Words: Corey Adams
I never thought high school was teaching me much. I think most headstrong boys of 16 years feel the same way. As I look back on it, however, there is something I learned that stuck with me from the first time I learned it. It came from what most consider the most boring high school class ever, economics.
The principle of supply and demand opened my eyes as a young adult. I gravitated towards it like a moth to a flame. Was everything this simple? The short answer is yes.
Supply and demand are the core factors to price determination. It is the natural forces of economics that can make or break any company across any industry. The point where supply and demand meet is economic perfection.
How this applies to the construction industry is easy. More demand equals higher prices. Low supply equals higher prices. The demand on our industry currently is through the roof. We get constant invites to bid from commercial clients, and plenty of calls for our residential work as well. Daily opportunities that we filter through to hand pick the projects that fit our company. The amount of work we can supply is lower than we would like it to be as well. It gets harder and harder to find just a handful of qualified employees, let alone an entire crew. Like most people in the industry, we are in a low supply – high demand scenario.
As spring sets in across the nation, we all are experiencing the same scenario. The base law of supply and demand tells us to raise our prices. I can already hear many responses to this statement. I hear them all the time when I suggest a price increase to the industry. “If I raise my prices, I will lose some work.” My response is always, “good, you probably don’t want that job anyway!” Raising your prices the right way won’t cost you enough work to bankrupt you. Here is how to do it.
When I get involved in something, I study it intensely. When I was beginning in real estate, the studying led me to a little piece of gold that translated well into my main industry, construction. It is called rate pushing.
As units in a rental real estate portfolio begin filling, rates are automatically adjusted based on target occupancies. If your vacancy rate is 50%, rates go down, if your vacancy rate is 5%, rates go up on the remaining available units. This is how apartment complexes, self-storage facilities, and other large unit real estate managers maximize income and keep targeted vacancy rates intact. How we modified that into construction is where the real money was made.
As our schedule fills up, we tend to raise prices incrementally based on back log of work. If we are one month out, add 10%, 2 months 20%, and so on until the customers say uncle. As we go back down the rate pushing ladder, and our backlog gets under control, we back the markups down until we get to our standard bid rates.
What we found the first year of doing this, about 15 years ago, is that our close rates remained the same until we hit the 3 month add 30% window. Once we backed it down to the 2 month add 20% mark, we closed the exact amount of jobs to keep our back log at 2 months consistently. In effect, we eased our way into an across the board 20% increase in our pricing, and never lost a day of productivity.
I find that many of the contractors I network with struggle with the concept of higher prices. They want them, but do not know how to implement them without fear. Rate pushing allows this to happen.
As we all feel the demand pressure on our companies to accomplish more and more every day, rate pushing is a great way to respond to the natural laws of supply and demand. It allows us to maximize our schedule, back log, and most importantly profit.