Every day in our contracting business or as a service provider we get up to go out the door to run our business. Unfortunately most contracting business owners never stop to ask themselves the most important questions:
- How much money does it take to run my contracting business?
- Why am I not making a profit in the market place?
- Do I have to charge industry prices or can I charge more?
Today’s Contractor Podcast will answer these questions and more…what does it take to make a profit in your contracting business?
The Point Is Profit
Guys that are new to the trades or whose businesses are struggling often overlook the main point of being in business which is to make a profit. The only way you can know if you are making a profit (or not) is to know your contractor numbers.
Early on it is easy to figure out monthly bills divided by 30 days to pay those bills. But as your business gets going and you start adding staff, more trucks, and travel, the expenses get bigger and bigger. Simple things like truck bills, gas and insurance can start eating into your profits, not to mention employee costs and overhead for your company.
Starting out in business you might have picked an arbitrary number out of the air to charge per hour…$55 seemed fair. That seemed to be in line with what the industry charged and so it should be right…right? But what about when you have to travel to that job eating up an hour of travel time, or you budgeted 8 hours for the job and it took ten.
In every industry there is a standard of pricing that everyone else is charging. Stay out of this…you can lose your hat especially if you are losing money every single day by pricing to the industry standard.
You need to work backwards by breaking down your costs by month, day, and even hour so you know what your nut is when pricing jobs.
For example, you cannot charge the same price to paint the inside of a house as the outside (even though some house painters will do this to get more work). Painting inside is 2.5X the size of your square footage. Trim is 20X of the square footage of the house.
A wise contractor once said, “You’ll get all the work you want if you are not making a profit”
Focus on a geographic area instead of chasing the money. We were making $200 a day but had no idea about expenses. We didn’t even know if we were covering expenses.
Get to your numbers, numbers never lie.
Mid-Sized Contracting Businesses
When contracting businesses go over the million dollar mark they get new problems and the need to track numbers becomes even more important. With every sized business you have marketing set up to bring that much business in. But be careful of getting that one customer who can push you over. For example getting a new builder who was a huge customer to a small-ish company, but they didn’t pay. No one customer could have more than 25% of your business. (if you get a big customer build the rest up so that the big one is still only 25%!)
While having a big company is the dream for many in the contracting business, both Dave and Justin have niched back down after getting big. Now they are focusing religiously on a small geographic target market, reducing employees, and raising prices…both are now managing smaller operations and personally making more money. If you are not tracking your numbers you will start chasing distractions instead of opportunities.
Aim for about 45% profit margins…a successful contracting business is not about cash flow, it is about profit. The key is not to have more sales, the key is to have profitable sales.
Contracting Business : Pricing Above The Competition
Dave has a great saying, “yes I need to eat, but I don’t need to eat tomorrow”. This means that he can turn down business that is not willing to pay his prices. If you wan’t to do business with me that is fine, I really am running about 3 weeks out right now and you know I will be in business in a few months where that person might be out of business sooner rather than later…you can pay a little bit more for better service or for not having the contractor come back and add a $1,000 later.
Contractors who charge too little might skimp somewhere, rush through jobs, make mistakes…it is natural human nature to try and make the most money. A smart consumer is willing to pay for experience, hiring someone who knows what they are doing and knows their numbers inside and out.
Taking Bad Jobs
When you take a bad job (underpriced, too far away) you create a snowball effect of disaster. Your crew will forget something, your team will be gone all day, if there are problems you have to go out there. Then someone will come along with a great job (right now money, no negotiating, right location) and you will have to turn them down because your whole business is busy chasing around after that bad job.
If you are going to run a real contracting business, seriously, sit down, put together your expenses down to the hour and figure out how much you need per hour to pay expenses and still have a profit.