I’d like to share a letter from a contractor trying to put the pieces together and make his business work.
You talk about the importance of having a consistent markup. Let’s say I have a small paint job that requires two gallons of paint. The paint costs $30 per gallon and my markup is 1.4. That would be $24 markup. It takes me five minutes to order the paint on the phone, and five minutes to pick up the paint. I can justify the markup for the time involved. If I have a job that needs 15 gallons of paint, then that’s $450 for paint and a markup of $180. It still only takes me 5 minutes to order the paint and 5 minutes to pick it up. I don’t see the value in that. And what are we to do when the customer has already purchased the paint? Turn down the job?
If the customer purchased their own paint to save money, yes, you should turn down the job. I believe if you’re smart, you’ll turn down any job from someone who wants to save a buck. They’re looking for the cheapest price they can get; they aren’t your best customers. You should only take jobs you know you can make money on. Let the low price jobs go to your competition who are more concerned about price than they are about taking care of their own families. There simply isn’t any nice way to say that.
Remember, you’re in business to provide a service and make a profit doing it. You aren’t in business to fuss and worry about price. If that’s what you’re doing, you should consider finding another job, because you’re going to go broke. Your customers will get great deals and you’ll have a tough time paying your bills.
I only give advice, you’re in charge of your own business, but I do believe it’s important to use a consistent markup. Determine the correct markup and review it on a regular basis to make sure you’re getting the results you need. Estimate the job costs, apply your markup, sell the job. By setting your markup and using it consistently, you can focus on selling and building jobs instead of jumping through math exercises to reduce your price.
If your markup is 1.4, add up the total labor and material cost including paint and multiply it by 1.4. Don’t fuss about how much of it was for paint and how much for labor. You don’t need to justify your markup. The purpose of markup isn’t to cover the cost of your time to order materials. It’s to cover your overhead and profit needs for the year: advertising, office expenses, telephone, insurance, warranty issues down the road, salary, profit needs, and a cushion for those jobs or situations that go south.
This is not a practice round to see who can be the lowest price and the nicest guy. It’s your job to run a profitable business. Get a good website and keep it fine-tuned. Do a good job of marketing and advertising your company, and you’ll get calls from people who know they have to pay for good work.
You can fly with the eagles or scratch with the turkeys; you and you alone have to make that decision. Are you able to take good care of your family now? If you are, then continue what you are doing and good on you. If not, then maybe it is time to take a look at the approach you are using for your business and make the adjustments needed.
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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