The services offered by construction businesses are in high demand right now. This is a great industry, and one where you can make a good living for yourself and your family.
But recent research by a university stated that less than half of all contractors are in business after four years. And I continually read stories about contractors who continue to “bid” on jobs, cutting their prices in a race to the bottom. If you’re pricing your jobs using the “how low can I go” pricing methodology, here’s something for you to consider.
Construction businesses almost always fail because they price their jobs too low. Most business owners (not all, but most) are honest, hard-working individuals who know their trade but believe they have to price their work low so they can make the sale. And after a few years of pricing too low, they end up broke, in debt, and looking for a job.
Can we look at this industry from another viewpoint? There are fewer contractors today than there were in 2006 and 2007. Many of the contractors who were working in what is starting to be seen as the glory days, prior to 2008, are no longer in business. They handled the recession by giving out the lowest possible bids they could in hopes of getting a job. They’re gone now.
Along with having fewer contractors today to do the work available, some of the contractors who are in business are new and don’t have a lot of experience or training.
At the same time, interest rates are still low and people want to remodel their existing homes or buildings. Some are even ready to build new. Others have put off maintenance or repairs for so long that they can’t wait any longer. I read recently that over half of all buildings in existence are 18 years old or older. That means we have a lot of buildings that don’t meet current code requirements or are in need of renovating.
Also, our population here in the US (and probably other countries as well) is increasing. That means we have even more demand for new homes, condominiums, town houses and the like.
So let me ask this question. Doesn’t it make sense that if there are fewer of us in the business, and the demand is higher for our talents and abilities, we should be charging a fair price for the work that we do? A fair price is the price that you need to cover your job costs, pay your overhead expenses and make a reasonable profit. It’s the price you need to stay in business.
You can type “Construction Business Failure” in any search engine and read all the reasons writers have for contractors going out of business. Everyone has a different idea. One reason there are so many different ideas, in my opinion, is that the writers aren’t contractors. But everyone is entitled to their opinion and on one point, they’re all right. We have a horrendous failure rate in this business. I especially appreciated reading the quote, “Mamas don’t let your babies grow up to start construction companies.”
But no one suggested that maybe contractors are pricing their work too low. Get real. If a business is able to make sales at a price that returns a fair profit and allows them to pay their bills, will it fail? No. Construction businesses are failing because they aren’t making sales at the price needed to pay their bills.
It’s not easy making those sales. You need leads. You need to know how to sell based on what you are providing, not based on your low price. And you need to know how to set a price that is fair to both you and your client.
Everyone reading this post, everyone, could add 10% to their next quote and it wouldn’t make one bit of difference as to whether or not you get that job. I ask many of our coaching clients to add anywhere from 10% to 30% to their quotes when they start working with us, and guess what? Their sales percentage (sales to leads ratio) goes up almost every time.
I firmly believe you shouldn’t guess at your job price. Calculate your markup based on your overhead and profit needs, and your sales projections. Estimate the cost of every project, and apply that markup to your job cost estimate. That’s the correct sales price. If you are on track to meet your sales projections, and if your actual overhead expenses are in line with your budget, you’ll do fine. If sales are below your projections, adjust your markup, reduce overhead expenses (if possible), and sell at that new price.
But I’ll almost guarantee you that if you haven’t walked through that exercise, your prices are too low. Start charging more for your work. Don’t participate in bidding; get out of the race to the bottom. Take care of your family by charging the price you need so you are properly paid for the work you do. You’re worth it.
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses and their lives. He is the author of the books Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations as needed.
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