For the past three years I have been aggressively working to help roofers. In addition to the networking groups, I have been traveling around the country teaching seminars for CertainTeed Roofing. I have discovered more about roofing than I every thought I would want to know. Most of what I have learned is not very earth shattering, but some of it has some real merit.
This article focuses on the greatest single challenge and problem facing the roofing industry: square unit pricing. Many of the industry prices and practices are just plain wrong. The mindset that many roofers have and the way they price jobs is a direct link to their poor income performance and struggles.
I should note that this is not the first industry we have put a lot of work into and changed some of the pricing philosophies. Twenty years ago we revolutionized the concrete pumping industry by teaching contractors to charge an hourly rate for the equipment and operator and a yardage rate for maintenance and variable overhead.
Price strategies tend to develop more from habit than reality. For example, where does the logic “overhead is 10 percent and profit 10 percent change orders” come from?
The RulesRemember when your mama told you not to swim for two hours because you would get cramps and die? It’s just not true. Well, roofing pricing seems to follow the same type of misguided logic. I want to use this article to dispel some of these myths. In order to do this, I want to lay down some rules:
1. The numbers I use are purely fictional and have been chosen because they are easy to follow.
2. These numbers are in no way meant to reflect what you should charge for a job or how much time it should take.
3. Our goal is to teach the concept, not the answer.
4. We have chosen a residential shingle model but the same logic will apply to commercial.
An ExampleLet’s start with a sample company: Joe’s Roofing.
Joe sat down and made a budget. He figured his overhead, salary and profit goals and concluded that he needs $1,000 a day for overhead, profit and salary. This is his budget and breakeven point.
Joe is a residential contractor and pays his guys by the piece. Joe tends to think that since he pays his guys by the piece, he cannot lose money. If the job takes more time, the field people have to eat it. I call this the piece rate or subcontractor profit illusion.
To prove my point, we need to run some numbers with this sample company. Let’s suppose Joe quotes and gets a residential job under the following formula:
Overhead and profit: $70 a square
Field labor installation: $40 a square
Material $40 a square
Total Price $150 a square
Again, these are fictitious numbers. Don’t get your shorts in a knot if you think they are too high, too low or whatever. We are trying to make a business and mathematical point.
Let’s look at some jobs and focus on the $70 a square overhead and profit. Assume the field-labor piece rate and material stays the same.
- A 30-square job would yield $2,100 overhead and profit ($70 times 30 squares). If the job takes two crew days, you would yield $1,050 per day and be above your breakeven goal.
- What about a 25-square job? Now it generates $1,750 overhead and profit ($70 times 25 squares) and if takes two days, the yield is $875 per day. Now you are below your breakeven point. Again, many contractors think that when they pay piece rate or sub the job it does not matter. But the truth is, we still did not reach our gross profit breakeven point even if the crew went home and we did not pay for the labor.
- What about a bigger job, say 35 squares? Now it generates $2,450 overhead and profit ($70 times 35 squares) and if we do it in two days, it generates $1,225 per day, well above your breakeven point.
- OK, so the solution is bigger jobs. Forty squares is $2,800 ($70 times 40 squares) but now the job takes 3 days with your crew. We now drop to $933 a day and below our profit and breakeven point because the job went into a third day.
Maybe this does not sound like a big deal, but $125 a day at 250 days a year equals $31,250 a year in income. This is why a lot of small roofers don’t make any more than what a good foreman might earn. The same applies to large companies too. They just have more people and hours and still fail to make adequate money for their effort.
Why should you agree with my logic?1. Profit is a function of time. You pay rent, truck payments, your own salary, so much a week or month, not so much a square.
2. Time never comes back. If you do not make your breakeven point, you build a deficit that must be overcome over time. Create too big of a hole and you will not get out of it.
3. There is no endless crew of workers. You can only find so many roofers and they must carry a profit each and every day.
Many of you are thinking: If I do this I will never get another job. Maybe not, but you really do have to take into consideration the number of man-days and the length of time it takes to do a job. Simple square or unit pricing does not work. You have to adjust prices when you go into another day or adjust crew size and production logic to make it work. Yes, many of your competitors price differently. You will also find a lot of roofers who go broke. Just because they jump off a cliff does not mean you should follow. Let your competitors take the jobs that require more time so that they make less money. Sounds like a good strategic position to me.