Articles Written by Charles Vander Kooi

What lurks beneath the surface in pricing

When you suspect pricing problems, you've likely got other problems to fix too.

By Charles Vander Kooi

Consultants aren't any smarter than the contractors they're working with. The big difference is that the contractor is in the swamp with water up to his neck preoccupied with fighting the alligators that exist in this business. He's so busy trying to survive from day to day that he doesn't have time to figure out how to drain the swamp.

A consultant is not in the swamp. So he can run around the edge, find the plug and drain it. Now he can't get down in that dried swamp and fight the alligators for you, but he can certainly give you a better shot at fighting them. And because he's helped many others battle similar alligators, he knows their strengths and weaknesses, and he can help you defeat them.

When contractors call me, there's usually a particular alligator they believe is at the root of their problem. They always want to know if I can help them in a specific area. The suspected problem area is often part of a bigger problem and it may not be the most important problem they have.

Pricing problems

One common area contractors call about is pricing. They're not making any money and suspect it's because they're not charging enough. So they ask for a system that will help them price their work. And sure enough, about 70% of the time they do have a pricing problem. But 100% of the time there are also other issues.

We often find that they are charging a competitive rate, but that their rates don't reflect their costs. They don't know how to build their costs into their rates. And they don't know if their costs are out of whack for where they should be, given the type of work that they do and the size of their company.

To discover where the problem(s) are, we set them up on our estimating and bidding system. We come up with their equipment costing and labor burden numbers, average wage, overhead budget, etc., and a plan to allocate costs to their jobs.

Here are some examples of why a contractor's prices may be competitive in the marketplace but they're not making any money.

Overhead is too high

The first and most obvious issue is that their overhead is too high. Over the last 34 years of working through contractor's financials, we've been benchmarking overhead percentages against sales based on the kind of work a contractor is doing. So we know about where your overhead should be.

Your acceptable overhead range is going to depend on whether you do design/build, hard bid and/or maintenance and whether you do mostly small, medium or large jobs.

A design/build contractor's overhead will be higher than that of a hard bid contractor because they spend extra time designing and working closely with the client. For a hard bid contractor everything is already designed. So hard bid overhead is going to be lower.

A contractor who does nothing but smaller jobs is going to have a higher percentage of overhead to sales because the cost to get a contract, whether it's $10,000 or $100,000 is about the same.

Landscape maintenance requires a lot of labor (a driving force of overhead) and a minimal amount of materials (a factor that boosts sales). So the percentage of overhead versus sales is going to be high. When you mix construction and maintenance in 1 set of books, you have to go through and divide out overhead between the 2 in order to get a true picture of where you stand.

In general the percentage of overhead against sales can be as low as 10% and as high as 30%. Nobody better be over 30%!

However, it isn't just a matter of going to your books finding your percentage of overhead versus sales, and then asking us where your percentage stands against similar contractors.

The percentages we use are based on what we classify under overhead. There's a good chance your bookkeeper or accountant classifies a lot more under overhead than we do. Many put all equipment costs and labor burden costs under general overhead spread evenly as a straight percentage against all jobs. We allocate equipment costs based on the equipment usage on a job, and labor burden costs (like workers' compensation) based on the amount of labor on a job.

Excessive equipment costs

Another reason why your prices may be competitive but you're not making any money might be that your equipment costs are too high. Either you're not using it enough to justify owning it, or you're spending too much on repairs.

When equipment goes out and is put to work, that equipment is making money. We determine equipment value on a job based on how much you would have spent if you were renting that equipment. Then you track your equipment costs (payments, insurance, maintenance, etc.) and compare that to the income it brought in for the year.

If it brings in more income than it costs, we can lower the equipment rate you charge against jobs. If it isn't working enough to cover costs, we can raise your equipment rates or make changes so you don't price yourself out of work. You've likely got too much equipment, the wrong equipment or you've got equipment breaking down too frequently.

Why & where are you making money?

Whether your problem comes down to overhead, equipment or something else, it's critical that you know the answers these questions:
Why are you making money?
Where are you making money?

If you don't know the answers, then when the economy changes or your marketplace changes, and you lower your prices to compete, you have no idea what that's going to do to you. You just hope it all works out. This has been the downfall of a lot of contractors through the great recession.

Since 1980, Vander Kooi & Associates has been helping business owners add more to the bottom line of their company's financial performance. We would be proud to help you with budgeting, estimating, high-performance management, marketing, sales, productivity and field training. Visit vanderkooi.com or call (303) 697-6467.