In every business, some things we do eat into our profitability. Sometimes it’s the things we don’t do. Once you see them, you can either start or stop doing those things and improve your bottom line.
We’re continuing our discussion of issues that eat into company profits with a discussion on pricing your work.
It is a fact of life that when you sell construction-related services, you’ll have clients tell you that your price is too high. Bless their hearts. They have no idea what would be a fair price for the work they want done, they just know that your price is too high.
That’s one of many reasons that most contractors don’t charge enough for their work. They give in to the pressure to lower their price, or they believe that they have to be competitive and that the only way to compete is by having the lowest price.
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However, not charging enough for their work is one of the main reasons some contractors have a difficult time paying their bills and supporting their families. When their prices are too low, they don’t have enough money to pay all their job costs and overhead expenses, and make a reasonable profit. When it gets bad enough, they file for bankruptcy or find another job and hope to pay off the business debts.
It’s difficult to survive in the construction industry, whether you’re a remodeling contractor, a specialty contractor, or a new home builder. It’s even more difficult if you mentally limit your business by believing you can’t charge a fair price for your work. Let me share a comment made on our website by someone who I assume is a contractor.
I don’t see how one would competitively get a job that is over 100k gross with a 1.45 markup.
Their focus is on being competitive and not on being profitable. Being competitive is an option; being profitable isn’t. The reality is that we know many contractors across the country who charge a markup of 1.50 or more on large jobs. (A 1.50 markup means they multiply their direct job costs by 1.5.) Those contractors understand they must charge enough to cover their job costs and their overhead, and make a reasonable profit as well.
If you want to know if your prices are right, check your P&L. If the bottom line (Net Profit) is at least six percent and preferably eight percent, your prices are okay. That’s assuming that you’re paying yourself a salary and that salary is included in your overhead expenses or job costs (if you’re working on jobs). If you aren’t drawing a salary and you consider net profit to be your salary, then that net profit needs to be enough to cover your salary needs and still leave six to eight percent in your business as a cushion for rainy days or future growth. We all know there are a lot of rainy days in construction.
Keep an eye on that bottom line, because it can vary from month to month, especially if you’re using cash accounting.
Here’s another thing to look at when questioning if your prices are right. If you have jobs booked out for several weeks (depending on the type of work you do), it’s probably time to raise your markup.
Look at your sales ratio. A good salesperson should be selling about one in three sales calls. If you’re selling more than one in three, you’re either an excellent salesperson or your prices are too low. Ask yourself these questions:
- Do you ever cave in and lower your price?
- Do you find yourself having discussions about your price being too high?
- Do your customers tell you they want to “think about” your proposal?
- Do you hear yourself talking or thinking about the need to be competitive?
If you said yes to any of those questions, you aren’t selling. You’re taking orders. It’s time to read our book, Profitable Sales; A Contractor’s Guide.
The most visited page on our website is a blog post titled, “How Much Should a Contractor Charge?” We wrote it to help building owners understand why contractors need the price they charge. Read it and share it with your clients. Also look at our Buyer’s Guide to Selecting a Contractor, and consider getting your own version printed to distribute.
You have a choice. You can keep worrying about being competitive and having a low enough price to sell jobs, and you’ll soon find yourself with more bills than money to pay them. You’ll also watch your employees leave for other companies where they won’t worry about getting paid.
Or you can calculate the right markup for your company and learn to sell so you can use it on every job. The right markup will allow you to see a steady eight percent net profit over time, giving your business and your family financial security.
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.
RELATED ARTICLES:
- Lowball Pricing in Construction
- Can You Be Both Competitive and Profitable?
- When Your Client Sets the Price
- Calculating Your Markup
- Finding the Path to Success
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