I want to discuss transparency. Transparency, as I'll define it based on what I'm hearing, is opening your books to your potential clients and showing them all the numbers pertaining to a job you are quoting. Those who believe in being transparent are showing clients what each item on their want or wish list will cost, and then they total it all up and show the potential client their overhead and profit numbers.
Transparency is more than itemized estimates. Generally speaking, when you itemize estimates you provide the price for each portion of a job, and your price includes your markup. There are all kinds of variations on itemized estimates. You can show prices marked-up to cover overhead only, and tag profit at the end as a lump sum. You can show costs on items that can be purchased at Home Depot, and increase your overhead and profit on everything else.
Itemized estimates are created by determining the total sales price you need to cover the estimated job costs and your overhead and profit, then breaking it down in whatever format best protects your business. You have to do this carefully, because the last thing you want is to have the potential client delete those items where you placed your overhead and profit, and keep those items where you quoted cost only. Itemization is really just playing games with the numbers to make a sale. And it's a game that your potential client stands a better chance of winning than you do.
Transparency is the next step beyond itemization. No games – everything is disclosed.
This was recently discussed on daily5Remodel.com. The conversation started with the premise that homeowners can find all pricing information online anyway. Since they can find it anyway, aren't we better off disclosing all?
This comment was made:
"I changed my business model because of this (the fact that our clients have access to pricing information). I also changed because it's very hard to justify a huge markup to a client who doesn't understand the cost of doing business. I also never felt right/fair about adding 50-75% to a change order because the customer wanted to upgrade their edge detail, for example. In response to the information age I decided to be 'open book': The client knows my costs and I charge a project management fee on the original proposal. Some change orders have a management fee and some don't depending on how much of my resources it took to make the change. If it was that edge detail change, for example, then no markup. The days of hiding costs and protecting information are coming to an end so the sooner we acknowledge that and accommodate it, the more professional (and honest) we will be perceived. IMHO."
I'd like to address this one piece at a time.
"I changed my business model because of this (the fact that our clients have access to pricing information)."
Well, they can't find everything online about our business. They can find enough pricing information to make themselves dangerous, but they don't have a clue what it costs you to tear out their kitchen cabinets or repair the dry rot in their bathroom. They just think they do.
I'll grant that some of job cost information is available in the form of prices for windows, doors, insulation, cabinets, etc. And, if the potential client is familiar with basic construction, they can tap into various forums and perhaps articles and posts here and there and garner what they may believe is a "fair" way for contractors to price their jobs.
Beyond that, almost all of their judgment or perception about how we price our work is guesswork at best. You tell me, could you get close to the price for your last job by looking on the Internet?
I've taught estimating in 44 different states to well over 16,000 contractors over the last 30+ years. In all that time and with all those people, I've learned that everyone has their own spin on how to put a project estimate together and as a result, you will almost never get two estimators to come up with the same job costs for a given job. So someone please explain to me, how is a person who is not trained or educated in construction practices going to come up with numbers that are even vaguely close to actual job costs? The truth is they can't and won't.
And, as I've discussed many times before, you need to base your company's markup on your overhead and profit needs, which isn't the same as anyone else's overhead and profit needs. So how can a potential client know what your markup should be? They can't.
In fact, based on the failure rate in the construction industry, most contractors don't know what their markup should be. And many who know what their markup is, don't use it because they are afraid they won't make the sale. Because . . .
". . . it's very hard to justify a huge markup to a client who doesn't understand the cost of doing business."
If, after carefully reviewing your overhead expenses and adding on a reasonable (8%) profit, you calculate a markup of 1.5, 1.6, 1.7, is it huge? No – not if it's what you legitimately need to charge. You need to calculate a markup that covers your overhead expenses and makes a reasonable profit. If it does that, it's not unreasonable, and it's not huge. It's what you need.
You only have to justify your markup if you tell them what your markup is. Your financial information and your markup are proprietary company information, it's no one else's business. It's especially dangerous in the hands of clients "who don't understand the cost of doing business." Let me tell you something: not only do they not understand the cost of doing business, but many of them don't care. They just want the lowest price and they don't care what it costs you. Those are clients you don't want.
"The days of hiding costs and protecting information are coming to an end so the sooner we acknowledge that and accommodate it, the more professional (and honest) we will be perceived."
The statement that giving out proprietary information makes you appear more professional or honest is, to be polite, horse apples. Does your doctor provide his or her proprietary information before you go in for surgery? If they did, would it help convince you they are a better surgeon? How about your attorney? Do you believe he'll do a better job of protecting you in the courtroom if you know how much of his rate per hour he takes home and how much he uses to pay for office staff and rent? Why does telling a client all your costs make you a better contractor? I'll argue that it makes you LESS professional. It shows you're uncertain of your ability and skills, and that's why you're focusing on price.
Price is not the number one priority for most clients. Too many contractors MAKE price the number one priority. They're hurting themselves, and they're hurting the industry. Giving potential clients a pile of numbers that they can't and don't understand doesn't inspire confidence. Being apologetic about your price or your method of pricing doesn't inspire confidence. Clients want to know that you will do the job they want done, in a timely manner at a fair price. They are hiring you to work on their largest financial asset, and need to know you'll do it right.
The absolutely best comment in this discussion came from someone else:
"Clients don't want transparency; they want peace of mind. They don't really want to see behind the curtain, they just want to be certain that we know what we are doing."
Exactly. Learn how to sell your work, learn how to present yourself, learn how to demonstrate that you will do the job they want done, in a timely manner, at a fair price. Give them peace of mind.
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NOTE: We've moved older comments here - http://www.markupandprofit.com/blog/transparency-comments