Is Low Pricing the Key to Financial Success?
Seldom are contractors happy with what they are making. When a group of contractors get together, there are always moments of reflection, storytelling and complaining. Some think getting smaller and getting back into the field is the answer. Others feel they could make money if they could sell enough work to put one more crew on the street.
Surprisingly there are two right answers to the question.
Yes is correct if....
the true per man hour production costs of crew labor, taxes, insurances, equipment, vehicle costs and materials are calculated
a real overhead dollar amount is known in dollars per man hour of payroll, for office rent, phones, parking yard, computer(s), accounting, office staff, facility maintenance
a profit margin is added
Why could this be true? If the above calculations show that you have been bidding more than needed for some work and losing too many bids, you can lower prices safely with confidence, still making a profit on each job. Result - you could sell more work, grow and earn more profit than before.
No is correct if.....
your price is simply set or bargained low enough to get the work no matter what the competition prices are
you use prices you learned from the company you used to work for
you multiply your crews hourly wage by some multiple like 3
you install irrigation systems by the head, zone or material multiplier
you install landscapes by multiplying the material costs by some number
you sell mulch installed and supplied by the yard, and the only dollar amount you know is how much the mulch cost you
Learning about business shouldn't be like the sex education so many of us had, hearsay, a friend or off the street. All of the above "no" answers mean your business is based on someone else's numbers and you don't know if they the best, average or totally wrong. Any price you guess, or adopt off the street from friends and competitors, is a number or factor you have no control over. You are trusting your financial welfare and your future to "I don't know."
The opportunity for healthy, business earnings is spoiled by attempting to use the "no" answers to castrate the competition with a lower price. Thankfully, you really can learn and master the profit making knowledge that I learned from professional consultants decades ago. Don't be ashamed or embarrassed not knowing the bidding and estimating in's and out's of the contracting and service business world. No one is born with the knowledge and it is not common sense. Success is learned and earned through education and harnessing the new knowledge.
One young contractor I recently spoke with has gross returns on his labor hours that vary by 300% between the different services that he sells. One major service only returns 75% or less of his cost of production. He is losing over $1,200 per week, yes actually losing on this service. The loss is hidden by profitability in other services he sells.
I am familiar with irrigation in New Jersey. A residential sprinkler install bid that may normally average from $3,000 - $5,000, but is sold $1,000.00 lower than competitor’s bids, is bad business. That is assuming the bids are nearly equal in all other respects. Wouldn’t $150.00 less be ok? Wouldn't you really like to know if you making or losing money? Wouldn't you hate leaving $850.00 on the table? Wouldn't you like avoiding an $1,100.00 loss? If you did close the deal blindly, you can brag how booked up they are. As one of the nation's great consultants, the late Charles Vander Kooi said, “you are low bidder, so now what?”
In 2008 I had the roof on my 3 story farm house replaced. That included sheathing, and capping all the high trim with aluminum to be prepared for siding. Three contractors priced the job at $17k - $18k. The spread was less than $500.00. When was the last time you priced a job between $3k-$5k, and there was a $500.00 or smaller spread between bids? Trust me when I say, you have overhead even when you think you don't. Second, you haven't just reinvented the bidding wheel if you are cleaning up on a high percentage of your bid opportunities. There is a reason your bank account never grows.
FOX TIP: Way better to have a full investment account in your retirement, than a full list of under priced work today.
This same story plays over an endless loop in all of the landscape industry. Guess work pricing and formulas that were based on traditions or unsound principles have been entrenched in our industry for generations. Lackluster financial performance does not need to be a passed on like a genetic defect.
For over 40 years I operated my company and sought out help from some of the greatest, green industry consultants in the nation. The methods I used for my successful costing, pricing and profit making can be learned and performed by anyone.
Here is a great resource to learn more. Financials for Non-Financial Field Service Business Owners
Every service business owner needs to know these 5 components of a price in order to succeed, grow and profit.
Labor cost per man hour consisting of wages, taxes, benefits, uniforms, insurances, including owners wage if working in the field
Cost of Materials for job or service
Equipment costs per man hour including interest on loans, depreciation, fuel, repairs, insurance, etc.
Overhead cost per man hour such as marketing, phones, software, computers, paper, ink, postage, credit card fees, interest on operating loans, office staff, facility rental, professional dues, training, government licenses and permits, owners wage for administrative work, etc.
A profit percentage deliberately added to all of the above for the owners financial reward and growing the business.
I'm Harold Fox and "Growing Your Profits is my business." What pricing ideas or techniques have you used to grow profits?