I want to tackle a common myth among contractors. The myth is that if they sell more, they will make more. But gross sales don’t drive success—gross profit does. If gross sales made a difference, Sports Authority and Borders Books would still be thriving.
Most contractors seem to think that if they sold more jobs, they would be more successful. That is only the case if you have a healthy gross profit. For definition purposes, let me define this: Revenue minus job costs equals gross profit (gross profit dollars). Your goal should be to increase gross profit dollars on every sale! Contractors don’t sell a commodity. Successful contractors sell a specialized service that highlights:
• Work-type niche
• Experience and expertise
Due to the nature of the work you do, personal relationships are the foundation of any successful contracting business. Remodeling contractors get unrivaled access to their clients’ homes. As such, your homeowner clients need to know and trust you. They are inviting you to work in their personal living space. Simply put, you are selling an experience as well as a project. Let me prove this to you. There are established companies who work in your area that:
• Get higher margins
• Charge more than you
• Have exceptional reputations
• Are always busy because price is not an issue
They are not using better materials or building a better project. They are selling an experience, and they guide their clients through that home improvement experience. If more than 80 percent of your work is coming from referrals, you must have a comparable service, because potential clients want you to work on their home! They have talked with a past client and, after seeing your work, have contacted you because they want the same experience!
You are a specialist. If you offer specific expertise (and have the experience to boot), you offer a unique and valuable service. Just ask your past clients. They wouldn’t have recommended you otherwise. Specialists don’t look at the market to determine what they should charge. They offer a premium, value-based remodeling experience and are creating a pricing model that rewards them for that expertise.
I want to introduce the idea of a “markup” matrix. This matrix begins to address the risk involved in any estimate. It allows you to protect yourself from factors you don’t control and compensates you for your experience. Please review the following suggested markups to help drive gross profit:
• Labor—1.8 (Due to lost productivity, raise your labor markup to cover time lost to weather, material delays and other lost labor factors you don’t control.)
• Materials—1.33 (You need to be paid to source, install and warranty all materials.)
• Subcontractors—1.5 (You have spent years building your team of qualified trade contractors. You are bringing these specialists to each job you do.)
• Change orders—2.0 (Change orders are extremely disruptive; you should be compensated for that disruption.)
When I review these markups with contractors, they tell me they can’t raise their prices like this. I ask them to do one simple test—add 5 percent to your next estimate and see what happens. If there is no pushback, raise the next estimate another 5 percent. You will find that your best clients will pay you what you ask. Start getting paid for your expertise. You’ve earned it!
David Lupberger has been in the remodeling industry for more than 20 years and is author of “Managing the Emotional Homeowner,” “The Remodeler’s Turnkey Program” and “The Home Asset Management Plan.” He can be reached at email@example.com or 303-442-3702.
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