Editor's Note: This is the fourth in our 2008 series of "Get Your Business to Work," written by our regular columnist George Hedley. In this article and the next, George Hedley will offer twenty tips to boost your bottom line. To read the previous article, click here. To read the next article in the series, click here.
I recently received a phone call from a business owner who does concrete slab finishing and placing.
His company is a subcontractor to concrete and general contractors. He supplies labor and equipment to pour and finish concrete slabs and sells his services by the square foot finished concrete. His customers decide on a job-by-job basis if and when they want to do the finishing themselves or use his company's services.
But several of his competitors offer the same services, and the price difference only varies by one or two cents a square foot. This leaves no room for error or little chance to make a reasonable profit. And his problem is larger than normal due to the tough economy in his market.
I asked what else his crew could do to offer more services to increase his price. He couldn't think of anything that he wasn't already doing. Then I asked how he could do business differently to improve his bottom line. No answer again. I suggested he consider offering more services and getting into a more difficult type of construction contracting-like tilt-up construction or decorative concrete-where customers will pay more for expertise and quality. He struggled with the idea as he wasn't sure his crew could handle more difficult work, and he didn't know how to price anything except flat slab labor. I then asked if he could increase his sales volume or reduce his overhead. He said his steady customers were slow, and he was as lean as he could get without going out of business. In my opinion, he was stuck and didn't know what to do next.
Are You Stuck?
Doing the same old thing for years and expecting it to get better? Not willing to try new methods or ideas? Too busy working to manage your business? Don't know how to keep it all going when the economy slows down? Doing the same things and working harder at a faster pace won't lead you in a positive direction. But by trying new techniques, tools, ideas, tactics and strategies, you will eventually get out of the hole and get back up to speed quickly. When your hole is getting deeper, what choice do you have but to try some new methods? Here are several business tools to boost your bottom line in any economy. Take the time to implement them, and you will make more money.
1. Buy Low and Continue to Sell High
Most business owners focus 90 percent of their energy on cutting costs by being more efficient, working faster, buying cheaper not wasting any money, keeping their crews busy or doing all the pricing and ordering themselves-this won't improve your bottom line much. Most contractors total their material costs and mark them up at the same rate for every job. For example, when you get a 10 percent better price on material or a lower bid from a subcontractor and then add your standard 20 percent markup for overhead and profit, the actual gross profit and final selling price is lower than if the materials or subcontract had been ordered at the original higher price. Look at these examples:
| Original | Lower Quote | Sell Higher | |
| Material Price | $ 1,000 | $ 900 | $ 900 |
| Overhead and Profit Markup | 20% | 20% | 20% |
| Gross Profit | $200 | $180 | $300 |
| Sales Price | $1,200 | $1,080 | $1,200 |
| Gross Margin | 16.7% | 16.7% | 25% |
The "sell higher" example increased your gross margin from 16.7 percent to 25 percent-a huge difference in your bottom line! And using lump sum at a higher selling price will increase your gross margins. On a cost plus markup basis, you actually go backwards the lower your sales price. Implementing these selling and presentation skills will play a major role in boosting your bottom line.
2. Double Every Discount
Always take every discount offered to your company by material suppliers and subcontractors. When they offer a 3 percent or 5 percent discount for prompt pay, take it! For example, if you purchase $10,000 of material for a job and receive a 5 percent discount for full payment by the 10th of the next month, you will pay $500 less than what you bid.
And professional business owners must have a bank line of credit to help them make money and grow their business. I recommend a bank line equal to two months of sales volume for most construction companies. Most banks charge an interest rate of prime plus 1 or 2 percent on borrowed funds.
Also, always ask your subcontractors and suppliers for early payment discounts. Often, they want or need to get paid faster than the contract or standard terms require. Offer to pay early in exchange for a 5 percent discount.
When you pay a subcontractor $40,000 before you get paid by your customer and get a 5 percent discount, you save $2,000 and get to keep it. On most jobs, you will likely get paid back by your customer within thirty days. To calculate what you actually made on an early payment, figure the cost of money. If you use your bank line of credit to borrow the $40,000 to take advantage of a 5 percent subcontractor discount and you pay a 7.5 percent interest rate to your bank for borrowed funds, your cost of money on borrowing the $40,000 for thirty days is only $250. You just made $1,750 on your banker's money. Do this twenty times in a year and boost your bottom line by another $35,000.
