- Has lots of dollars in the bid.
- Has lots of hours built in – to keep the team busy for a long time.
Once we got a handle on the financials, we started pricing ourselves out of the new construction market. The good news? We weaned ourselves from “BIG Jobs” and started making money on “Sweet Spot Jobs.”
You see, before I figured this out, I was sure that if a Job came in with a hefty Gross Margin, it was a good Job. But Gross Margin just ain’t “all that.”
Gross Margin is Sales minus Direct Costs (Cost of Goods Sold) expressed as a percentage. Gross Profit is Sales minus Direct Costs (Cost of Goods Sold) expressed as dollars. You need to pay attention to both. I will take a low Gross Margin if the Gross Profit – per hour, or per day – is really good.
Pull up a chair, business builder. I’m going to share something that I never learned in business school or in any business building seminar. My mentor Frank Blau taught this to me…and it is a key to making money.
Let’s use a dramatic example to illustrate the challenges of the “BIG Job.” Suppose you have the opportunity to bid a new job. The General Contractor alerts you that he will be supplying the materials. You may find that a relief. “Oh, good…I don’t have to worry about that. No fussy owners to talk to. No ordering the wrong thing. And the “BIG Job” will keep the crew occupied for a while.”
Now, let’s assume (this may be a big assumption) that you have done some numbers crunching and have a handle on your selling prices. Let’s assume that Frank Blau dressed you down once upon a time. He taught you a basic breakeven formula:
- Add all your costs of doing business, including great wages for your team and a decent salary for yourself.
- Divide the total costs by the total estimated number of billable hours you can generate. That gives you a breakeven per billable hour.
- Then, inflate that number for your desired profit percentage. That’s your selling price per billable hour.
Easy peasey. If you have done this exercise, you will probably come up with a selling price that is 3-10 times the going rate for labor in your market. Note what happens when you put a bid together for this “BIG Job.” For our example…
- The yellow cells are how you price. This is the classic “Frank Blau” method. Selling price for labor is $300 per hour. $300 time 200 hours is $60,000. That’s the selling price for the “BIG Job.”
- The green cells represent a typical pricing strategy…$50 per labor hour.
The only way you are going to get this “BIG Job” is to cut your price. You could put in less hours or your could drop your selling price per hour. Or, you could say, “No, thanks,” and not even submit a bid. On this type of job – low ratio of materials to labor required – your price is always going to be a lot higher than the contractor charging the “going rate” for labor.
Let’s look at a job that has a high ratio of materials to labor required. In this scenario…
- The yellow cells calculate a selling price by multiplying $300 times 10 labor hours. And materials are inflated to create a 20% gross margin.
- The green cells show a price derived by using $50 per labor hour and increasing the materials for a 50% gross margin (doubling the materials.) It’s a standard approach in our industry.
Well, well, well. You are the low bidder in this scenario. You could get this job. Submit the bid. I love high materials to low labor required jobs! Sell really nice materials and focus on remodeling, replacements and repairs. Put together fantastic systems combining solar, hydronics, hvac and lovely plumbing fixtures. Offer the good stuff…but keep the overall scope of the job modest. Even if you blow the bid, you could recover from this job. If you blow a bid with hundreds of hours in it by even 10%, it could jeopardize your company.