In the beginning, you had ambition and energy. You were going to be Super Remodeler. You were convinced you could leap tall buildings, stop a speeding train, build a room addition in less than 24 hours and sell anything. Finding the path to success in construction was going to be easy.
Your theory was to build great quality into your jobs. You’d get lots of business, you told yourself.
The truth set in quickly. Clients didn’t want to make commitments; instead, they wanted to get other bids, think things over, or sleep on it. They weren’t at home when you arrived for an appointment, or only one spouse was present. There was always a soccer game, softball practice or scout meeting that was more important than you or your time.
You were frustrated when you heard, “Your price is too high.” You heard it on almost every sales call.
You understood what it cost to build a job. You may not have known what your overhead costs were, but you knew they should be included in your sales price. You hoped you could someday make a profit.
But you continued to hear the song about price. You heard that other bids were 10% to 50% less than yours. You left sales calls with your tail between your legs, wondering how others could build the same job for less than your cost.
You needed work to pay bills that were piling up. Your employee told you he needed more work or he would have to find another job. Your spouse was all over you because they had to put in more hours to cover the household bills.
So you cut your markup to 20%. Your office was in your home and you rationalized that your overhead was non-existent. You would make up the loss of profit on your next two or three jobs. Besides, isn’t a markup of 20% the industry standard?
After you cut your price, you landed the first big job. Unfortunately, you didn’t make any profit on the job. In fact, you lost money because your estimate didn’t include permits and you had to hand excavate for the foundation. But you saved money by working on the job yourself.
In the meantime you took three or four more leads, priced them with a markup of 20%, and sold two more jobs.
Just like the first job, you forgot a few small items on the estimate and did a few extras to appease an owner competing for the “Horse Behind Of the Year” award. So you lost money on those jobs as well.
Over the next few months, you sold several jobs. You actually made money on a few of those jobs, but they were jobs of less than $1,000.
Problems came up that you couldn’t deal with. You were amazed at how your clients changed between the day you first met them and the day you asked for the final payment. Everyone seemed to want something for nothing and you continued to throw in extras at no charge to appease them.
They expected you to show up and finish the job on time, but they made payments when it was convenient for them. Cash flow was getting tighter, and you had trouble paying bills. You had several accounts over 90 days past due, and your suppliers put you on a cash-only basis. Slowly but surely you watched yourself and your company sink into debt.
You hated to go home at night because you knew your spouse would ask questions that you couldn’t answer.
Then it hit. You had bills to pay and no money to pay them. You were over $30,000 in debt, with no progress payments due on jobs. Your savings were gone, your spouse was furious. Everything they said to you seemed to lead to a fight. The kids were pulling away because “You’re always yelling at us.”
On the way back from dinner at your in-laws’ house, your spouse laid down the law. Their patience was gone. They were tired of working to pay the bills so that you could do what you wanted. You’d wasted every dime that had been saved, and it was time for you to get a real job. Your days of working on your hobby were over.
It was a long drive home. You couldn’t deny where your business was and still keep your marriage together. You needed help.
The next morning you went to see an old friend in the remodeling business. He was successful; he never seemed to have the problems that were a daily event for you.
Your hope was that he would tell you the magic formula, the secret that would fix everything quickly. You found out that wasn’t going to happen.
Your friend listened while you told your story. He understood the tears in your eyes as you described your conversation with your spouse. They’d lost faith in you and in your business. You’d let them down.
He understood because he’d been there, done that.
The first thing he told you was that education is the key to success in any business. You must stay on top of your business and never get the idea that your way is the only way or even the best way.
He emphasized that you were in trouble because of decisions that you and you alone made. He told you in plain language that he wouldn’t let you talk about how it wasn’t your fault. You would have to take full responsibility for your trouble, and full responsibility for getting out of it. And you made your first good decision in a long time and agreed to listen and follow his advice.
He sent you out with some homework. He wanted to know to the penny every debt you had, and to the penny your monthly overhead expenses. And you were told not to give any more quotes without his okay.
At your second meeting, he looked at your numbers and showed you how to establish your markup. It was 1.52. You knew then it was all over; no one could ever sell a job at that price.
He listened while you repeated all the reasons you couldn’t charge that much. You knew from talking with other contractors (who were also broke) that the industry standard was cost plus 20%. A client would never pay more.
