The Design Builder's Blog

3 Financial Strategies for a More Scalable Construction Business

As 2017 dawns, the outlook for the construction industry is optimistic. Despite setbacks experienced during the Great Recession, the industry is set to add 790,400 jobs over the decade of 2014 to 2024, accounting for the majority of new jobs in the goods-producing sector. Real output will grow 2.8 percent annually during this period. In 2017, total U.S. construction starts will increase 5 percent, reaching $713 billion, anticipates Dodge Data & Analytics.

For contractors, this is great news, but it also presents the challenge of scaling up to meet growing demand. Scaling up requires not only hiring more workers and buying more material, but also adjusting your financial strategy to cover your increased overhead expenses without hurting your cash flow and profits. Here are three financial strategies for successfully scaling up in 2017.

 

Scale up Revenue while Scaling Down Costs and Expenses

A scalable remodeling business model is designed to allow you to increase revenue while holding both job costs and overhead expenses down. To be scalable, your financial plan should aim for gross profit margins of 40 percent or more (minimum of a 1.67 markup).

To achieve this level of gross profit margin, one fundamental strategy is increasing your revenue. The key to increasing your revenue is improving your marketing and sales. One of the most efficient ways to improve your marketing is by improving your positioning through a better unique selling proposition (USP): a brief statement that summarizes what you offer customers that your competition doesn’t.

To refine your USP, narrow down your ideal target market. For instance, is there a certain neighborhood or a certain type of building that would be more profitable to specialize in? Research what your target market is most seeking in a construction contractor. For example, are they price shoppers or are quality or service bigger priorities for them? Craft your USP to emphasize what your target market most values and make sure all your marketing material reflects your new USP.

Along with increasing your revenue, the other half of keeping a high profit margin is keeping expenses low. Many construction businesses fail because they can’t cover the cost of overhead. Finding ways to reduce the money you must pay for running your business is key to minimizing your expenses. Taking the time to research different organizational charts, industry best practices, project management methods, business management software and employee compensation strategies based on performance.   Investing in these areas now can help your business reduce overhead through efficiency of operations as well as economy of scale as the business grows.

 

Maintain Efficiency through Automation

Another effective strategy to lower job costs is automation. Automation can help you lower the costs of materials by helping you plan more precisely to avoid unnecessary waste. J.E. Dunn has partnered with Autodesk and Microsoft to develop Lens, a cloud-based software tool that combines 3-D virtual modeling with instantly-calculated cost estimates for each component of your building project.

Although not common yet in residential remodeling, another way automation can help cut materials costs and waste is by using 3-D printing. 3-D printing allows you to select from a wider range of cost-efficient materials, while speeding up the building process. Last year, Chinese company Huashang Tengda was able to assemble a 3-D-printed house in just 45 days.  Remember, many said nail guns would never catch on!

 

Keep Costs and Expenses Down with Outsourcing

Outsourcing is another proven way to cut labor costs both in the field as well as the office. Many successful large companies outside our industry have used outsourcing effectively to streamline their labor expenses. For instance, Google relies heavily on revenue from pay-per-click advertisers who pay to have their results featured in search engine rankings. Maintaining its advertising revenue requires a large sales support team, which Google has outsourced. Amway is another company that outsources its sales, relying on a distributor model to promote direct sales.  In our industry many contractors already outsource activities such as design, engineering, building permit procurement, sales, lead intake and prequalification, RRP demo, specialty trades and even general carpentry.

As these examples illustrate, you can outsource functions that are part of your core business if it is more efficient to delegate them to specialists than to maintain in-house talent. For instance, there is no need to pay for the expense of in-house 3-D drafting when you can easily outsource it. With the right plan and system you can also easily outsource routine peripheral functions such as bookkeeping and payroll.

