Some words to the wise

BY RICHARD DiTOMA, L.M.P.

contributing writer

“Are you a contractor in business today?” That’s a question I am often asked by contractors seeking my contracting business expertise to help with their business problems. Many mistakenly think that I am just a person who speaks about the industry without experiencing current situations contractors encounter.

A number of contractors think my articles were written about them because in their businesses they are experiencing the identical problems of which I write. The reason they think I am writing about them is due to the fact that I am currently a contractor -- have been for 30 years and counting -- as well as a contracting business consultant (for 18 years). I’m capable of multi-tasking. My present and past contracting business experiences put me in touch with the same situations all contractors face. That’s why I can hit the nerve of their problems with accuracy. My knowledge and common sense approach to contracting business management is the rationale that allows me to help them solve the problems that plague their contracting businesses.

Some of their problems are small and simple to fix. Others have a bit more complexity. All of their problems stem from the use of wrong numbers compounded by wrong procedures. No wonder they get wrong results.

I am proud to say that the contractors who have asked for my advice, and have understood and correctly implemented my contracting business theories and methods, have all improved their respective bottom lines. Before they called me, many of those contractors sold their services for minimally $30.00 per tech hour less than the amount it cost them to produce that hour of service. That means when they implemented correct business procedures they stood to minimally increase their annual revenue by $50,000.00 per technician with the same work output.

Then there are those who don’t call. Many of them think the numbers I use as examples are high and unattainable. They have the misconception that I sit in an ivory tower away from what real contractors experience on a daily basis. They don’t realize that I am a real contractor in the contracting business today.

Regarding the numbers I use in my examples, you must understand that I must use some numbers for demonstrative purposes. They can be replaced with your numbers as long as they reflect your entire true costs; the profit margin that will allow you to reach your goals; and you don’t try to fool yourself into believing incorrect numbers. Remember that 2 + 2 = 4. It never equals less. It never equals more.

Contractors encounter problems for any of the following reasons:

1. Lack of business knowledge;
2. Low self esteem;
3. Fear;
4. Misguided ego; and
5. An inclination to act in a lazy and stupid manner.

The root cause of 99% [if not 100%] of their problems is the result of low selling prices, which are at, below or not high enough above their proportionate operational costs to reach their goals.

Laziness never will allow anyone to seek knowledge of any kind. It’s too much work. That same lethargic attitude causes contractors to utilize erroneous business practices which exacerbate their problems rather than solving them.

To rid yourself of laziness you must first be determined to run your business in a proper sound business manner. Then you must understand the principles of elephant eating. The only way to eat an elephant is one bite at a time. It’s too big to do any other way.

When you face the enormity of your problems, you might become overwhelmed with fear. Although being frightened is a natural human sensation, fear will never solve problems. As a matter of fact, fear blended with laziness will tempt you to act foolishly.

Low self-esteem comes from not knowing what you should know. This malady, which is pervasive in the contracting industry, will cause you to lose revenue that you should bring into your business to make it financially strong. If you don’t know the cost you incur to run your business, 99.99% of your selling prices will be wrong. If the rest of your selling prices are correct, then that can be attributed to dumb luck. After all, it’s said that a blind squirrel can trip over an acorn once in a while.

Some sample problems

I recently received an e-mail from a contractor located in Bergen County, N.J. That’s in the New York City -- northern New Jersey Metropolitan area. The NY-NJ Metro area is probably one of the most expensive areas in the world to live. I know. I live in and conduct my contracting and consulting businesses from the Metro area in Rockland County, N.Y. (about 25 miles as the crow flies from New York City). I’m about a 20 to 30 minute drive from this contractor in Bergen County, N.J.

After reading my article “The cost of a simple task” (9/08 issue Phc News), he wanted to know “what is the price for changing a ballcock, flapper, flex supply pipe?” I called him and he seemed to be a very nice person. He did not seem to have an ego problem. But, he is an example of a contractor lacking sound business knowledge and having low self-esteem. Because he didn’t know his true costs and his value to society, he feared charging proper profitable selling prices. He erroneously believed consumers “won’t pay that much.”

