Michael Stone’s visit to Ottawa this week, presenting “Building a successful construction business” to about two dozen Greater Ottawa Home Builders’ Association members, reminded me of a few important things.
- The best concepts are simple (and few)
- The people who need to understand these concepts the least tend to absorb them the most.
Stone has built a successful consulting/teaching business with a simple concept — most residential contractors fail to price their services properly, in part because they don’t know how to effectively market and sell. Stone’s formula for pricing — establish a reasonable mark-up on all jobs, and refuse to deviate from the minimums — seems to me to be so simple to understand that even a dummy can get it.
You can of course (and probably should) do more detailed calculations, especially to work out your overhead, but simply put, figure out your actual project/job costs (materials, labour, time) and multiply by the mark-up factor appropriate to your business/sector.
For new homes, this is 1.26 to 1.30 or more, for specialty work, 1.35 to 1.50 or more and for remodeling, 1,50 to 1.70 or more. Never less — and generally your mark-up should be upwards of 2.0 for small jobs.
In his program, Stone goes into greater detail about overhead, reasonable profit, owner compensation, how to handle change orders and payment schedules and the like, but if you can grasp the simple mark-up concept you probably have solved 80 per cent of your business problems.
If you cannot earn your mark up minimum, you must avoid the job, he advocates. Period.
Of course, this means you must get your price — and the problem is, you have many competitors out there who don’t price their work properly so will appear (on the surface) to be “lower” than you. So how do you compete?
Here, Stone advocates effective marketing and selling practices and provides contractors and renovators some basic concepts which overlay the ideas this blog (and in part explain my interest in his material).
(Stone makes clear that his advice applies for the residential/homeowner market. He stays clear of commercial, public sector and institutional projects, where the marketing (and pricing) challenges are significantly different and more challenging.)
As I left the room, I thought about the dozens of contractors who have complained to me about their inability to make a reasonable profit for their work; the ones struggling with costs and an ability to pay their bills. I wondered why they weren’t there. Probably, they thought, they are “too busy”, or the program is “too expensive” ($150), or “this stuff doesn’t apply to me” or “I know it all, already.” I compared these excuse-giving failures in business to the contractors at the front of the room, absorbing every word that Stone could offer (one has invited him to stay on in Ottawa for a few days to provide additional training to his staff.) For some reason, the people who need the advice the most are the least likely to accept the simple concept that you really need to set a reasonable mark-up for your work, and for renovation contractors this is at least 1.5 times your project costs.
Simple, eh. But if you are like the majority of contractors struggling to make ends meet, you won’t get it, ever.