Being profitable doesn’t mean getting rich off your clients; it means being able to pay your bills, provide for yourself and your family, and set aside a cushion for your business. The first step to being profitable is charging the right price for your work.
The right price starts by knowing your minimum price. Your minimum price is determined by calculating and using the correct markup for your business. The math necessary to calculate your markup isn’t usually a problem; most contractors use math all the time in their layout work, so putting the correct figure together isn’t difficult once you know the formula.
The difficult part is using that markup correctly on every job. Not some of the jobs, ALL of them. That’s the decision that trips up so many contractors. They focus on selling price, rather than making a profit, so they reduce their markup to make the sale.
People outside our industry, who don’t know or understand construction or sometimes even business, will tell you that you must be competitive. What they mean is that your price must be the lowest. They think that if you sell a lot of jobs you’ll win, and you’ll sell more jobs if you have the lowest price. If you’ve been in business for very long, you know that that kind of winning can often mean losing.
The only way you are going to win as a business owner is if you’re profitable. The only way you’ll be profitable is if you sell your products or services at a price that covers your direct job costs and all overhead, and makes a reasonable profit.
If you aren’t profitable you’ll eventually go out of business, but not until you’ve suffered through many sleepless nights and stressful days trying to figure out how to pay your bills. Being competitive sounds good until it’s your business that’s failing.
Construction has one of the highest failure rates of any industry, and most of those failures are because they didn’t charge enough for their work or service. There is a minimum price you have to charge if you want to survive. If you’ve bought the lie that you have to price your jobs with a 10% overhead and 10% profit in order to be competitive, you’ll fail even faster.
When you focus solely on price and sell jobs below your minimum markup, you’re ignoring the financial needs of your company, your employees and your family. You’re taking care of your clients first, and that sounds noble until you realize it’s hurting your business and your employees. At times you’ll forgo your salary to pay the bills, and your employees work for low wages because that’s all you can afford.
Can you charge more than the minimum? Yes. I’m not always comfortable with that practice, but it’s your business so it’s your decision. Some believe in raising their price if they think a client can afford a higher price, or raising their price if the client perceives a higher value than what the minimum price calculates. I think that practice can come back to bite you down the road with a loss of referrals and possible damage to your reputation.
My issue is that you need to know and charge at least the minimum price for your jobs if you want to stay in business. You’ll get your financial house in order when you charge a price on every job that allows you to cover all your job costs, cover all your overhead expenses and make a fair profit.
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.
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