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To understand the phrase "contractor profit advantage," look at the meaning of each of those words.
Contractors are persons who enter into agreements with consumers to perform a specified service and/or to deliver precise merchandise to the consumer.
Profit is the money which remains for contractors after they recover the cost they incur to perform services and/or deliver the merchandise associated with the terms of the agreement.
Advantage is the means by which contractors earn their profit.
You must realize that the only reason "for profit" businesses exist is to earn a profit. Think about it. If you just recover your cost of operation, you break even and are standing still. That's okay if you are a non-profit, not for profit or charitable enterprise.
If you spend more than you bring in, you are losing money. In which case, regardless of your type of business, your existence in business will be directly related to your ability to absorb much stress and frustration.
To be a "for profit" business and succeed, you must know your true cost, sell your services/products above your true cost and strive to perform your service in an excellent manner. The delivery of excellence to consumers is the gateway to maximizing profit as well as the respect consumers have for your business.
The amount of profit you can earn as a contractor is directly related to the value you deliver to your client. You must 1) address consumer requests in a manner which fulfills the reason for which they called you and gives them peace of mind; 2) properly calculate your true cost; 3) blend your true cost with a proper profit margin to arrive at profitable selling prices; 4) hire qualified technicians who are properly compensated; and 5) warrant your workmanship to the consumer for a reasonable amount of time. Excellence and proper business management are contractor profit advantages.
If you do not properly and profitably calculate selling prices, your ability to deliver excellence wanes. As profit declines to nonexistence, ensuing problems you will encounter will create disgust for consumers and yourself. They don't receive value and you attain nightmarish results rather than your American dream.
Good example of a bad example
A contractor recently called for information about my coaching services. He told me about the success he was having with his six-year-old business which according to him was growing by leaps and bounds.
As his narrative unfolded, he told me he makes the same pay as his techs (while incurring much more responsibility than his techs). To add fuel to the fire, his wife who works administratively in the business receives no pay. That’s far from a successful business. His business management style echoes that of many contractors and is the reason our noble industry is in the sad state of affairs in which it exists.
As we discussed the reason for his call, he admitted needing help. When I asked what method of pricing he used. He told me T & M with a splattering of up front pricing for jobs such as water heater replacements etc.
His T & M rate was $85 per hour. That's far from profitable in the U.S., where the true cost to a PHC contractor for a qualified technician with service vehicle is minimally $100 per hour if all available tech hours are sold all the time.
I informed him that he minimally shortchanges his business $15 for every tech hour he sells, if he sells all tech hours all the time. If he sells only 70 percent of those hours, he minimally loses $57.86 for every tech hour he sells. You can rest assured his upfront pricing rates are equally flawed.
Of course he couldn't pay his wife for her labors and reward himself for the risks he takes. He was too busy paying his customers (by shortchanging his business) for the privilege of servicing their requests.
The truth is his business isn't successful. It is a philanthropic hobby that can only serve to give him much mounting stress and frustration as time goes by.
When I told him problem No. 1 was not charging above his cost, he seemed to agree. But, he added, "I don't want to be the most expensive."
When I asked him why, he told me the rumor mill claimed contractors who used flat rate pricing were not called back by consumers. He was missing a very important fact. There are many low priced T & M contractors who are also not called back by consumers because of their mediocre service.
Smart consumers seek the peace of mind which comes from a contractor who quotes prices before work commences, performs in an excellent manner, stands behind his/her workmanship and runs a truly successful business. And, those consumers do use those contractors repeatedly.
I asked him to rate his caliber of technical services to his clientele on a one to 10 scale with 1 being the worst and 10 being the best.
He told me, "eight to nine, because no one is perfect."
Yet, due to his erroneous mindset about pricing, T & M pricing method and his below cost $85 rate, he was charging for his services like he was only a one on the quality scale while relying on his wife to work for free as he received no extra reward for being the owner and risk taker.
Fairness and intelligence dictate that it is the responsibility of every contractor to know their costs and set their prices at maximum profitability so they can afford to pay all their bills and employee salaries (including wives who work in the business). Their clientele receive excellence for dollars paid and the contractor receives the reward he/she deserves.
T & M pricing forces contractors to have rates which are competitive with less qualitative contractors. It does not take into consideration the quality delivered to consumers. It does not give consumers the price before the work is authorized. It does not allow contractors to earn that which they deserve. And, it gives contractors lots of stress and frustration as the surprise bill shocks the hell out of the consumer.
T & M pricing is a disadvantage to both contractor and consumer. T & M pricing is the tool of contractors who do not know how to correctly operate a contracting business. Business is not correctly operated because they are too lazy to crunch their numbers properly, and/or not confident enough in their technical ability to get the job done within the constraints of a price quoted before work is commenced.
Correctly calculated and profitable selling prices quoted to consumers before work starts are an advantage to consumers because there are no surprise bills. Contractors receive an advantage by properly and profitably arriving at their selling prices. And, as long as the contract is fulfilled with excellence by both parties, there are no legitimate causes for dispute.
As they say, "It's a win-win!"
As to that contractor who didn't want to be the most expensive, he hung up with the free advice I had rendered knowing he had problems to solve. The ball is in his court to decide whether he wants me to show him how to attain a contractor profit advantage.
If you want to resolve to earn more money in 2015 and would like information about enrollment in one of my contractor profit advantage programs designed to help you improve your business results, give me a call. You have nothing to lose. 2
Richard P. DiToma has been involved in the PHC contracting industry since 1970. He is a contracting business coach/consultant and an active PHC contractor. For more information about the CONTRACTOR PROFIT ADVANTAGE or to contact him: call 845-639-5050; e-mail firstname.lastname@example.org; mail to R & G Profit-Ability, Inc. P.O. Box 282, West Nyack, N.Y., 10994; or fax 845-634-7236.