Youandrsquo;ve just gotten to the end of a job, checked your bank account, even tried to look at your job cost reports, and discovered that yet again the expected profit just wasnandrsquo;t there. Contractors who complain about not making enough profit are often making a relatively few number of mistakes. The problem is that they make them over and over again. To avoid these costly errors:

1. Know your numbers

2. Donandrsquo;t confuse markup and margin

3. Recognize all your labor costs

4. Price properly

5. Keep job costs accurate and current

6. Monitor change work

7. Apply what you learn

1. Know your numbers

Many contractors keep the numbers in their heads. That works fine when you only do one or two jobs at a time, but as your company grows, you need to spend the time to focus on your numbers. If you know how much youandrsquo;re spending as youandrsquo;re spending it, you can avoid bad surprises and actually use what the numbers tell you to ensure that the next job will be more profitable.

2. Donandrsquo;t confuse markup with margin

Any financial statement that provides percentages will show margin numbers. Margin numbers are calculated as a percentage of revenue. For example, if your statement shows that total overhead is 18%, that means that youandrsquo;re spending 18% of your revenue in order to cover overhead. But if you then use that number (which is margin) as a markup figure to cover overhead when youandrsquo;re pricing jobs, youandrsquo;ll lose money. Markup is based on costs while margin is based on income. Confusing them can turn your bottom line red very quickly.

3. Recognize all your labor costs

How much does it really cost you to put one production worker in the field for an hour? If you pay him $20/hr, itandrsquo;s tempting to estimate based on the $20 figure. But donandrsquo;t forget all the other burdens that you need to add to that $20. Things like payroll taxes, Workerandrsquo;s Comp, liability insurance, paid sick, holiday, and vacation days, and any company contributions like retirement, health plans, etc. If youandrsquo;re estimating based on unburdened labor costs, then your profit will take a hit. The more labor-heavy a job is, the less likelihood there is that the job will produce the profit you expected.

4. Price properly

For fixed (contract) price jobs, remember that the price of any job must cover three things: (1) the actual costs for the job, (2) that jobandrsquo;s fair share of company overhead, and (3) that jobandrsquo;s fair share of the companyandrsquo;s overall profit. If you price to andldquo;break evenandrdquo; then youandrsquo;ll actually lose money because you wonandrsquo;t cover overhead and there sure wonandrsquo;t be any profit to worry about. If you price to cover overhead but neglect to intentionally include profit in the price calculation, then you wonandrsquo;t make what you neglected to plan for.

5. Keep job costs accurate and current

Track job costs using the same criteria used for estimating, and keep your job costing current. In other words, donandrsquo;t estimate in apples and job cost in oranges, and donandrsquo;t wait until the end of the job to see how you did. Using the same cost categories for both estimating and job costing will improve your ability to identify and analyze cost overruns, and that can lead you to better estimating practices. Keeping your job cost information current can alert you to problems with the job, or may reveal change work that wasnandrsquo;t documented.

6. Monitor change work

It is a rare project indeed that has no change orders. While some companies regard change orders as a great opportunity to increase their profit on a job, others struggle with identifying, estimating, pricing, and collecting on change orders. Bear in mind that change orders usually affect both the final price and the final completion date of the project and homeowners need to be reminded of this. Donandrsquo;t let change orders accumulate to the end of the job. That gives customers a bad surprise and sours their attitude towards you just when you want them to be singing your praises. Finally, donandrsquo;t forget to add the cost of change orders to your total estimated cost for the job so you can accurately monitor the jobandrsquo;s costs and andndash; ultimately andndash; profit.

7. Apply what you learn

Use your financial reports to analyze your overall margin and identify slippage. Then act on this knowledge by investigating and eliminating inefficiencies in production or reporting practices. Conduct a job autopsy at the end of every job and look for estimating or production errors. Revise your estimating or pricing practices based on what you learn from your reports.

JobType Demands Have Changed

When new construction slows down in a bad economy, builders often end up changing the kind of work they perform. Unfortunately, they may not make equivalent changes to the ways that they estimate, manage, or price the job.

Customers Want Smaller and Less Costly

In recent years, prospective customers are finding credit more challenging to get. This means that theyandrsquo;re stuck using their own money for projects, which in turn means they have learned to scale back on their expectations and count their pennies. Customers won't thank you for encouraging them to think about what they could have for more money; they'll thank you for showing them how to get the biggest bang for their buck using more utilitarian products.

What Are the Implications for Contractors?

Many home builders who downsize to remodeling work continue to estimate and price the new remodeling work just as if it were the same as new construction. Remodeling and new construction arenandrsquo;t the same! For example, in general,

• The proportion of preparation, setup, and cleanup time increases as job size decreases
• The amount of overall project management time increases when job size decreases
• The need for worker flexibility increases as job size decreases
• Down time increases as job size decreases

How Does Job Size Affect Pricing?

Letandrsquo;s look at an extreme example. Assume that Company A used to build custom homes with an average job length of 8 months. Now Company A has started doing handyman work with an average job length of 5 hours. When estimating the 8 month new home, allowance has to be made for initial setup and daily cleanup. Letandrsquo;s allow 1.5 hrs per production day. This drops the total available production hours per worker from

1280 hrs (8 hrs/day x 5 days/week x 4 weeks/month x 8 months)

to 1040 production hours (6.5 hrs/day x 5 days/week x 4 weeks/month x 8 months).

For the new construction, that puts the workerandrsquo;s productivity at 81.25% (1040 actual production hours:1280 paid hours). If we allow 1.5 hrs for the handyman, then his 5 hour job will actually take 6.5 hours, leaving a theoretical 1.5 hours remaining for him to start the next job.

Now there are two things to consider: If his productivity is only 77% (5 productive hours:6.5 paid hours) and you keep the same pricing strategy, youandrsquo;ll be losing money. But wait! Do you really think youandrsquo;re going to get another 1.5 hours of productivity out of that worker? Does it really make sense for him to drive to another job site and start getting set up? Or is it more likely that heandrsquo;ll use the remaining 1.5 hours for other tasks, such as organizing the van, gassing up the truck, entering his timecard information, etc.? So maybe itandrsquo;s more realistic to calculate his productivity at 62.5% (5 productive hours:8 paid hours).

Monitor the Results

If productivity tends to drop on shorter jobs, and the need for management (more jobs = more subs = more scheduling and communication) increases, itandrsquo;s critical to price as carefully as you can and then monitor, monitor, monitor. Abiding by the same old rules when the game has changed can put you in a very bad place pretty quickly.