a single model where all trades, engineers, architects and owners could add their information.

For many contractors today pre-planning the construction project means spending 1 hour with the foreman instead of having them pick up the plans in the office on Friday afternoon in order to start on Monday!

When we discuss construction project pre-planning basics with project teams they often think it is a good idea but fall back to doing things the old way when time and resources are crunched.

The reality is that the landscape of design and planning are changing in the industry and while contractors can still get by today with their current systems they will find themselves uncompetetive in the near future if they don't embrace the technologies available.

If you want to have a glimpse into the future of pre-planning there is a fantastic article on Building Information Modeling (BIM) by Building Design & Construction magazine that provides a lot of insight.

Giants 300 (Biggest AEC Firms 2005)

Reed Construction Data - A Beacon of Hope: Giants 300

Always interesting to look at lists of the biggest contractors by category to see where trends may be and where the potential opportunities in construction may be.

Construction Hiring & Workforce Current Status

Building Design & Construction - Hiring slows down, likely to level off - 7/1/2006 - CA6354622

This short article points to how the overall construction market and labor force are reacting with the slow-down in housing. Even though there is a significant slow-down with the housing market and this article points to and abundance of construction labor currently there is still the long-term trend that the market will face huge shortages of qualified workers.

Contractors should still be spending a lot of time working to align strategy with the organizational structure and tying that together with recruiting and personnel development goals. A qualified workforce does not develop overnight - most of the people you rely on daily to build your business have been doing this for 10+ years. If you want to avoid significant pain in the future you will have to focus on workforce development starting today.

Online Project Management & Construction Classes

Continual eduction is necessary in the construction field to stay current with the many changing codes and construction techniques. RedVector provides thousands of online courses ranging from construction claims to project management decisions to trade exam courses. Well worth some investigation.

Trademark Guidelines

August 04, 2006

This blog post by Guy Kawasaki is geared towards trademarks for web applications because technology is his realm but the advice is good for any other type of product / service trademark. Advice applies to general marketing as well as trademarking.

Whether trademarking applies to you or not there is great marketing advice here. Contractors should be more thoughtful when marketing their services - if you want to differentiate yourself in the market you can not use generic descriptions.

30 Days (Outsourcing)

Last night I was watching Morgan Spurlock's show "30 Days" last night about outsourcing of IT jobs. The subject person was Chris Jobin who was a programmer with Morgan Stanley until his job was subcontracted out to Bangalore, India. Over dinner with his family he makes a comment that he would suggest that his son become a "plumber or something.." as if that were a step down from "programmer."

This is exactly the type of mentality that lead to the current problems we have in the construction industry. Starting many years ago the education system has somehow created an environment where people believe that a career in construction is a bad choice where one in IT and some other "professional occupations" are good.

Let me remind you of a few things -

(1) Most construction workers make as much if not more than these "professional" jobs

(2) Most of these so-called "professional" jobs that the weak education system trains people for are basically low-level jobs that actually create little value and there is no reason why a company wouldn't want to subcontract these out as cheaply as possible - be real with yourself about your work - are you really creating value or is it basic data entry / analysis stuff?

(3) while some pre-fabrication activities for construction can be done out of the country construction jobs are pretty immune to outsourcing and

(4) It was us "dumb" construction workers that laid the fiber across the county and across the oceans (while getting paid a lot!) that allowed for 3rd world countries to start pulling themselves up out of poverty.

I sincerely apologize for the harshness of this post but I love construction - it was the path I chose. When I was in school I was told I wouldn't amount to much because of this chosen path. At least I had the benefit of good vocational classes when I was in school - today kids don't even have that opportunity. Wood, metal and auto shops have been replaced with computer labs. Great job! Create even more kids that think construction is a bad career choice who will soon have their jobs outsourced.

Building your career in the construction industry is a great opportunity - don't listen to the masses!

