This Month's Contributing Marketing Pro: Michael is the author of Markup and Profit; A Contractor’s Guide, published by Craftsman Book Co. He is a graduate of Eastern Oregon State College, is a Certified Arbitrator for the Better Business Bureau and has over 40 years in the construction industry. Since 1980, Michael has spoken at national, regional and state conventions, and has conducted business management seminars in over 180 major US and Canadian cities, for over 17,000 businesspeople in construction. www.markupandprofit.com

The possessions we are talking about are the things that you do every day in your business.

A possession is a phone call from a potential customer. It is the lead that you set, the sales call that you make. It is the presentation that you give and the contract you write.

A possession is the schedule you make for the job, and getting the job started and completed on time. It is the contacts you make with the subs and suppliers that will work with you on the job and the neighbors that live around the job. It is doing the job you contract for and leaving happy customers.

A possession is a call from a newspaper or a magazine asking about you and your business and it is your presence in a local trade show or county fair. It is organizing your time so that you have time for your wife/husband and your babies each day and on the weekends. And just as important, it is being thankful for all these possessions.

As you go through each day and each week, every possession will either be won or lost by you. You can rationalize, debate and discuss, but the bottom line is you are the responsible party. What are you doing about it?

Are you and your staff well trained on the phone, answering it properly and returning all your calls the same day or by 9:00 am the next day? Do you have a lead slip to record all the information that the potential customer gives you before you end your first call with them? Do you ask the appropriate questions of each lead to be sure they qualify to buy from you instead of them qualifying you to sell to them?

Do you arrive at your sales calls on time, well dressed, hair cut, shoes shined ready to do some business? Do you ask questions and really listen or do you spend your time talking about all you know. When you write a contract is it complete and blessed by your attorney?

Do your jobs start on time and do you complete them on time, with no excuses? Are your jobs kept clean from start to finish?

Do you follow up your jobs with a questionnaire asking how you did, and then asking for at least two referrals? What kind of advertising program do you have in place to keep leads coming in? And as long as we are doing an honest gut check here, how is your relationship with your wife or husband and your children? Are you a family? I have said in all our seminars, your business will be a direct reflection of your marriage.

Many contractors that write us are having a problem with their business, and in many cases, the contractor has simply lost focus on what is important. The owner of the company has drifted into dealing with minutia, instead of staying focused on the purpose of being in business.

Stay focused on winning. You are in business for just one thing: to make a profit, enabling you to take care of your family and provide for your future.

You’re not in business to drive around and give out "bids" or free estimates. You’re not in business to provide a free design service or to make selections for the customers. You’re not in business to provide jobs for other people, including family members.

You must stay focused on making money (winning). The way you do that is to make every lead, every sales call, every job, and every possession count.

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How do you make a profit in construction? If you follow the thinking of many, it is all in how you build your jobs. That has been the focus of national construction related magazines and conventions for years. If getting better at production is the way to make money, why then do construction businesses have such a high failure rate?

Getting better at production is not the answer to financial success. It is charging more for the work you do and it is just that simple. Most contractors do not charge enough for the work they do. That includes new homebuilders, remodelers or specialty contractors.

When I do seminars and classes on MARKUP, I ask the following question. “You should never try to be competitive, you should always try to be _____?” The answer, of course, is profitable.

You must make a profit if you wish to remain in business. If you do not make a profit, you and your business will go away. Then you will have the task of trying to pay off a pile of bills. That statement presumes you would do the honorable thing and repay your debts and not declare bankruptcy.

Either case is far more work and heartache than learning the basics of how to establish the correct sales price for your work. Once learned, you can put those basics into action, and become one of the few that ever makes more than a living in this business.

First, let’s define MARKUP. MARKUP is a number that, multiplied times the job cost, will yield a sales price that will cover all job costs, overhead expenses and profit.

The very first thing that you need to know is your overhead expenses for the last year, or what you project them to be for the next year. That number should include both fixed and variable overhead. Then you need to convert that expense to a percentage of the total work done while incurring those expenses.

Here are some percentages for contractors that are doing under 2.5 million dollars in volume a year. Remodeling contractors will typically have overhead expenses ranging from about 24% to 42%, or even higher, with the average being about 28% - 32%. New home contractors will have a range of about 12% to 28% with an average being about 18% - 22%. Specialty contractors that do just one trade will normally have overhead expenses similar to remodeling contractors but slightly less.