3. Be Low and then Charge More
On private work, the goal of every bid is to get a meeting with the decision maker to negotiate the final price and scope of work. If you don't have an "in" with the customer on the specific job you're bidding, and all else is equal, be the low bidder.
Your original bid proposal should be for the bare minimum required by the bid documents. If you're in doubt, leave it out, and do not include additional items; gaps in the plans; improperly specified materials, methods or upgrades from the minimum requirements to get the job done. If you have a better and more cost-efficient way to supply or install an item, include it in your proposal as an inclusion. This tactic will keep your pricing lower and will help you get that important meeting with the decision maker to review your proposal.
At the meeting, discuss every option to upgrade the project, improve the quality of materials, improve the project with add-on items or present prices for necessary items to fill the gaps and complete the work. To boost your bottom line, offer these upgrades and additional items at a lump sum price including markup double your standard rate. I use the old slogan, "Don't ask, don't get!" You decide the final price at the meeting and can offer them a total package price for the added items they want. If you can get an additional 15 percent markup and an additional 10 percent of work, this will increase your total bottom line by 1.5 percent.
4. Buy in Bulk
Wealthy drywall contractors buy their drywall and metal studs by the train carload. Rebar, lumber, irrigation pipe, copper pipe and all the other materials that subcontractors and contractors need on every job can also be bought in bulk. When you buy small amounts from wholesale houses, you pay 5 to 20 percent more for materials. Want to boost your bottom line? Look at your annual purchases and start buying items you use over and over in bulk. This tool should make you at least 2 percent to 5 percent on your bottom line.
5. Get another Quote
Most contractors buy their materials and supplies from the same company year after year and never get additional quotes from other suppliers. When you have companies competing for your business, the price you pay will go down by a few percentage points. What supplier have you been using exclusively for a long time without checking their prices? Are you positive they give you the best possible price on every item you buy from them? I know service is important, but you'll get the same service at a better price if you keep them honest. Go to Home Depot and look at what retail buyers pay for the same products you use on a regular basis. Get quotes on items you buy regularly by calling three other suppliers. A few phone calls and meetings with different suppliers will boost your bottom line, even if you decide to stay with your "old faithful."
6. Markup Your Markup
Most contractors leave lots of money on the table by using one total markup rate when pricing jobs, bidding work and calculating the cost of change orders. But when you blend your overhead and profit into one total markup, you're not marking up your fixed cost of doing business (overhead). See the example below:
| Job Costs | $100,000 |
| Overhead and Profit Markup @ 25% | $25,000 |
| Total Bid Price | $125,000 |
| Gross Profit Margin | 20% |
Smart profitable business owners understand the power of marking up the entire cost of doing work. Look at the better way to markup your jobs by using the same total markup of 25 percent:
| Job Costs | $100,000 |
| Overhead Markup @ 15% | $15,000 |
| Sub Total | $115,000 |
| Profit Markup @10% | $11,500 |
| Total Bid Price | $126,500 |
| Gross Profit Margin | 20.94% |
In the second example, you made an additional $11,500 or nearly 1 percent more gross profit. Your bottom line would increase by $9,400 for every $1 million of total sales volume for the year that you "markup" your "markup."
7. Trash Your Tools
When is the last time you performed a tool inventory to determine which tools should be thrown out and replaced? Your field crews often work with broken, bandaged, damaged and old tools because they don't want to ask their boss for new ones. Plus, the boss doesn't want to hear about an employee who has broken a tool.
But how much money are old or broken tools costing you? If you have ten people on your field crew and each person loses five minutes per hour working with bad equipment, you're losing the equivalent of 6.7 total hours per day. This can add up to 1,700 hours of lost time over a year. If you average $25/hour per crew member, this totals $42,500 annually down the drain.
Invest in a pro-active tool management program-I bet your field efficiency will go up by double what you are losing. Instead of losing $42,500, you'll probably make an additional $85,000 because your employees will be proud to work for a cutting-edge company that cares about quality. Visit trade shows every year looking for new tools, equipment and techniques that will make your crews more efficient and boost your bottom line.