Creating Clarity Through Writing

August 03, 2006

Seth Godin provides some fantastic tips on the writing process that are very applicable for anyone building a project team or business. Tip #4 describes the purpose of writing as a "vessel to contain an idea" which is a wonderful way to put it. The idea only has value if it spreads - the book, paper, website, etc. only helps with that process. The last thought he leaves us with is #19 which is that writing clarifies thinking.

In construction many company owners and project managers get frustrated with people not being able to do things "the way I do it!" which is a thought I've struggled with quite often. One of the best ways to get past this point is to truly commit your "brain" to writing. The process of going through and trying to write down a detailed description of say a change order or submittal is very challenging. It forces you to clarify your thoughts. It forces you to continually draw diagrams trying to describe the flow of things. If you go through the process of editing it and having it reviewed by everyone on the team you will find the clarity you are looking for.

There is no doubt that this is a time consuming process but it is well worth it and will often make you think deeply about what and how much information you are trying to convey. You will clearly see streamlining opportunities as you go through the documentation process. Don't worry about being "good" at writing - the important part isn't grammatical (or political) correctness - the important part is clarifying your thoughts and committing them to paper which will help others understand your "brain."

How many critical processes are there really in your company - you know - the processes that really create profit: Get work, do work, keep score. I bet there are 10-15 key processes that really make profit happen. If you just picked off one of those every month or two you would have your thoughts completely clarified and documented over the course of a couple years.

Should Employees or Customers Come "First"?

August 02, 2006

John Moore makes some good points about a quote from Frederick Reichheld relating to how marketing should focus more on employee relationships to be really successful in the market place.

It seems a little counter-intuitive but if you put employees first they will put the customer first - if you just say "Customers First" in your mission statement or values hanging on the wall then it is very unlikely that the organization will actually execute and truly build customer loyalty.

Construction Pricing Negotiation

Yesterday I had a long drive to a client site and picked up an audio book for the trip called "Often Wrong, Never In Doubt" by Donny Deutsch which focuses primarily about lessons he learned building an advertising agency in NY. In one chapter he discusses the pricing models for advertising which in construction terms is T&M or Cost+. The rates were based on a formula designed to cover salary costs plus an overhead allocation and mark-up for profit.

One of the trends in the advertising world was that some of the large clients like Phizer started coming into the agencies with auditors and "analyzing" these costs - checking to see how much actual salaries were, what rent on the building was, etc. They were trying to make sure the mark-ups were "fair!" While these audits may have looked for the things that were easy to measure such as costs and mark-up they did not take into account anything else that mattered. They were not comparing actual billable rates against competitors. They were not comparing actual work done for a certain amount of hours (productivity) against competetors. They were not comparing quality or results either. These auditors were simply looking at costs and making sure that the markup was as low as possible! Donny states that he doesn't know of any other industry that is subjected to this - well, here's one - CONSTRUCTION.

Almost every day in construction a project manager or estimator is asked for "backup" for their pricing by a customer or potential customer. This is especially bad when working on a T&M job or change order. Whether a customer has any construction experience or not for some reason many of them turn into these construction operations gurus when it comes time to review a proposal, bill or change order. They start asking all kinds of questions such as why does this take two people, this activity should have only taken X time, why does this guy have a company truck, why is your overhead so high, etc.

Many times their right to this information is in your contract and if it is you should be aware of it but also remember that as soon as you start negotiating pricing based on your costs you have already started down the wrong road. From the very first conversation you have with the customer you should be positioning for value - whether it is your speed, quality, ability to start ASAP, etc. Focus on what makes you different from your competitors. If you start talking about costs then the conversation has shifted and you are no longer a valuable service - now you are considered a commodity and like rice or grain will just be paid for in a similar manner.

One other thing to keep in mind - the customer only wants to talk to you about pricing based on your costs when things are going well. If things go bad and your costs go way up then they would prefer you stick to the lump-sum price. If you give in constantly when negotiating pricing when things are going well you will not have enough money left over to cover the risks when things will inevitably go wrong.