---
title: The Five Biggest Financial Mistakes Contractors Make
description: Here my list of the five biggest financial mistakes contractors make that lead to money problems, and suggestions on how to avoid or prevent them.
image: https://www.shawnmccadden.com/hs-fs/file-29619152-jpg/images/wild_ass_shirts-wr.jpg
---

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# The Design Builder's Blog

## [The Five Biggest Financial Mistakes Contractors Make](https://www.shawnmccadden.com/the-design-builders-blog/bid/88271/The-Five-Biggest-Financial-Mistakes-Contractors-Make)

Posted by [Shawn McCadden](https://www.shawnmccadden.com/the-design-builders-blog/author/shawn-mccadden) on Sun, Apr 14,2013 @ 06:00 AM

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## **The Five Biggest Financial Related Mistakes Contractors Make**

Having worked with hundreds of remodelers to help them improve their businesses and achieve their goals has exposed me to the **common reasons their businesses run into financial problems.**   Here my list of **the five biggest mistakes** I see contractors make that lead to money problems, and some suggestions on **how to avoid or prevent them.**

1. ### **Guessing at the markup used to determine selling price**

![Wild ass guess](https://www.shawnmccadden.com/hs-fs/file-29619152-jpg/images/wild_ass_shirts-wr.jpg?width=173&height=123&name=wild_ass_shirts-wr.jpg)Pricing your work without knowing the true cost of being in business is referred to as using the "WAG" method, or** “Wild Ass Guess” method.**  Unless a business knows what markup to use to determine the right selling price it puts itself **at risk of actually buying jobs instead of selling them.  ** Unless you know your minimum required markup to cover overhead, how **do you know how low you can go** when the prospect wants to negotiate?

[**Don't Put Your Business at Risk by Guessing At What Markup to Use**](https://www.shawnmccadden.com/the-design-builders-blog/bid/76906/Don-t-Put-Your-Business-At-Risk-By-Guessing-At-What-Markup-To-Use)

 

1. ### **Using different markups on different cost categories without knowing the impact on required gross profit.**

![2.	Using different markups ](https://www.shawnmccadden.com/hs-fs/file-29618964-jpg/images/head_trash-wr.jpg?width=127&height=127&name=head_trash-wr.jpg)This is like a **Super-Sized WAG!**  Unless you use a single across the board markup on all estimated costs, **you will need to be very accurate** when anticipating how much you will sell of, and **how much you will markup**, each category of costs your business includes in estimates throughout the course of the year.  Most contractors who do this have **no idea how to do so**.  Keep in mind that if you do drop the markup on one item you will need to increase the markup on another to **make up for the drop in gross profit dollars** on the first one.  One contractor I know said he believed contractors who use this method have what he called **“Head Trash”** about money.  He went on to say they should “get over it” and should **learn how to sell.**

 

1. ### **Not factoring for the cost of non productive time in the labor rate used when estimating.**

**Most contractors have no idea how to handle this one.  ** Using the wrong labor rate can have a **double negative effect**.  Not only will you not charge enough to cover labor costs, you will also **lose the markup on the missing labor dollars!** To bring in the money you need to pay your employees when they are not producing work you need to **include that money in the billable hours** they do work. 

**[How to Cover the Cost of Non-Productive Time in Your Estimates](https://www.shawnmccadden.com/the-design-builders-blog/bid/78591/How-to-Cover-the-Cost-of-Non-Productive-Time-in-Your-Estimates)**

 

1. ### **Not estimating and job costing apples to apples.**

![Accurate job costing](https://www.shawnmccadden.com/hs-fs/file-15727594-jpg/images/apples-for-oranges-wr.jpg?width=146&height=109&name=apples-for-oranges-wr.jpg)First, this assumes the contractor even does **job costing**, most don’t.  As one example I estimate that **fewer than 10% of contractors can job cost their labor costs the same way they estimate them.**   If you use a burdened labor rate to estimate the dollar cost of task hours, your total labor cost will include things like workers comp insurance, non-productive time and employee benefits.   If you use **QuickBooks for job costing**, and you enter employee time card information into QuickBooks, typically only the employees wage and employer paid payroll taxes are expensed against the job budget in job cost reports.   This **will falsely make the actual labor cost appear much lower** than the labor budget from your estimate.   To solve this, use** [my free labor cost worksheet](https://www.shawnmccadden.com/Request-Shawns-Free-Excel-Burdened-Cost-of-Labor-Template/)** to calculate your **true burdened labor rates for each employee** and then work with a **QuickBooks expert** who knows how to set up the software to include labor burden assumptions in job cost reports without affecting the accuracy of your P&L.

 

1. ### **Not factoring for actual costs at time of production when estimating**

![Anticipating construction cost increases](https://www.shawnmccadden.com/hs-fs/file-29619363-jpg/images/inflation-wr.jpg?width=150&height=101&name=inflation-wr.jpg)If you sell **work that you won’t be starting for some time,** in your estimates you will needed to include the **actual costs you will incur at the time you produce the work. **  If you don’t do so the extra costs will eat away at your planned net profit until it’s gone.  If the **extra costs exceed your anticipated net profit** you will **need to use your own money to finish** that customer’s job.  Keep in mind that some reports anticipate many construction materials will increase in cost as much as 25% this year.

 

**[Anticipate increases and include them in estimates before jobs are sold](http://www.remodeling.hw.net/job-costing/up-to-date-estimates.aspx)**

 

 

 Topics: [Business Financials](https://www.shawnmccadden.com/the-design-builders-blog/topic/business-financials), [Labor Costs](https://www.shawnmccadden.com/the-design-builders-blog/topic/labor-costs), [Margin and Markup](https://www.shawnmccadden.com/the-design-builders-blog/topic/margin-and-markup), [Financial Related Topics](https://www.shawnmccadden.com/the-design-builders-blog/topic/financial-related-topics), [Earning More Money](https://www.shawnmccadden.com/the-design-builders-blog/topic/earning-more-money), [Estimating Considerations](https://www.shawnmccadden.com/the-design-builders-blog/topic/estimating-considerations)

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