By: Shawn McCadden, CR, CLC, CAPS, Remodel My Business, Inc. (Re-post from our EM NARI Chapter)
The remodeling market is now even better than it was before the recession. 2017 is expected to be a banner year for remodeling with consumer spending expected to increase by upwards of 8%. That can be good news for remodelers still trying to catch up from the challenges of the great recession. So, don’t think like a hungry teenager at a buffet grabbing everything you can in case the food runs out again. Instead be selective and scan the buffet for the jobs and customers with the greatest potential for profits. Here are three easy things smart remodelers can do to increase profits next year and beyond.
Know what you need to charge to make a profit
Too many contractors guess at what markup they need to use to make a profit. One contractor called me in a panic. He had already sold $500K of work right before he got his taxes back from his accountant. Unfortunately he lost over $40K the year before and used the same pricing strategy when he sold the $500K he had under contract to complete.
It’s really not that hard to figure out the markup you need to use to make a real profit. One guy who attended a seminar I presented on the topic of margin and markup came up and thanked me at the end. He said in 5 minutes I was able to help him understand what had perplexed him for 30 years. He also said he wished he learned it 30 years ago because due to poor profits he figured he would have to work until he dies.
Put a properly setup Job Costing System in place so you will know if you are making money
Job costing can and should be used to separate the profitable jobs from the money losers. Job costing requires your business does bookkeeping in a way that allows the ability to compare estimated costs to actual costs. However most contractors are not comparing apples to apples if their job costing system is not properly set up. If your bookkeeper or accountant set up your QuickBooks file you should probably assume you are comparing apples to kumquats. In all my years working with contractors not even one of my coaching clients was job costing accurately when we first started working together.
One example of this is with labor costs. Most contractors use a burdened hourly rate to factor labor hours in their estimated costs. That burdened hourly rate covers much more than just wages and payroll taxes. The rate includes things like vehicle costs, workers comp, paid time off and non-billable hours like commuting time and shop maintenance. However unless properly setup to include those factors accounting software like QuickBooks only includes direct wages and payroll taxes in standard job cost reports. This could give you the false impression that you are making money when you aren’t. And even worse, what if you use your job cost history as a guide to price and sell new work?
Concentrate on selling material intensive projects
Financial success is much more predictable if you know what markup to use to earn the gross profit dollars your business needs to cover overhead and profit requirements. If you mark up all your estimated job costs using the same markup why not also be strategic about what you plan to sell. For example with the typical challenges related to finding and keeping good workers consider staying away from labor intensive jobs and instead concentrate on selling material intensive jobs. And, materials are easier to manage than labor!
Consider the example above. Both job types have the same crew of two men and the same $800 burdened cost of labor to complete. However if you had a choice which job would you send your crew to tomorrow morning? In the example there is twice as much gross profit per day in the material intensive job. I also highly recommend you stop allowing your clients to provide their own materials if you want to take advantage of this strategy.
Profits don’t happen by themselves
Waiting for profits and profitable jobs to show up on their own is a recipe for failure. If you are not earning enough money to live the life style you want, now as well as in your retirement, you better make changes before its too late. Don’t risk or assume you will work until you die. You may end up living longer than you think. Will you still be able to wear your tool belt and hang a sheet of drywall when you are 75 years old?
The market is hot and heating up. Are you maximizing your potential earnings?