Regarding his question, I explained that the price of any task would depend upon his goals and the costs he incurred trying to reach them. He felt that he couldn’t get more than $78.00 for the task in his area. Mind you, this is an area where many consumers choose to drive cars that sell for $40,000.00 (and up) rather than $20,000.00 or less. When I asked what cost he incurred for an hour of labor and overhead for one technician, he didn’t know. That didn’t surprise me. Most contractors don’t know. They just guess or use the numbers charged by equally ignorant contractors. Then they wonder why they have problems. Ignorance is nothing of which to be ashamed. Everyone on the planet is ignorant about something because no one knows everything. But, when someone remains ignorant about that which they should know, they are turning their ignorance into stupidity. I applaud this contractor for trying to turn his ignorance into intelligence.

With information he supplied about the task in question, I quickly surmised that the cost he had to pay out of his pocket for the task (not his selling price) was between $157.00 and $299.00. Compared to his selling price of $78.00, he lost $79.00 on the low end of the range. His lack of business knowledge, low self-esteem and fear caused him to lose more money than he brought in to his business for that task.

The time expended to complete the task inclusive of his travel time was 1.42 hours. On average, there are only 1,708 sellable hours in a technician’s annual work year that can be sold [based on 52 forty-hour workweeks, less two weeks vacation; six holidays; and 244 preparatory hours, which cannot be sold]. That means he could perform the same task 1,203 times in a year. With a selling price of $78.00 and a minimum cost to him of $157.00 for the task, the result would be that he spent $95,037.00 a year more than he charged his clients. His pricing policies defeat the purpose of being in business.

I can only assume that in his mind he might be thinking that I was crazy since he knows he is surviving at his $78.00 price. But, surviving is not succeeding. Surviving requires working many more hours for no pay to make up for wrong selling prices. And, it increases stress and frustration levels. Additionally, the fact that he had to ask me what the price should be says that deep down inside he really knows his $78.00 price is wrong.

The next time that a call to change a ballcock, flapper, flex supply pipe comes in he would be better off sending the consumer a check for $79.00. At least that way he would avoid the cost of performing the task, not have to guarantee the job and accomplish the same result. That is, losing $79.00. With his free time he could play a round of golf or go fishing.

In another conversation, a contractor came to a contractors’ meeting where I was speaking with the specific intention of seeing me regarding his business. Before the meeting started and after the usual pleasantries, I asked him a few questions to get a feel about his operation.

I asked how he came up with his prices. He very confidently ex­plained that he made a list of the materials he would use for any particular task and found out the cost of those materials. Then, he marked up the cost of that material. Next, he would estimate the time it would take to complete that task. He would then multiply his estimated time to complete the task by $100.00 per hour. For his last step, he added the amount of dollars of the marked up material to the amount of dollars for his labor. But, he couldn’t figure out why he wasn’t reaching his goals.

Putting aside the fact that his material mark up procedure was probably incorrect, I asked him the following question about his labor calculation. “How did you arrive at the $100.00 per hour rate?” He didn’t know. The look on his face told me that I had hit the nerve of his problem. He immediately signed up for one of my “Profit-Ability” workshops, which would give him the answer to the question by showing him the proper procedures to use in identifying and calculating his true costs; establishing his profit margin; and developing his selling prices properly and profitably.

A third contractor called and in the discussion revealed that he did both service work and new construction. He had two service techs and three new construction journeymen with helpers. He told me that he charged $75.00 per hour for one service tech with a service vehicle. He charged $88.00 for one new construction technician (journeyman or helper) who drives directly to the job site in his/her personal vehicle. Putting aside the possibility, and most likely probability, that these selling prices were incorrect, the first thing that popped into my head was that he charged less for service work, which gave him the additional cost of a fully outfitted service vehicle than he charged for new construction without the vehicular cost. That makes no sense (or cents). When I brought this up, he said he hadn’t looked at it that way and agreed that problem needed fixing.

Some words to the wise

No one should cry over spilled milk. But it’s never too late to fix your future. Today is the first day of the rest of your life. Don’t let foolish behavior ruin your life. Discover, understand, and implement the contracting business theories and methods that will allow you to reach your goals.

A misguided ego will not allow you to realize the error of your ways. If you truly believe you are right when you are wrong, you, your family, your employees, your creditors, and your clientele will lose.

I know what you are going through because I am a contractor. And as a contractor, I face the same hurdles you encounter everyday. I feel your pain. The difference is that I have the knowledge needed to operate a business correctly and the common sense to implement that knowledge so that the business has an opportunity to be successful. No one, especially in these hard economic times, can guarantee success. But, if you don’t place your business on the path to success, you will surely fail to reach your goals.