8. Realize that Estimators Are Not Professional Visitors
One of the biggest goals of all estimators is to get profitable jobs at their price. Most estimators think they are paid to price work. But when the prices are about the same between competitors, customers make hiring decisions based on trust and what people and companies will do for them.
You can't present what your company will do for customers and projects on a bid form. It must be done in person by someone responsible for selling and closing the deal. If that person is you or the estimator in your company, he/she should be trained on developing customer relationships, overcoming price objections, selling effectively, negotiating and presenting bids. This person must be taught that they're in the "show" business and the bid presentation is often just as important as the price. If you can improve your bid proposal success hit ratio by as little as 15 to 20 percent, your top-line sales volume will go up, and you can boost your bottom line easily by as much as 100 percent. For example:
| Bid-Hit Ratio | 6 to 1 | 5 to 1 |
| No. Bids/Year | 100 | 100 |
| No. Jobs Awarded | 16.6 | 20 |
| Average Job Size | $50,000 | $50,000 |
| Total Annual Sales | $833,000 | $1,000,000 |
| Job Costs @ 70% | $583,000 | $700,000 |
| Annual Overhead | $200,000 | $200,000 |
| Net Profit | $50,000 | 100,000 |
9. Empty Your Yard
To me, owning equipment is a necessary evil only if it makes financial sense. For example, owning a major piece of equipment is all about the numbers:
| Purchase Price | $100,000 |
| Financing Cost | $20,000 |
| Insurance 5 Years | $20,000 |
| Maintenance and Tires 5 Years | $20,000 |
| Repair items | $5,000 |
| Gas and Oil 5 Years | $35,000 |
| Total Cost Over 5 Years | $200,000 |
| Overhead and Profit Markup @ 20% | $40,000 |
| Total Cost Of Ownership 5 Years | $240,000 |
Determine if you can make it worthwhile to own equipment, maintain it, store it, deliver it, service it, secure it, insure it and finance it. The deciding factor is how many hours you can keep the equipment busy on the jobsite.
| Billable Hours Per Year | Cost Per Hour | Rental Rate? |
| 2,000 hours | $24 | $________ |
| 1,500 hour | $32 | $________ |
| 1,000 hours | $48 | $________ |
| 500 hours | $96 | $________ |
Doing the math will determine if you should own or rent equipment. If you can keep it working enough billable hours per year to make money and cost you less than renting, it makes sense to own equipment. Call the local rental companies to compare your cost of ownership to their rental rates. Sell the unprofitable equipment, take the cash and boost your bottom line by investing it in assets like real estate.
Also, purchase equipment that requires little maintenance and gives you a big return. Used job office trailers only cost $5,000 to $7,500 to buy. And you can rent them to your projects at $350 to $450 per month. That is more than a 75 percent annual return on your money.
10. Finish Faster
I visited one of our jobsites a few years ago in mid-August where we were building a large, 75,000 square-foot, concrete tilt-up industrial building. The project superintendent and concrete foreman said they scheduled the crane to erect the panels in mid-November, but I asked if they could move the date up a few weeks. After they said no, I offered them both a $1,000 incentive if they tilted up all the walls by October 31. They both changed their tune and guaranteed to finish two weeks faster. Not a bad investment: a $2,000 bet versus twenty men working for two weeks ($40,000 minimum plus onsite costs). And they actually tilted up the walls on October 26.
What games and incentives can you offer to entice your crews to work faster and boost your bottom line? Faster jobs equal more money in your pocket. Try different incentives like competitions between crews, games to beat the budget, challenges to finish ahead of schedule, hardware store coupons for no defect or punch-list items, catered barbequed jobsite lunches for meeting milestones, dinner gift cards for crews who hit important targets, winter jackets for no jobsite accidents or anything else that will keep work fun, exciting, interesting and competitive.
Make it your priority to tell your people how difficult it is to actually make a profit. Explain that these little bottom-line boosters can make a big difference.
Check out next month's column for ten more tips.
George Hedley owns Hedley Construction and Hardhat Presentations. He is the author of The Business Success Blueprint Series available in eight workbook and audio CD sets. He is available to speak on his proven system to build profits, people, customers and wealth. Call 800.851.8553 or visit his website at http://www.hardhatpresentations.com/.
Construction Business Owner, Spril 2008
