Construction Business Owner, April 2008

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. The first ten follow.

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%               33%

                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.

 

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