You will note the large difference in the overhead expense percentage between the new homebuilder and the remodeling contractor. That difference is why general contractors doing new home construction must use a different markup than those doing remodeling work. That is the main reason that you should not try to do both. Few general contractors have the discipline to use two separate MARKUPS, one for new homes and one for remodeling as their numbers will dictate. They make the mistake of using the smaller MARKUP thinking it should cover them for all jobs. It won’t, in fact can’t. When you’re done with this column, you will know how to do the math to prove that statement to yourself.

Once you have your overhead expense established, you need to set a goal for profit. Your goal should be no less than 8%, and preferably 10% or more.

We need two more numbers to arrive at the correct selling price for your work. The first number is the volume of work for the same period of 12 months. If you have been in business more than three years, you should be able to predict that number very closely. If you’re still new, you will have to make an educated guess.

Let’s assume that we have $250,000 in sales. Looking at a remodeling company first, if we assume $250,000 in sales and 30% overhead, we have an expected overhead expense of $75,000. An 8% profit would be $20,000. To compute our job costs, we subtract overhead and profit from total sales and get $155,000 ($250,000 - $75,000 - $20,000 = $155,000). $155,000 is our job costs, or the money we have to build the job(s) sold. The formula to arrive at the correct MARKUP for our company is:

SALES PRICE ÷ JOB COSTS = MARKUP
$250,000 ÷ $155,000 = 1.6129 or 1.62

Now let’s do the markup for a company building new homes. If we assume a total of $250,000 in sales, and we have 18% overhead, that means an expected overhead expense of $45,000. 8% profit is $20,000. Now to get job costs, subtract overhead and profit from total sales and get $185,000 ($250,000 - $45,000 - $20,000 = $185,500). $185,000 is our job costs. The formula to arrive at the correct MARKUP for our company is:

SALES PRICE ÷ JOB COSTS = MARKUP
$250,000 ÷ $185,000 = 1.3514 or 1.36

I can hear the screams of anguish and disbelief from all quarters. “Nobody can use that MARKUP and sell a job in this town. I can’t use more than a 10% MARKUP, that’s all I can get.”
OK, show me where the math is wrong. That is first. The math is correct, regardless of how many times you run it out on your calculator. More importantly however, you now see why so many companies go broke in this business. This is why I said above, “most contractors do not charge enough for the work that they do.” If you think that you can’t use the markup numbers that we have calculated here, you are in all probability undercharging your own customers for your work.

Second, remember this is a hypothetical case showing the correct math formula to arrive at the correct sales price for your work. If you do remodeling work, your MARKUP may only compute to be 1.42 or 1.48 instead of the 1.62 shown above. It all hinges on your overhead expense and how much profit you want to make. We all have different expectations, desires, and overhead expenses and therefore have different financial needs and goal(s) for our companies. That is the main reason that I tell remodeling contractors that one MARKUP, say 1.67, will not work for everyone, or that a MARKUP of 10%, 15% or 21% may not be right for everyone building new homes.

Still not convinced? OK, answer this question. If, 90% to 96% of all contractors will not survive 10 years in this business, and if you believe Dun & Bradstreet when they say that most contractors go broke because of lack of profits (i.e.…they don’t charge enough for what they do), then if you try to be “competitive” by pricing your jobs at or close to what you think “your competition” is charging for their work . . .then what does that make your numbers?

Now keep in mind here that we are talking about companies that do 2.5 million dollars in sales a year or less. Most of the larger companies know their numbers well enough that they seldom fall into the trap of trying to be competitive. Plain and simple, they know better.

Every once in a while we hear some contractor say that they will take a job for less than their markup dictates because . . .”I must be competitive,” or . . “I have to keep cash flowing through my company.” and of course there is the famous . . .”I need to keep my guys working!” My answer to each is the same, “No you don’t . . . what you have to do is make a profit.” If you don’t, you and your company are going to go away.

Then there is always the line about . . .”I’ll make it up on the next one”. Right! Last but not least is the . . .”The insurance company won’t let me charge more.” Right, again! The bottom line is this; you have to make a profit or you will not stay in business.

As we close this column, I hope you have given some new thought on how to make your company a profitable construction business. If you have, and have some questions, please feel free to send them to us, and we will do our best to answer them for you. Feel free to send them by e-mail to michael@markupandprofit.com

Thank you for spending your time here. I am always honored that a peer in our business of construction would spend a few minutes of their time to read about new ideas and review some old ones with me.