Contractors who call me for business coaching are often concerned about losing business if they raise their prices. But, since business only exists to make a profit (the money remaining after all expenses are paid), I say they should be more concerned about improperly setting their selling prices in a manner that does not allow them to recover their true operational costs, and to earn the profit they deserve for the excellence they deliver.
Before I started writing this article, I received a call from one such contractor I’ll refer to as Jay. He wanted information on my Contractor Profit Advantage programs. He seemed to be a very amiable and intelligent person, and he was concerned about being fair to his clientele and keeping them as his clientele.
As we spoke, I came to the realization that he is selling his services at prices that do not allow his business to recover its true cost and earn the reward his business deserves. Since fairness is a two-way street where both the consumer and contractor benefit, Jay couldn’t possibly be fair, to himself and his employees, by selling their services at prices that do not allow the business to recover its true cost and have an opportunity to earn the reward he and his employees deserve for delivering excellence to his clientele.
My articles often stem from conversations with people, and that which I have heard and observed. Before writing an article, I contemplate my approach for several days and then put my words down in the first draft that usually gets revised at least a dozen times before being submitted.
During this contemplation period, I was struck by the words used by the priest at my church during his sermon. He spoke of the five p’s of success. He didn’t coin the phrase, but he preached it well. He said the five p’s to remember are: “Proper Preparation Prevents Poor Performance.” He attributed the phrase to the great football coach Vince Lombardi.
As I sat there, I realized that the priest was using the phrase to preach about that which is really important in life, and Lombardi was coaching his team with regards to the importance of preparation in winning football games.
Since I am a business coach who preaches the theories and methods I believe contractors should consider implementing to win the game of business while enjoying their lives, I thought it would be good to bring this phrase to your attention since it is apropos.
Jay was not content with the results his contracting business was getting. That’s why he called for information about my Contractor Profit Advantage programs that offer proper preparation to prevent poor performance in business results.
As Jay and I spoke, he emphasized his fear of losing work. I tried to explain that work that costs him more money than that work brings in to his business is work that is worth losing. Contractors must fear losing money more than losing work.
Jay uses a mixture of time and material pricing for some tasks and contract pricing for others. His hourly selling price for services is $120 per tech hour, but he doesn’t know how much that hour costs him. I’ve heard that from so many contractors I am numb to the thought that contractors price their services without knowledge of their true cost. But, the coach and preacher in me will continue to explain the importance of contractors knowing their true cost in order to be properly prepared to prevent poor business results.
I asked Jay what he paid his techs and added a minimum overhead burden per tech. I told him in my opinion his true cost per tech hour was minimally, $112.50 if he sold all available tech hours all the time. At that number he makes more than he spends, but no one sells all their tech hours all the time. If he only sells 90 percent of his available tech time, his minimum true cost is really $125 per tech hour. If he sells less hours, his hourly tech cost increases higher yet.
He further exacerbates his selling price deficiency by charging $100 per tech hour when he works as a subcontractor. This type of mindset regarding pricing policy is a self-inflicted wound that stems from lack of proper preparation.
To show Jay the error of his ways, I asked what he charged to reseal a water closet. He said $200. He told me it takes one hour plus 30 minutes travel time to complete the task on average. One and half hours at $120 is $180. He claimed his material, inclusive of wax seal, bolts, supply tube, and caulking, cost him $10. That means the minimum cost to him to do the job, if all tech hours are sold all the time, is $190. In which case, he makes a $10 profit. That’s a whole 5% profit margin ($10÷$200 = 5%). Whoop deedee!
However, if he only sells 90 percent of his available tech hours, his true cost is minimally $197.50 (1½ hours x $125 + $10); still makes $2.50. Big deal! But, at 88 percent of available time sold his hourly tech cost becomes $127.84 and the task minimally costs him $201.76 (1½ hours x $127.84 + $10). In which case, he paid $1.76 for the privilege of delivering excellence to consumers. And remember, his hourly tech labor/overhead cost might be higher than $112.50 if all tech hours are sold all the time.
I said Jay was amiable and intelligent, and he saw his need for proper preparation to prevent poor performance in business results. So he took the first step by ordering my book Solutions Management Theories & Methods for the Contracting Business that shows contractors how to properly prepare.
As a contractor, to properly prepare you must address:
1. The foundation of successful contracting businesses, that is, the proper identification and calculation of your true cost of operation.
2. Issues to consider regarding the proper choice of profit margin percentage to be applied to the true cost so you can get where you want to go;
3. The blending of your true cost and proper profit margin to develop properly profitable selling prices;
4. The value you provide to society;
5. Proper answers to consumer questions that are honest, rapid, intelligent, and correct so your employees can show consumers your personnel know what they are talking about which, in turn, will lead to more profitable services performed providing you have applied the aforementioned price developing criteria;
6. Proper implementation of business protocols to make every day administrative duties efficient;
7. Proper selection of employment candidates by knowing what to look for before hiring anyone;
8. Proper evaluation of technician performance so you can properly compensate, and retain, employees that help your business succeed.
Figure 1 shows different prices for that water closet reseal dependent upon different labor/overhead costs to contractors in $25 increments based on all tech hours being sold all the time. Even though no contractor sells all tech time all the time, the cost of the task will be based on selling all hours all the time. That means you must choose a profit margin that can absorb the unapplied labor/overhead cost factor and still afford the opportunity for a profit to be earned. The illustration will show the cost to contractor if all hours are sold, and, selling prices based on profit margins of 30, 40 and 50 percent.
At a 30 percent profit margin, if you only sell 70 pecent of tech time, the best you could do is break even and earn no profit. At 60 percent of time sold, a 40 percent profit margin only allows you to break even. And, a 50 percent profit margin requires you to sell more than 50 percent of tech time to earn a profit. That’s why choosing a proper profit margin is part of proper preparation.
The material cost allowance to contractor, inclusive of wax seal, supply tube, compression nut and ring, water closet bolts, sealant, and caulking, as per my Readily Available Pricing Information Digest is $21.23 (you may pay less). The average time to perform the task is 1½ hours (30 minutes travel + 1 hour to perform task from the knock on the door until the departure from the premises).
If your hourly tech cost, if all hours are sold, is $100 and you apply a 30 percent profit margin and perform the task for $244.61, but, you only sell 60 percent of your available tech time, you would still lose $40.77 ($285.38 - $244.61). That’s why the preparation must be proper. Even though you thought you would make money with your price of $244.61 - you really lost money.
I look forward to helping Jay and any contractor make 2018 a better business year through the proper preparation my books, price guides, coaching, consulting and Contractor Profit Advantage programs provide. Remember - Proper Preparation Prevents Poor Performance. If you have any questions, feel the need to give me your opinion on this article, or, are interested in my assistance preparing properly to prevent poor business results, give me a call.