- 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.
Even if your competitor chickens out and lowers the margin on materials, look at the results.
In this example, I dropped the gross margin to 25% on materials. You will be slightly higher priced, yet if you have basic sales skills and good operating systems (show up clean, sober and on time for starters) you can still get this sale. Submit the bid…in person…and take home the check.
A high materials to low labor hours required job is a “Sweet Spot Job.”
When you have a selling price that covers all your costs, you don’t have to inflate the materials to cover overhead. You can just inflate your materials costs to generate profit. Materials are gravy! And, they can help you leverage every hour you sell.
In the “BIG Job” scenario, even if you did get that job, there are no materials in it. You will spend 200 billable hours (if all goes well) and miss the opportunity to generate any additional sales dollars per hour. In the “Sweet Spot Job” for every hour of labor you sell, you are generating profit dollars from material margin.
Within the total bid, you have a selling price for the materials of $12,500. Less the cost of the materials, you generate $2,500 in gross profit…or $250 per billable hour. I love love love “Sweet Spot Jobs!”
The “Crack Cocaine of Contracting”
Here’s another problem with the “BIG Job.” When you get one of these, you will keep the team busy for a week or two. Then, between the sub-rough and the rough, and the rough and finish, there are weeks of waiting. So, you take another “hit.” Because you have a lot of team members now, and you have got to keep them working, you take another “BIG Job.” There is an initial rush. Ahhhh. The selling price of the job seems so big and looks like the money will be more than enough to cover all expenses. You start leap-frogging the production. Hey…it could work! You seem to work better when you are busy. Sure, you run into some snags. You realize you forgot to include hours in your bid for the stuff that happens that you couldn’t anticipate. Then, you sweat as you extend your line of credit to cover payroll while waiting, sometimes for months – sometimes forever, for the last retention payment to come through. And, you take another, “hit.”
You get to do what you want to do.
Don’t let me or anyone else tell you what to do. I am just sharing my experience – and prejudice – with you. Do you love new construction work? Great! I wish you the best. Be disciplined about the financials and make sure you are charging more than it costs. Be obsessive about good bidding and production systems. I hope you do really well at it.
However, it may be that this article is validating what you have already discovered: That “BIG Jobs” don’t work for you. So be it. I encourage you to discover your “Sweet Spot Jobs” and expand that area of your business. You could work less, enjoy life more, make more money and assume less risk.
NOTE: This cool spreadsheet will help you find your “Sweet Spot.” Want one? Just download a sample. Save as and customize to work for you. Here to help!