Excellence costs more than mediocrity

 

RICHARD P. DiTOMA, L.M.P.,

contributing writer

 

Any time a conversation ensues among contractors regarding the industry’s prices, the contractors involved in the discussion always moan and groan about those other contractors with ridiculous prices who destroy the industry. Some say others charge too much. Others say some charge too little. They never seem to point out their own contribution to mindless industry pricing. Their ego blinds them to the prospect that they may be part of the problem.

 

All prices should be based on the legitimate costs each contractor incurs serving the public and the proper profit margin which will allow each contractor to attain his/her goals. If a price is too high for the value of the service rendered in the eyes of the public, then that contractor should consider adjusting his/her business strategy, not necessarily his/her prices. For those whose prices are too low, the consumers’ perception of the value of that contractor’s services will soon be lowered by the bitterness of a poor job done and/or warranty after the fact.

 

The benchmark for the break-even cost of each contractor must be arrived at through logical mathematical and fundamental business methods. Guessing does not count. When you guess, your prices will probably be wrong 99% of the time. The only reason I didn’t say 100% of the time is because even a blind squirrel sometimes stumbles upon a nut or acorn.

 

Wrong selling prices, flawed pricing methods and defective business practices cause all the self-inflicted problems you may face as a contractor. All business problems stem from an inability to correctly identify and calculate your real costs of operating your contracting business and the proportion of those costs as they pertain to any given task.

 

Not knowing how to choose a proper profit margin to apply to your real cost of operation further obstructs you from developing proper profitable selling prices that will allow you to attain your goals.

 

Deserving respect

 

As long as you deliver excellence to society, you deserve respect and reward for taking the responsibility and risk, which comes with serving society. But, since most of you don’t really know your true cost of your business operation, it’s difficult for you to prove to yourself whether your prices are at, below or above your cost.

 

If you calculate your budget, but don’t include all your tangible and intangible costs, or use wrong numbers, you will begin to fool yourself into thinking that your costs are all-inclusive when they are not. In that instance, those missing or wrong numbers will render wrong results. If so, you will be more than likely selling your services below your proportionate cost of operation. Your prices will probably be not high enough to recover your costs, let alone earn the reward you deserve to attain your goals.

 

When you quote at or below cost selling prices, you are not only harming yourself by creating more work, stress and frustration, you are also hurting your family, your employees, your creditors, your clientele, your competitors and our noble industry.

 

Therein lies one of the reasons you may not be happy with the return on your monetary and sweat equity investments in your business. Flawed management theories and methods that cause your problems also kill the proverbial goose that lays the golden egg.

 

To earn your reward, you must first understand that you deliver value to society, and that there are only four possibilities regarding a return on your monetary and sweat equity investments in your business: (1. You can fail. (2. You can just survive. (3. You can be comfortable. Or, (4. you can be content.

 

Failure and survival defeat the purpose of why you entered the business world. Being comfortable may not be enough, especially in these hard economic times. “Content” is defined as satisfied, not displeased, to be at peace with oneself.

Are you content with the return you are getting back from your monetary and sweat equity investments in your business?

You went into business in search of success, not failure or survival. Failure and survival occur when you don’t give your business the opportunity to succeed. Without the opportunity you can never succeed. But opportunity alone doesn’t guarantee your success.

 

The current economic climate makes it obvious to anyone with a modicum of intelligence that success is harder to achieve today than when the good times roll. I’m sure when you went into business you did so with the intent of delivering excellence to your clientele, while earning the reward you deserve for the delivery of that excellence. But in these hard economic times, offering your services at the wrong prices increases your problems, because when there is less work, your cost per task actually goes up. The practice of lowering your prices to levels below your true cost will only serve to make your life more miserable.

 

Examples of wrong number and wrong results

 

To survive in my geographic area, a qualified technician needs a minimum $50,000.00 annual salary. I know; I live there. When you take that salary into consideration and add salary-based expenses like fica matching funds, insurances such as unemployment, disability, workers compensation, liability, health and a few bucks for an ira, the salary cost per technician hour to the contractor is minimally $42.34 if the contractor sells all available tech time in a 40 hour/52 week (no overtime) work year. That’s without overhead expenses, which are probably an approximate minimum $75.00 per tech hour. That means the minimum labor overhead cost is $117.34 per tech hour.

 

While perusing some coupons I received in the mail, I noticed some really stupid offers from contractors. Some even bordered upon deceptive and fraudulent advertising.

 

Coupon 1: A duct cleaning company offered a “whole- house duct cleaning special.” For just $44.95, it included unlimited vents, one return, one main and one access panel. It did state that “additional mains, returns and access panels will incur additional charge.”

