If you’ve read our newsletters or our blogs or attended one of our webinars or classes, you know I talk a lot about charging enough for the service you provide. I do that because not charging enough is the major reason construction companies fail. Here are some of the pitfalls contractors fall into when pricing their work.
1. Guessing at their markup. It’s not difficult to calculate your correct markup for your company, you learned those math skills by fifth or sixth grade. But too many contractors don’t know how to calculate their own markup. Or, if they know how to calculate it, they won’t take the time to get their numbers right. They just pull a number out of the air, or borrow their friend’s markup, and use that. Or they think there is an industry standard they need to use (there isn’t).
Make sure your numbers are right for your business. If you aren’t sure, get some help. Our book, Markup and Profit; A Contractor’s Guide Revisited will take you through the steps of establishing your markup and when you’re done, you can use that number confidently, knowing your jobs are priced right.
(Simple definition of the right price: it’s the price that will allow you to pay all your job costs, all your overhead, and make a reasonable profit for your business.)
2. Adjusting their markup to be competitive. Think about that for a minute. In almost all cases, that means you’re cutting your price to try and compete with another company who, very likely, doesn’t know what their right price should be. Remember, most construction companies fail because they don’t charge enough for their work or service. If their markup is wrong, and you’re lowering your markup to be competitive (equal or below) theirs, what do you suppose that makes your markup? If you said wrong, you’re right. Being competitive is an option. Being profitable is not.
If you find yourself worrying about your price and/or your competition, you need to work on your sales skills. Price isn’t the number one concern with most of your clients. It shouldn’t be yours, either. We’ll discuss this in next week’s newsletter.
3. Variable markups. Gang, please don’t. For this discussion, I’ll define a variable markup as using one markup for labor, one for material, maybe no markup on subcontractors, and a different markup on every other cost. It’s complicated and it doesn’t help you get the right price any faster.
Total job cost times markup equals sales price is the quickest and simplest way to get to the right price for your work. When you start trying to use variable markups two things happen. First, your focus is on price instead of selling your services at a profit. Those who use variable markups are always fussing and worrying about their price. And, at the end of the year, after all the fussing about what markup to use where, every company I’ve seen that used a variable markup ended up with a low net profit. Because, once again, they were worried about price.
4. Using a margin (instead of markup) incorrectly. If you are going to use your margin to calculate the sales price of your work, be sure you’re using the right numbers, the right way. We recommend using markup because it’s easier, both on paper and when you’re doing mental math in front of a potential client. On a scale of 1 (easy) to 10 (complicated), markup is a 1. Margin is a 4 or 5 or 6. They’ll both give you the same price when used correctly. So why use margin? KIS my friends, KIS.
I’ve gone into this in more depth in these articles:
- here – Markup, Margin and Why You Should Care
- and here – Using Gross Margin to Price Jobs? Better Use It Correctly
- and here – Markup, Margin . . . Does It Really Matter?
And there’s always the book, Markup & Profit Revisited.
If the right price is the price that will allow you to pay all your job costs, all your overhead and make a reasonable profit, the wrong price (if it’s too low) means you won’t be able to make a reasonable profit, or pay all your overhead, or maybe even not pay all your job costs. And that’s when your business will fail.
We like to see the good guys win. We want you to make money in the profession you’ve chosen, and you can if you run your business correctly. You can also lose your assets. So let’s do it right.