Once I got my feet wet in this industry, I didn’t have a pricing system – but got pretty good at estimating what to charge. I quickly learned the ‘acceptable ranges’ and did what I could to keep myself competitive. I didn’t know exactly what I was making on every job – but I knew we were making money.
Fast forward a few years. I was still pricing work the same way – and we were still making money – but we weren’t making as much profit as I thought we should be. And the more we grew, the further we seemed to get from the profit I thought we should be earning. And I didn’t know exactly why – or how to fix it.
Years later, I look back at four simple steps that changed my business forever. It wasn’t that I didn’t know how to price all my work. It was just that some of my jobs were making money while others were losing money. And I didn’t know which jobs – or why.
I sought out any education I could get and started working some simple systems. It took me years to implement these systems, but with technology and information on the internet today, any committed business could get these rolling within one year.
Here are the four (easy) steps I take each year to ensure that we make consistent profit on every job we price.
Step One: Build Your Budget
If you only have time for one single step this year, this is the one. Your budget sets the course for your company, helps you run your business from a plan for profit, and even helps you sleep at night. No, I don’t mean it’s so boring that it will put you to sleep. I mean that you’ll put your head down each night knowing whether you’re on track to have profit left over at the end of the year. I can’t put a price on that kind of focus for my company.
If it’s your first budget, you’ll likely spend about one single day putting it together – but it just might be the most important day of the year. Subsequent years should take you half a day or less. The framework is already there from the previous year; you’re simply adjusting your forecasts.
Tip for Better Budgeting – If you’re doing all kinds of adjustments or extra spreadsheets, you’re doing something wrong. Your accounting should be divided into simple, organized categories so it’s easy to find your numbers. Cost of goods sold accounts should include all the costs you build into your estimates. Your overhead accounts must include all the costs you don’t estimate. With clean, organized accounting, pulling last year’s actual results should be a fairly simple process – with minimal extra calculations or splitting required.
Step Two: Develop a Turnkey Estimating System
If you’ve got even some experience in this industry, it’s tempting to price a job with your gut. Your busy season will be on you before you know it and there are 10,000 things going on. Clients will be demanding pricing – but instead of making sure you’re making top profit at this opportune time, you’re rushing pricing out the door, and likely making some careless mistakes. You throw some quick numbers at the wall and you hope they stick – and you hope you’re making money.
But you can never hope to grow a consistently profitable company when you estimate on gut instinct.
- Some jobs will be too cheap, others too expensive. When you’re too expensive, it’s too easy for someone who priced the work correctly to win the job instead. When you’re too cheap, you’re more likely to win the job! So you’re far more likely to win the jobs without any profit – and to lose the jobs that might make up some of the difference.
- You can’t delegate or train others to estimate with gut instinct. It’s too easy to make a mistake and requires years of experience to estimate even somewhat correctly.
- Even if your gut instinct is exceptionally accurate – your operations will be filled with mistakes and overages. A “gut instinct” estimate has provided no plan for hours, for equipment, for materials, for tools – all without that critical information, the job plan gets made up on-the-fly. That’s when tools get forgotten, materials aren’t ready when required, crews are non-productive, waiting for instructions, and jobs go over budget. So even if you did price the job “correctly” – there were too many mistakes to make money at that price.
Your budget gives you the numbers you need to price work correctly. Based on your mix of labor, equipment, materials and overhead forecasts, you’ll know the markups you need to add to your costs to recover your company’s costs, overhead and profit on every job.
Tip for Better Estimating – Kits, assemblies, checklists – whatever you want to call them, you need to be using them. Estimating ‘checklists’ give your company benefits, not the least of which include:
- Spend less time estimating
- Eliminate/reduce forgotten costs
- Easier/faster training + consistency
Step Three: The Estimate Is the Job Plan
All of your estimate pricing should be constructed from basic building blocks:
- What crew(s) and how many man hours?
- What equipment?
- What materials/colors/costs?
- What other expenses?
The overhead markups from your budget (see Step One!) will clearly show your break-even, and then it’s as simple as adding the profit margin that suits the job/task. You may spend an extra half-hour putting together a detailed estimate, but you need to be doing this anyway. If you have any hope of turning out consistently profitable work, you need to set crew goals, mobilize tools and equipment and order/stage materials. You don’t really save any time all estimating without details – you simply procrastinate this work until later – when it’s far more likely to cause delays, questions and productivity problems.
When your estimates clearly define exactly how the estimator ‘saw’ the job when it was priced, you’ve made the next step so easy.
Tip for Job Plans – Your estimating system should produce job plans in seconds. You can hide the costs/prices if you don’t need to share that data, but when the details (labor, equipment, materials, etc.) are in your estimate, producing a job plan should be quick and painless.
Any hours or days over budget are hours or days you can’t earn revenue somewhere else.
Step Four: Track + Analyze
Tracking jobs is absolutely essential. You’ll have real facts/data on what’s going right (and wrong), and you’ll also be creating a work culture that enforces the importance of keeping projects/contracts on budget. And Steps One and Two have set the table for your analysis.
Your budget (Step One) ensures you’re estimating enough work and have sold enough man hours to hit your goals. Even if you’re growing (or shrinking) faster than your forecasts, your budget is still useful! The ratio of labor to sales, materials to sales, and even overhead to sales will ensure you’re steering your company in the right direction, even during times of big changes.
Your estimates – because your price was clearly defined by labor, equipment, materials and subs, you’ll be able to spot exactly what’s going right and wrong. Your estimates were priced for profit because of your budget (Step One). The details in your estimate ensure you have clear goals for every job (Step Two). And your job goals were clearly communicated to the people responsible for the work because of Step Three.
All that’s left for you to do is compare your actual results with your estimated results to look for areas you consistently miss. Really focus on managing your labor hours. Any hours or days over budget are hours and days you can’t earn revenue somewhere else.
Tip for Track and Analyze – Ditch the paperwork! Companies spend, on average, more than 400% more hours per year entering and correcting data manually from timesheets. Using apps/technology to track crew time is far cheaper than paying admins to do it, and will increase the amount and quality of information tenfold. Companies running on paperwork are unable to compete with the efficiency and accuracy of information enjoyed by competitors who use technology.
Keep these systems simple so your staff can follow them with you. The dividends are priceless. You’ll feel more in control, your results will be more consistent, your staff will work to goals instead of guesses and best of all, you’re sure to see a bigger number in your bank account at the end of the year.
Mark Bradley’s Corner is an occasional advertorial series sponsored by LMN. For more information, visit their website at www.golmn.com.