 

I’ve been tracking the average travel time in this area for 32 years. The average time for a technician to take the call, plot the route and drive to the consumer is 30 minutes. At $117.34 per tech hour minimum labor/overhead cost, if that task with travel time took an hour, that contractor spends $117.34 to collect $44.95. To add insult to his/her own self-inflicted injury, he/she offers a 10% senior citizens discount so he/she could lose more money. If it takes more than an hour, he/she loses even more money.

 

I’m sure he/she is figuring to get other work while there. But even if he/she gets more work, he/she has to make up for the loss created with his/her silly offer before beginning to break even. Added-on extras only serve to make the offer appear to be a bit shady.

 

Coupon 2: Another contracting genius offers “Complete New Bathroom at $6,900.00,” including: complete demolition; new sheetrock; new steel tub; new toilet; new sub floor; new vanity & sink; ceramic tile floor; tile shower walls; sink & shower faucet; and disposal & dumpster fees. This coupon did claim in small print that upgrades were available & larger bathrooms may be subject to extra charges.

 

I don’t know if you ever have contracted to remodel this type of described job in totality. I have. It takes between 100 and 120 tech hours.

 

Using the same aforementioned minimum $117.34 labor overhead cost and only 80 hours, this company minimally spends $9,387.20 on labor and overhead. The material described and disposal and dumpster fees have to minimally cost $1000.00. That means spending $10,387.20 to collect $6,900.00. And that’s if it only took 80 hours to complete.

Instead of going through the hassle of operating his/her business, advertising this ridiculous offer, performing the service and standing behind the workmanship, this extraordinary lackluster contractor without a clue should just send any consumer who wished to avail themselves of his/her $6,900.00 offer a check for $3,487.20. He/she would have accomplished the same result without having to do the work. Silly irrational selling prices are stupid!

 

Coupon 3: This is yet another ingenious plot to prove how foolish contractors can be. This mastermind of the absurd offered to install a 50-gallon gas water heater replacement for $795.00 and a 40-gallon gas water heater replacement for $695.00.

 

My contracting business has replaced many 40- and 50-gallon gas water heaters during the last 32 years. I’ve tracked the average time to perform this service. Some might be done faster than the average time. Others make take much longer. But, on average, that task takes at least four hours, plus the initial travel time. The technician spends time introducing him/herself to the consumer. Then, he/she has to check out the situation. Next, it’s back to the consumer to explain what must be done and the price to do it. If the consumer agrees, a contract (usually an invoice with prices, terms and conditions) must be completed. The tech has to set up the work area; drain the existing water heater; pick up the new water heater; install the new water heater; fill the new water heater; light the new heater; and wait for the temperature to reach limit to assure that the highest temperature will not scald. While waiting for the temperature rise, the tech can clean up the work area and get paid for the service.

 

No matter how you slice and dice it, at least four tech hours are spent. If you add 30 minutes for the initial travel time, that contractor has just spent 4½ hours to install that water heater. At a minimum labor/overhead cost of $117.34, this brainiac has just spent $528.03 without any material. The minimum cost of the water heater is between $300.00 and $500.00. The immediate piping and fittings for the water and gas hookup; some venting material; and solder, acetylene, flux, grit cloth, sealant would probably add another $50.00 to $120.00 to the material cost.

 

That means the cost to this mastermind of the contracting world ranges between a low of $878.03 and a high of $1,148.03. With $695.00 or $795.00 brought in to his/her company, this mathematical genius minimally loses between $183.03 and $353.03 every time he/she performs one of these advertised specials. Isn’t he/she brilliant? And, if something goes wrong with the job he/she will be in even deeper trouble.

 

Don’t fool yourself

 

Don’t make these types of mistakes. They are foolish, non-productive, and costly. Before quoting prices, make certain that you know your true costs and use a proper profit margin that will give you the opportunity to attain your goals. Apply that data to any job before quoting a price to perform that service.

In order for you to deliver excellence to your clientele you must acknowledge your true costs and sell your services above those costs. If you don’t, your excellence will soon turn into mediocrity because you won’t have the money to pay for the cost of a top quality job and the cost to stand behind your work.

 

If you’re not sure of how to go about figuring your costs and choosing a proper profit margin to attain your goals, give me a call at 845/639-5050. I’d be glad to show you how to do the right thing so you don’t drag yourself and our magnificent industry down like the poor ignorant desperate souls who made those ridiculous offers.

 

As always, I wish to you the best of health and good fortune.