Because you are surrounded by a bunch of competitors who are ignorant, foolish dolts who pretend to be in business rather than act like smart business people is no excuse to act as stupidly as they behave. Being frightened and not acting in a sound businesslike manner and following their lead only makes you more foolish than they are.

I always question myself about the things that I do. This allows me to fix what’s broken and continue doing and enhancing that which is right. I do not suffer from low self-esteem. I know I am good at what I do. False humility is not an admirable trait. It’s fuel for the fires of low self-esteem. I am not overly prideful. Pride is only a sin when you think you are better than you really are.

Regarding fear, President Franklin Delano Roosevelt said, “We have nothing to fear but fear itself.” If you are going to fear anything let it be fear of not doing the right thing.

Charging absurdly low prices will not allow you to deliver excellence to consumers. For example, all contractors (except for the liars) have callbacks. Even if you did a superb job, there is the chance that the material used was defective. This will, in turn, give you a callback situation. When your prices are low you really don’t have the funds to address the call- back in the excellent manner to which your client is entitled. If you address it and absorb the loss, you just lose more money. And the beat (as in beat yourself up) goes on!

I refuse to act in a lazy and foolish manner. Doing so would be an insult to my parents and grandparents who raised me, and to my own integrity. I strive to be the best I can be whether as a person, technician, contractor, administrator and/or consultant. I charge the prices that give me a chance to be the best I can be so that my clientele can receive the excellent service they deserve while my business has the opportunity to flourish. I urge you to join me in these goals. If you need help, I’m a phone call away at 845/639-5050. That’s all it takes to start the journey to success.

Truths to consider

There are certain sayings, excuses, or whatever you want to call them, that contractors use to justify their misguided flawed business practices. These contractors must rid themselves of their negativity and embrace logical sound business protocols.

Some say, “You can’t charge that much!”

The truth is that you must charge prices that will allow you to:

1. Cover your operational costs;
2. Deliver excellence to consumers; and
3. Earn the profit you deserve for the risks you take delivering excellence.

After you properly identify, control and calculate your costs, you may probably find that your costs [that is the amount of money you pay out] is higher than the “going rate” you have been charging. One contractor told me it should be called the “going broke rate.”

It’s also said that, “All consumers are ungrateful self-indulgent pains in the neck.”

The truth is that less than 2% of consumers are the “Consumers From Hell” who should be avoided. Most consumers are good people.

An old adage states, “The customer is always right!” The truth is that when they’re wrong, they’re wrong.

But, if you want to keep them as a customer you’ll have to suck it up and say they’re right. I say, “Bull!!!” When a consumer drags your prices down to levels below your cost, you don’t need them. Let them pull that garbage on your competitors. They’ll drive them out of business.

The fictional Forrest Gump said, “Stupid is as stupid does!”

The truth is that if you do the same stupid things over and over again, you are stupid.

Get smart! Don’t be afraid. Get rid of low self-esteem by setting aside any egotistical, apathetic and complacent behavior. Seek the business knowledge that will allow you to deliver excellence to your clientele and reap the reward you deserve for the delivery.

I wish you, your families, your employees, your creditors and your clientele the very best health and a joyful holiday season. I hope that 2009 brings prosperity to you and excellence to your clientele.

               

Richard P. DiToma is a business consultant and contractor with 36 years of experience in the P-H-C industry. He conducts seminars, evaluates business operations, publishes customized price guides for contractors and offers continuing support.

His book -- “Solutions Management Theories & Methods for the Contracting Business” -- deals with solving pr-oblems contractors face; identifying & calculating costs; developing proper profitable prices; addressing consumer questions; hiring and evaluating technicians; and logical management procedures

It’s also available as a “Workshop On Demand” for individual businesses (from one person to multi-person businesses); contractor groups  (organized or informal); trade associations; and wholesalers to the trade.

Date: Arranged according to your schedule

Location: Wherever you wish. Richard P. DiToma will come to you -- or you can come to him. Contact Richard to find out if there is a workshop coming to your area.

His other book -- “Readily Available Pricing Information Digest 2006” -- for the plumbing-heating-cooling contractor service price reference book is available with plumbing &/or heating &/or cooling section(s). To receive more info about his services, to order his books or to contact Richard at 845-639-5050, by fax at 845-639-6791 or via email at richardditoma@verizon.net