I was reminded again recently of the need for in-house training on what it takes to pay the bills in a construction related company. I don’t mean how much money is spent on this or that overhead expense. That’s proprietary information, the only people who need to know that are the owner, the general manager and the bookkeeper. I am talking about teaching employees that overhead is an ongoing expense, it has to be paid and that each job must stand on it’s own two feet.
I was talking to the sales manager of a new home construction company, and his focus was price. He was bound and determined that lowering the sales price on the company’s services was the only way to solve their lack of sales.
Here is an example. One of their customers had asked for a change on the job, and had refused the quote given. The cost of the change was about $11,000, using the company markup of 1.40, the sales price would have been $15,400. The sales manager told me, “I know we could have sold that easily if we’d used a 1.20 markup. The total time needed to implement the change was 20 minutes of the job superintendent’s time to write the change work order. That was all, 20 minutes. The super would write the change order, incorporate it into the job and they could make $2,200 on that change.”
Now, there are two sides to that coin. If in fact this change order only cost 20 minutes of the job superintendent’s time to implement, using a 1.20 markup might make sense. An example would be if the owner decided they did not like siding A and wanted to use siding B instead. Assuming siding B takes the same amount of time to pickup, install and guarantee as siding A, and siding A hasn’t already been ordered for the job, then only difference is the cost of materials. Okay, maybe I can buy using the 1.20 markup on cost for this change only. But only under very special circumstances, and you are still at risk – if there is a installation or warranty problem on siding B, you might wish you had the cushion to protect yourself when you make the repairs/replacement on the more expensive siding.
But if the argument from a sales manager is that a lower price will get the sale, I would never agree to a lower markup. Because, and I have seen this many, many times, even after you lower the price, the owner will come up with another excuse or reason not to buy, or come up with another way to get you to lower your price. They are playing a game, and you are losing, but the sales manager doesn’t know it.
If you have people working for you that think this way, or if you think this way, I would strongly suggest a session in our Markup and Profit book, chapter 3 to be exact.
Overhead is a 24/7/365 day a year monster that does not go away. You can’t sweep it under the rug nor can you ignore it. Even if you work out of your home, you still have overhead expenses that have to be paid. You may not spend as much as the guy who works out of a storefront, but you still have overhead. If everyone around you is cutting their prices, your overhead expenses won’t reduce or go away. If you don’t charge enough to cover your job costs, all of your overhead expenses and make a profit, you will go away just like all the business owners who are, right now, trying to sell price.
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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