 

These 12 Hard Questions Can Help You Decide if You Own a Remodeling Business or a Low Paying Job

Are you pretending to be a remodeling business owner but in reality you are actually just a "job owner"?  The questions below are tough and may make you feel real bad about yourself depending on how you answer them. But that’s not why I assembled them. Don’t kid yourself. If you are not cut out to be a business owner recognize that reality now. Don’t wait until you lose you all your money, your home and maybe even your family.  If being in business is not your calling keep in mind the industry is desperate for good employees.  Real remodeling business owners offer good jobs with great pay and benefits.  Answering these questions might just be the best thing you do for yourself this year.

 

1. Are you one of about 85% of remodeling business owners who have no clue regarding how to calculate your required markup and gross profit margin (WAG)?
2. Are you one of those business owners who uses a convoluted scheme for marking up different things at different markups even though you have no idea whether you are buying or selling jobs (WAG)?
3. Are you one of those business owners who doesn't know the difference between markup and margin, or worse you think they mean the same thing (WAG)?
4. Are you one of about 80% who do marketing without a marketing plan?
5. Are you one of those business owners who has no idea whether you made or lost money until your taxes are done in March or April by your “historian accountant” (WAG)?
6. Are you constantly getting tax filing extensions because your books are a mess and or because you don't have the money to pay the taxes you were surprised to find out you owe (WAG)?
7. Is your business up to its eyeballs in debt and you have no idea how or why you got there, or how you will ever get it paid off (WAG)?
8. Are you, or will you be, one of the 52% of Americans ages 62-65 who have less than $25K saved for retirement?
9. If you divided your total pay Wage plus net profits) by the number of hours you worked this past year are some or all of your employees making more per hour than you?
10. Are you able to still say you’re still in business because of your wife’s job and health care plan?
11. Do you brag that you do no marketing and totally rely on referrals but at the same time complain about the jobs and customers you get?
12. If you answered yes to most or all of the above are you ready to do something about it?

 

 

How to Raise Your Markup: The Short 7 Step No BS Answer

OK, I’m sick and tired of the foo-foo fluffy BS answers some magazines and bloggers put out there to answer how contractors can raise their markup.  All the BS answers I see offered by others never call these contractors out on their ignorance. Without knowing what markup they actually need to use how would a contractor who is “slowly raising” his markup know when he has finally hit the right markup? It drives me crazy!   If you are ready for the no BS answers read on…

I have observed that the most common reason contractors can’t or won’t raise their markups is because they have no idea what markup they actually need to use. Yes, the hard truth is they are ignorant to how profits are built into their pricing and how to determine what markup they actually need to use. Due to their ignorance they have to guess and therefore completely lack any confidence in the prices they quote to consumers.

 

OK, no more BS.

If you want to make a predictable profit as a contractor here is the short and sweet no-BS plan.  

1. Recognize you have no clue what to charge to be profitable and make a commitment to stop using the WAG Method (Wild Ass Guess)
2. Learn how the financial game works so you will know what needs to be considered and how to figure out what to charge. If you have never been able to do this on your own, consider the definition of insanity and take a different route.
3. Do the work and due diligence required to calculate the markup you need to use to be profitable, to live the life style you deserve, and to be able to retire some day (before your body gives out or you die). Knowing this number will be business and life changing.
4. Accurately estimate your direct costs to build projects and then use the markup you calculated to establish the profitable price you need to sell at.
5. Tell prospects your price and stick to it with confidence.
6. If you don’t know how to sell, other than by dropping your price, get real sales training. Remember, profits are earned during the sales process and protected during production. If you are trying to make money in production it’s probably because you’re not a business manager, you’re a carpenter.
7. If the people in your current market won’t pay what it takes for you to run a real business find a new market to work in.

Done! No more BS.

She took control of the bull.  But, will you do it?

 

 

Comparing Contractor Markups Can Be Pointless and Very Risky

Many remodelers determine their pricing structure by copying what other businesses do rather than figure out what markup their business actually needs to use. Comparing or copying markups or margins is pointless and very risky without knowing how they were determined.   The decision about what costs or expenses go above or below the gross profit line can be different at different remodeling companies.   Therefore the markup each company will need to use to cover overhead costs and planned net profit will be different. Let me explain and clarify.

