We received a note from a new remodeling firm in Canada with some questions. Since those questions are typical of those we often hear from new business owners, let me share them here.
I just wanted to send you an email to ask your opinion. We have been in business for 9 months now as a remodeling renovation business. Originally we calculated a markup of 1.5 for business. Upon reassessment, our sales – which have been steady are only amounting to a now projected $200,000 – $215,000 for our first year.
That’s too low for survival but it’s not out of line for a new business. First year companies often struggle with sales and bring in less than half of what they need to stay in business long term. They need to push that up to at least $450-500K as quickly as possible to provide enough income to pay their bills and survive in business.
The best way to do that is through a website. We all look online first when we need something, and so do your potential clients. They’ll find you with a well-designed website. If your website is put together properly, designed with SEO in mind, it should generate 3 to 5 leads a week. Your potential customers want to know all about you before they call, and your website is where you tell them what they want to know.
Back to the note:
We will need to increase to a 1.7 to meet our overhead costs. Do you think this is too big of a jump? With the way inflation is going I personally feel that it is what it is. We are a husband-and-wife small business and just wanted to get your take on the jump.
I told them not to fuss about the markup, charge what you need to stay in business. It is what it is. Your potential client has no idea what your numbers are or what they should be. Based on feedback from 25 years of coaching clients, I told them they shouldn’t lose many sales with that bump. They need to focus on quality, value, and the service they provide, not a low price, and they need to learn how to sell that. A low price is a sure-fire path right out of business.
Also, there is a construction labour shortage here in Canada, not sure if you guys have the same issue in the US – but other business owners are asking us to quote out hourly jobs for them where we will make no markup on material. Should we be quoting these with a much higher mark up to compensate for that loss markup in materials?
In my opinion, the labor shortage is one area where almost all industry associations have fallen short. Most associations have done little if anything to encourage young people to get involved in the trades.
About the hourly rate: I would think twice about doing work for other contractors. They are essentially asking you to do piecework, working for hourly wages. If you’re going to do it, price your work at your cost times at least 2. If the GCs don’t like your price, walk away. I know there is a need to increase sales, but let’s not give away the farm.
My numbers are:
Sales: $200,000
Overhead: $66,000 (this includes a 10% salary of $20,000)
Profit 8%: $16,000
Looking at their numbers, their job costs are about 59%, which is right on target. That leaves gross profit at 41% and net profit at 8%. Their numbers are good, they just aren’t high enough. How can a couple live on $20,000 a year? That is $1,666 total income for a month, and many mortgages are higher than that. However, their salary shouldn’t be more than 8% of sales the first 3-4 years in business, so they definitely need to sell more.
My husband is the only worker at a rate of $60/hr and we have an occasional hand that we pay $30.00/hr but charge him out as $60/hr as well because he is just as experienced – he is retired and only helps on the odd large job.
That rate for the owner is good for estimating purposes, but hopefully it isn’t what they are charging other contractors. I also hope they aren’t billing their jobs by the hour. It’s okay for small handyman type projects, but if they want to start making money, they need to quote firm, fixed prices for their work. The owner also needs to get off the jobs so they can focus more time on sales.
These are typical small start-up questions and comments, and the good thing is that they knew enough to ask questions. I suggested they read Markup and Profit Revisited as it covers the topics above, and Profitable Sales to help increase their sales. Remember, you are in business to provide a service and make a profit doing it. You are not in business to drive around doing “Free” estimates, give away your design assessments of the job to be built, or do the labor on jobs so that other contractors can put the gravy in their pockets.
Read, study, and keep learning. Those who do can succeed in this industry.
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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