Then he asked you, “If you’ve estimated correctly, you’ve properly calculated your overhead expenses, and you want to make an 8% net profit, how can you do the job for less? Show me where the math is wrong. Show me how you can cut your price and still pay your overhead and profit.”
He was right, it made sense, but how could you sell a job at that high of a price? It couldn’t be done in your town; you’d never get any business.
Then he told you that he uses a 1.75 markup on every job and sells one out of every three. You knew he wasn’t lying, but how could he use that markup and sell jobs?
That’s when he told you the secret. You were caught in the trap of selling price. It’s the trap that leads most contractors out of business, and it’s also the trap that brings you difficult clients.
When somebody shops price, they’re more apt to be a problem. They are looking for something for nothing. That’s not the client you want. He explained that the client you want is a client who understands that you get exactly what you pay for, no more, no less.
Your friend also put quality in perspective. He said, “Others can do the job just as well or better than you. That is the reality of construction. What you need to sell is you, your company and the service you provide.”
“When your client is looking for a contractor, they have three basic fears. The first is that they won’t get what they want. The second is that it will cost too much. The third is that the job will take too long. You must build your presentation to address each of those issues for the client. Once these fears are resolved, your client will begin to buy you. Price is number seven or eight on their list of concerns. Once a client buys you, they will accept your price almost without exception.”
You were told to work on your sales skills. The last thing he told you that day was to stop trying to sell price, because you can’t win on price. Sell quality, value and service and you will see an immediate change in your potential client’s response.
You talked to your spouse. They agreed to give it a try. You had little left to lose, and they wanted to see you succeed. You started your reading, and practicing your skills.
On the next sales call you focused on asking questions instead of giving advice or opinions. You listened and discussed everything they said they wanted. You had them prioritize their list. You summarized their project.
Then you asked for their budget for the job. You arrived at an approximate price for the job based on their budget and your knowledge of what things cost. They were willing to compromise on some things, while others were a necessity. By the end of the budget discussion, they knew roughly what the job would cost, and they were comfortable with it.
You sketched out, on paper, the time frame for their job. You talked about when things needed to be ordered so they would be available for installation on your schedule. You allowed a little extra time for the “stuff” that Uncle Murphy brings to each job, and came up with a realistic time schedule. In short, you thoroughly addressed their three major concerns.
You’d been told to start using a design agreement, so you decided this was the time to give it a try. You explained to your potential client how a design agreement works: they were purchasing your services to get the plans drawn, compile a firm fixed-price quotation within the agreed-upon budget, and write the specifications and contract for their approval. If they chose to continue with the job, the design agreement would be credited against their price.
They looked you right in the eye and said, “Where do we sign?”
You couldn’t believe it. Why hadn’t you been doing this all along? Of course, it wasn’t that easy. You had done your homework and worked on your sales skills.
You were so excited you couldn’t wait to tell your spouse. You would have bought flowers, but money was still too tight. It didn’t matter. They still fell back in love with you.
You called your friend the next morning. He laughed, then gave you a few more ideas on things you needed to do right away.
As you hung up the phone, you realized what you’d been doing. You’d given your talent, ability and work away because of preconceived notions on how it was supposed to be. You listened to others who set limits on your ability to succeed. You didn’t bother to educate yourself until it was almost too late.
You knew you had a lot of work ahead, but you were bound and determined to turn your company around. It was the first step on a long journey.
Over the next few months your business started to turn around. It took four to six weeks for your checkbook to see any difference, and you wanted to give up at times. But you stayed with your commitment, and good things were starting to happen. You were paying all current bills on time and began retiring the old debt. There were fewer client complaints.
You still heard “no” from potential clients. Your friend reminded you that even the best salespeople in remodeling hear “no” on two out of three sales calls. But you didn’t quit, and you kept your focus.
One day you did the math and realized that your sales ratio with a markup of 1.52 was almost identical to what your sales ratio had been when you used a markup of 1.20. Your friend had told you that would happen, but you didn’t believe him. Now you knew the truth.
As time went on, you got out of debt. You maintained your markup and actually increased it as your sales abilities and your company reputation grew. You were worth more, and you charged it. You began to consider yourself a true Professional Remodeling Contractor.
Then one day a young contractor called you. They were badly in debt and needed some help. Would you be willing to talk to them?
Why Do You Need to Make a Profit?
Pricing Too Low
Making Money, Breaking Even, Losing Money
Progress Payments: Keeping a Positive Cash Flow
There is no Industry Standard
Why Cash Flow is Important