 

First, here are the terms you need to know

Above the line = direct project costs (materials, labor -including burdens, subs and equipment costs)

Below the line = overhead related expenses

Indirect costs = overhead expenses plus net profit added together

 

Here is the simple mathematical formula for determining your markup

The businesses’ total indirect costs divided by the expected direct costs for an anticipated volume of work equals the required markup % to add to estimated direct costs.

This assumes profit is a required expense of doing business!

 

Let’s do an example:

The setup:
Assuming a remodeler is running a $900,000.00 a year business with the following above and below the line expenses:
$300,000.00 (Of indirect cost: overhead + net profit) ÷ $600,000.00 (Of direct cost: materials, labor and subs) = 50% markup

Proving the math works:
So, $600,000.00 of estimate direct job costs marked up by 50% = $900,000.00 (Provides a sell price that includes $300,000.00 of gross profit to cover the indirect costs of overhead and net profit)

Therefore:
One contractor can put something like vehicle expenses or worker’s compensation insurance related to field staff above the line.   Another might put the same items below the line. These two contractors may get to the same exact selling price but will be using different markups to get there.

 

Other important considerations to be aware of

It also important to know that fewer than 20% of remodelers actually know the true costs of being in business.  That means that 80% or more are using what has been referred to as the WAG or “Wild Ass Guess” method when it comes to deciding what markup they use to price the projects they sell. I call that “Contractor Roulette”

If that isn’t shocking enough for you keep in mind that about 9 out of 10 remodelers go out of business within ten years. Your chances of copying a successful remodeler’s markup are therefore about one out of ten. And the odds of copying the wrong markup get even greater if you don't know how, or even if, that remodeler actually calculated his required markup or did the WAG.

 

So here’s the bottom line regarding markup

You need to do the math or you won't know whether you are buying or selling jobs! Your ultimate success hinges on knowing the true costs of being in business and how to profitably price the work you sell.

 

So, what about you and your business?

The choice is yours. You can get the help you need to figure out what you need to charge for your work so you can be successful. Or, you can continue using the Wild Ass Guess Method and go to bed every night wondering if and when you will join the 90% who go out of business.

 

Other related articles:

Self Quiz To See If A Properly Setup Financial System Can Help You:

10 Causes of Construction Business Owner Financial Anxiety

Don't Put Your Business at Risk by Guessing At What Markup to Use

Don’t Confuse Bad Cash Flow with Under-Pricing

The Five Biggest Financial Mistakes Contractors Make

 

Contractors, Is Your Pricing Really Fair?  

I often hear contractors say they offer fair pricing.   When I ask them what they mean by that most really can't provide a logical answer, or their answer is subjective. It got me to thinking about what fair pricing really is.  I came up with three considerations I think make a contractor's pricing fair to their customers, but also to their business as well as their employees.  Let me know what you think.

 

#1: Your markup is established using math, not a Wild Ass Guess (WAG)

Your pricing will be fair if the markup your company uses to price your projects is based on a budget that identifies your true overhead costs for running a professional operation and a respectable net profit.   I suggest if you run your business, but don't work in the field, you shoot for a salary at 10% of your produced volume as well as a 10% net profit for the risk of being in business.  Remember, if you don't work in the field your salary is considered overhead.  If you do work in the field be sure to split your time and related salary appropriately between direct job costs before markup for your hammer swinging activities and the balance for your time under overhead for your business management efforts.

Your overhead will be fair if you include enough money to properly manage your business, market to the right customers and adequately staff your office so you’re not a slave to your business.  Therefore, your price will be fair if your markup is fair. Click here to read an article on how to calculate your markup using simple math.

