One of the biggest challenges I find as a Construction Professional is having to compete with people who don’t know the ins and outs of running a construction business. And, in effect, they lower the standards of the Industry.
The Bottom Line-
1. Proper Markup
With little or no knowledge of what it takes to run a construction business, many new Contractors are unfamiliar with how to determine the proper markup for profit and overhead. And that is one of the reasons why construction businesses have one of the highest failure rates in small business startups.
After working in the trades for 25-30$ an hour, many new entrepreneurs think they have it made because now that they are licensed Contractors they can add a 10% markup to their estimates. And soon they’ll be driving Porsche pickups.
The fact is your overhead alone, (not including profit), is likely to require a 20-30% markup. Factoring in all of the new expenses it takes to start and stay in business. There’s advertising/marketing, sales, fees for licensing and having the proper certifications for the work performed. You have several different insurance requirements- bonds, liability, worker’s comp. Not to mention payroll burden, tooling up, including buying, renting, repairing/replacing tools needed, (which is an ongoing expense), vehicle maintenance, bookkeeping, accounting, office staff, and the list goes on.
Most people don’t realize that you need to have individual Business licenses in ALL of the municipalities where you perform your services. I counted 16 different Building Depts. that I frequently deal with. And licenses go anywhere from $50-$150 each per year.
Overhead is a fixed expense and cutting corners to lower overhead can only go so far. Remember, overhead is the price you pay to stay in business. And keeping the business healthy and profitable is the key to Staying in the Game.
Not having experience with estimating, many new contractors think they need to sharpen their pencils and figure everything at the bare minimum in order to get jobs. The fact is, when you’re trying to estimate labor and material expenses for each phase of the project, there are a multitude of variables, unexpected’s, and incidentals that can drive your costs to double or triple the “best case scenario” mindset.
If we don’t factor in some compensation for the likelihood of mistakes that need to be fixed, unforeseen things that require extra labor or materials, etc., we can easily lose money on a job. Thereby having to rely on the next job, or 2, to recover our losses. Let’s face it, we’re only human and inevitably mistakes will be made and they can be very costly.
Having been in this business for 34 years I have seen many ups and downs in the economy. And when the economy dips, inevitably paranoia sets in with all of the inexperienced Contractors.
I start hearing
“If we don’t lower our prices we won’t be able to get any work.”
Not realizing that if they do lower their prices they may very well be looking for alternative careers soon.
This attitude causes a negative image for our industry. Prices get lowered below what is needed to do quality work and keep customers happy. Some will even resort to doing jobs unpermitted when permits are required.
When prices go down, those of us who know better are forced to compete with numbers that are below where they need to be. And let’s face it, too many of our potential prospects consider the bottom line the driving factor on who they will select to do the work.
3. Sales Expense
The larger remodeling firms can have a sales staff with as many as 8-10 sales people.
And you can bet these people are paid well because they are the driving force behind jobs awarded, i.e, Gross sales.
So sales alone is usually the biggest line item markup for a Construction Company. Many small contractors consider their sales time as “just a part of doing business” and view it as a “freebie” and don’t factor this into their overall profitability.
This is the biggest misconception you can make when trying to have a successful business. The reality is, if you’re awarded 40% of the jobs presented, you’re doing very well by industry standards. So you can imagine the time spent chasing dead ends.
It’s not unusual for me to spend 20- 50 hours a week just in sales alone. I meet with clients, go over the scope of the project, followed by multiple meetings on site with subs.
We’ll go over the scope periodically throughout the bidding process and make adjustments as needed. Review products being used, finishes, timeframes, logistics, etc. Then we assemble the written Work Order which can be 20 pages of detailed scope of the project, contingencies, draw schedules, specific products and finishes. All of this can be very time consuming. And it’s not unusual for some clients to request 2 or 3 revisions of the estimate to get the project on budget.
So think about people, should we be willing to give that much of our time for free?
You need to factor your time spent on sales into your overhead or your business is doomed right out of the gate.
The bottom line is- If you want to stay in business for the long haul, keep your clients happy, and preserve the integrity of the Construction Industry, you need to be very familiar with “The cost of doing business”, how it affects the bottom line, and what it takes to “Stay in the game.”
Hiline Builders inc.