Most construction business owners focus lots of energy trying to cut costs by being more efficient, working faster, buying cheaper, not wasting any money, keeping their crews busy, or doing all the pricing and ordering themselves. Spending all your time focused on cutting costs won’t improve your bottom-line unless you keep some of savings for yourself. Most contractors add up their material costs, and mark them up at the same rate.
What should you do when you get a 10% better price on material, or a lower bid from a subcontractor? By always passing along the entire costs savings generated by your hard work or negotiating skills, you’re actually hurting your bottom-line. By using the lower cost in your estimate, and then adding a 20% mark–up for overhead and profit, the actual gross profit and final selling price and is lower than if the materials or subcontract had been ordered at the original higher price. Look at these examples:
Original Quote Lower Quote Sell Higher
Material Price$ 1,000$ 900$ 900
OH & P Markup 20% 20% 33%
Gross Profit$ 200$ 180$ 300
Sales Price$ 1,200$ 1,080$ 1,200
Gross Margin 16.7% 16.7% 25%
Review the three examples. The ‘Original Quote’ mark-up example shows the result of getting a material price of $1,000 and then selling it at $1,200. The next ‘Lower Quote’ example shows what happens when you work hard to get a lower price and then pass all of the savings on to your customer. The ‘Sell Higher’ example shows what happens when you get a lower price for material and then still sell the item at the market value or what the customer is willing to pay for the work. Should you always offer your customer the lowest price on every bid and purchase on the job? On the ‘Sell Higher’ example, you purchased material or subcontracted work for $900 and still sold it for $1,200. Your gross margin increased from 16.7% to 25%. A huge difference in your bottom-line!
What if you buy in bulk?
When I was remodeling our home, the contract with the electrician included an allowance for the number of light switches and power outlets we anticipated. When the walls were framed, I walked the job with him and located where we wanted the switches, lights, and outlets. He told me the final number was larger than the amount he had included in his contract. No problem for me. I still wanted them. He then told me he had already bought the switches and outlets included in the contract at a quantity discount and he would now have to charge me more per extra outlet because he couldn’t get the same price from his supplier.
I was thinking, on every house built there are lots of switches and power outlets. If I was an electrician, I would buy them by the case, pallet or car load to get the best price I could and store them in my warehouse. The selling price would still be the same but I would make more money by buying them at a lower price in bulk. What can you buy in bulk to save money? Wealthy drywall contractors buy their drywall and metal studs by the train car load. The same for standard sizes of rebar, masonry, lumber, irrigation pipe, copper wire, and all the other materials subcontractors and contractors need on every job. When you buy small job amounts from wholesale houses, you pay 5 to 20% more for materials. Want to boost your bottom-line? Look at your annual purchases and start buying items you use over and over in bulk. This tool should make you at least 2% to 5% on your bottom-line. Also look at charging real rates for your equipment, even if it is paid for. Why should you give customers your equipment cheap or for free? Even banks charge for the use of their money!
Should you always pass the lowest cost along?
There are many instances when you work hard to get a lower price. Should your customer always get the full benefit of your efforts? What about on change orders? Should your change order cost include the cheapest price you bought the materials for, or what the market price is for the item? Should you always pass your contractor discounts along to your customers? By presenting a lump sum or a cost plus price for changes using the market versus the cheapest price for materials, you can increase your gross margins significantly.
Think about how you price work and sell your services. Bidding with the cheapest price you pay for materials for is not always the best approach to make more money. Want to make more money? Decide how you will estimate your jobs based on what your customer is buying. It is not always about being the lowest price contractor to get work or keep your customers happy. Email GH@HardhatPresentations.com to get a copy of George’s ‘BIZ Tools to Boost Your Bottom-Line!’
As a professional construction BIZCOACH and popular industry speaker, George Hedley helps contractors increase profits, grow and get their companies to work! He is the best-selling author of “Get Your Construction Business To Always Make A Profit!” available at his online bookstore at www.HardhatPresentations.com. E-mail GH@HardhatPresentations.com to sign-up for his free e-newsletter, join a peer mastermind BIZGROUP, attend a BIZ-BUILDER Boot Camp, implement the BIZ-BUILDER BLUEPRINT, or get a discount for online courses at www.HardhatBizSchool.com.
George Hedley CSP CPBC
Phone: (800) 851-8553