 

#2: You pay and treat your employees as professionals

I would suspect most contractors work for customers who have good jobs offering decent pay for the job performed, workers compensation coverage, benefits like vacation and holiday pay so they can enjoy life, health insurance so they can stay healthy and retirement contributions so they can save for a comfortable retirement.  I bet if their employers took any of those things away from them “it wouldn’t be fair”.

Therefore your pricing is fair if it includes enough money to offer those same things to you and your employees.   Perhaps remodeling prospects who don’t think paying enough so you can offer those things aren’t being fair to you and or your employees when they hire contractors who pay their employees under the table or as 1099 subs.

 

#3: When consumers buy from illegal businesses they aren’t being fair to any of us.

Home owners who work with illegally operating contractors aren’t being fair.   If contractors ignore RRP requirements, that’s their choice, but it’s not fair to legal business, or to those who end up getting lead poisoning as a result.   When they buy from unlicensed contractors when licensing is required, or purposely do the work without a building permit, that’s not fair. And when they knowingly work with contractors who operate this way, then sue them because they can, that’s not fair either.

If you and your business comply with these things and many others such as OSHA regulations and payroll taxes at your business, and charge appropriately for them, it is my opinion that your pricing is fair.

 

Are my article and my opinions fair? 

Let me know what you think. Did I miss some things you think should be considered regarding fair pricing?  Do you disagree with my thoughts? If you don’t share your opinions, maybe you’re not being fair either?

 

 

 

Sales System Considerations for Remodelers Looking to Break $1Million

Well before attempting to break past $Million in installed sales remodelers and home improvement contractors should already have an established and tested sales system in place.  The system should be well defined. Those involved with selling, as well as supporting the sales department at your business, must be trained and held accountable to using it correctly and consistently.  

It’s also imperative to get a salesperson other than the owner in place and productively selling well before passing the $1Million threshold.   Doing this is important because the owner's time will most likely be pulled away from sales for more important activities as the business grows.  

Here are several important sales system related considerations for business owners looking to break past $1Million in installed sales.

 

Decide on how fast you want to grow your business  

Growth can't happen without sales, sales won't happen without talented sales staff, and having enough quality leads won't happen without a strategic and effective marketing plan in place.   All three of these things must be worked on consecutively and put in place as soon as possible to support a fast pace of growth. Remember, the biggest cause of remodeling business failure is growing the business faster than the systems needed to support that growth.

Decide what Sales System you will use

I suggest you choose a known and proven sales system and sales trainer you feel will be a good match for your desired brand as well as your target customer type. If you are preparing to grow your business I recommend the owner take the training first. Then, after the business owner embraces the system new sales staff can be sent to the same training and trainer.

 

Put sales goals and metrics in place.

The markup your business uses to price projects should be based on two interdependent factors: the volume of business you plan to do and the combined cost of overhead plus planned net profit. By creating sales goals for the business, as well as each individual salesperson, you can track against those goals to be sure you will meet your planned volume of sales. Also, by having individual goals for each salesperson, you can support them and hold them accountable to achieve the goals and or decide you need to find their replacement. Hitting the goals will be important because coming up short on installed sales will mean you will come up short on the gross profit dollars you needed to earn to grow your business.   Your financial system should be designed to support measuring sales volume by salesperson and determine their commissions earned.

 

Summary: Remain committed to using the system!

I want to stress that consistency of and with your company's sales approach will be really important as the business grows.  Without consistency it will be difficult for the owner to become a sales manager, or transfer sales management to someone else, because each sales person may approach selling in a different way.   And, without consistency of sales approach, repeat customers and their referrals may not experience what they expected when a new salesperson visits them. Plus, by having a consistent sales approach that successfully helps prospects buy the right solution, you can market the advantages of that sales system with confidence prospects will experience what they expect if they respond you your marketing.

 

(Note: This is the eighth article in a series of articles written specifically for remodelers who want to successfully break past doing $1M/year in installed sales.  Click here to see a list of all the published articles in the series.)