Odus Sweetin, owner of Sweetin Construction Co., Chattanooga, TN, asked us many years ago if we'd be willing to share some ideas on the importance of profit. He said that he'd run into many other contractors who have misguided ideas about profit. This article was originally published in 2004 via email only.
Too many confuse profit with salary or with hourly wages. They also believe that profit is optional: that contractors should be satisfied with making a "good living."
Let's look at how we are paid.
Hourly Wages: Hourly wages are paid for physically working on a given job. Hourly wages can (and should) be paid to the owner if they are the one working on the job. These wages are paid directly from the job cost (cost of goods sold) account. Time for this work should have been included in the original estimate or change work order. If it is not, the job cost accounting will not be accurate, and in turn the markup for that company will be inaccurate (too low).
For me, this is a frequent topic of discussion with owners. You can't work on a job unless the time you spend on that job, regardless of what it is, is on your estimate sheet. And you should be paid for all work you do on the job. This includes picking up and delivering materials, cleaning up or lending a quick hand, giving the owner advice, etc.
Salary: A salary is a fixed sum paid to company owners who work in the business. It can also be paid to office staff. Salary is normally based on some given period, i.e.…a year, month, or week.
Only on rare occasions should field personnel be paid a salary – their compensation should be either hourly wages or straight commission. Paying job forepersons or superintendents a salary or hourly wage does not produce the results that a straight commission will. When our coaching clients switch their production people (foreperson or super) to commission based on jobs built and collected, almost always company production jumps 15% to 25% within 60 days.
Profit: Net Profit is the money left after all your job costs and your overhead expenses have been paid. Net profit should never be thought of as owner's compensation for owning and running the company. The owner is compensated for their work with a salary. Net profit is used for company growth and survival.
A net profit of at least 8% is necessary if a company is to survive long-term. An 8% profit assures the company that it can meet payroll every time. It provides a cushion, assuring the company that overhead expenses will be paid even if a job goes south on you, as they will from time to time.
An 8% profit assures the owner that there will be money to pay all bills. When a company can't pay its bills, the owner gets distracted. They start making decisions based on emotion instead of logic. When that happens, the decision making process in the company goes downhill. With an 8% profit, the owner can stop worrying about expenses and focus their attention on how to fine tune and improve their business. And they have funds available for additional advertising and other opportunities that arise.
If you hire sub or specialty contractors to work on your jobs, be sure they are making a net profit from the work. If they don't make a profit on their work, they will soon go away. As Odus said in his note to me, "Those of us that hire subs only working for labor should know that we are putting them out of business."
Putting a sub or specialty contractor out of business can be expensive. Our best estimate of the cost to replace a sub or specialty contractor and train them to work to your standards is between twenty-five hundred to three thousand dollars. Besides, isn't helping others survive the right thing to do anyway?
Odus concluded his note by saying, "With the challenge of getting good artisans today, we need to extend our thinking so that we try to insure that those who produce good work remain in business for our next project. . . We have enough stresses on the building community today, we do not need to further strain things by putting good artisans in business out of business if we have the opportunity."
So what's wrong with just making a living? Just paying your bills, living from one payday to the next, is no way to live. You might make a living while you are young, but there is nothing to put aside for the future. When you get older and are physically unable to work on jobs effectively, your body will be ready to retire but you will be between the proverbial rock and a hard spot. You can't work any longer but have nothing set aside for retirement. Few contractors reach retirement age with any kind of nest egg to carry them through their golden years.
Price your jobs so that you can pay all hourly wages, pay yourself a salary and realize an 8% profit from your jobs. If you don't have the book Markup & Profit: A Contractor's Guide Revisited, buy it and read it today. Watch our online videos, attend our two-day class. Or call us to discuss coaching. Put your business, and your life, on solid ground by making the changes necessary to get past just making a living, and start making a profit.
Note: This article was originally published in 2004. Odus Sweetin passed away in 2011; his obituary talks about the good he was able to accomplish through his remodeling company.