The cost of sales and estimating can be a huge and often misunderstood expense.

Question: For years, I did a lot of new construction. I grew tired of getting beat up on price, so I decided to diversify and do more work directly with homeowners. While the company is more diversified now, I do get frustrated with the cost of selling, marketing and frankly, still estimating new construction jobs I do not get. Do you have any formulas or input for managing sales and estimating?

Answer: The cost of sales and estimating can be a huge and often misunderstood expense. Unlike job costing, which can be performed with standard accounting software, too many contractors do not analyze what it costs to sell and estimate jobs. Because such expenses are either part of overhead or performed by the owner, at first glance the bottom line may not appear to be impacted. This can be very deceiving and it is important to remember that time lost on estimates and presentations for jobs not awarded to your company can have a devastating impact on your lifestyle.

Estimating vs. Sales Cost. Contractors can be very impatient and pragmatic individuals. Estimating tends be a pragmatic exercise, “Here’s my number, and did I get the job?” We can feel like we are “working” when we do an estimate, even if it is a wasted estimate. Selling can seem like a waste of time to the pragmatic.

One of the few advantages in working for builders is that they tend to build similar houses over and over and one sales relationship with the builder can drive a lot of jobs. Of course, these jobs tend to be price-driven but you do not have to constantly work at building new relationships. As long as you are cheap, you probably will get the job. Estimating commercial work tends to be a project-by-project process with certain customers giving you a second look or an edge on the job. Some jobs go low price; others are shopped or bought out. While there has been a lot of improvement in estimating software and techniques, commercial estimating is still a risky business with lots of specification and contract issues.

Selling jobs is a whole different deal from pricing estimates. In commercial sales, the majority of contractors fail because they do not have the time, patience or structure to make the process work. It can take five to eight sales calls to get the job — and few contractors have an individual dedicated to the process that has adequate sales time available. It is not uncommon for a contractor to hire a commercial sales person only to fire that person in about six months or just about the time the whole process begins to work. Developing commercial relationships takes time.

Residential selling can be a time-consuming process. When contractors are small and it does not take a lot of work to feed production, contracts can generate leads through word of mouth or repeat business. As the business grows, this becomes unrealistic and difficult to do. As contractors mature and build a real business, their costs tend to increase with a non-working owner salary and their prices are just too high to win jobs by stuffing an estimate in a mailbox. As overhead grows, so does the need to build adequate marketing and sales structure into the business.

Track your closing ratios. Sales closing ratios can be deceptive. For example, if you are awarded 40 percent of the jobs quoted but you win 80 percent of the referrals and repeat customers quoted, then your actual sales ability might be distorted. You also need to look at dollars quoted vs. jobs won. If you lose all the big jobs, you may be a weak sales person or simply over designing what the customer can actually afford. Look for patterns and try to adjust. Track closing ratios by repeat customers, referrals, yellow pages, etc.

When bidding commercial jobs, don’t become an estimating factory. If you are only wining one out of 10 jobs, you are probably estimating work where there is a small chance of success. Screen estimates and work harder on the ones where you have a chance to get the job. Visit the general contractor or organization you are bidding to, bring field people in for their opinions, and in general, be more strategic. Track estimates by type of job and customer, and understand which jobs you win and lose.

Know your cost of estimating. Add up all your sales support salaries including designers, take-off folks — whoever contributes. Make sure you include payroll taxes, vehicle expenses, payroll benefits and other costs. If you do the selling as owner, put a fair salary down for what you would pay someone else to sell. Now divide this cost by the number of estimates given. If these sales costs add up to $150,000 and the company made 300 estimates, your cost per estimate and design is $500. Or if you sold $1,000,000 in sales for this $150,000 cost, your cost of selling is 15 percent of sales.

Question: With a slower economy, the fly-by-nighters are killing my business. What can I do to compete with these guys? Would a license requirement help?

Answer: Licensing might help but it really has had a limited impact on the industries that have tried it. It is very hard to legislate an economic issue. The real problem is the ease of entry and low capital requirements in starting a contractor business. Get a pick-up truck, a few tools and off you go.

If you graduated from a leading culinary school, would you apply for a job at a fast food restaurant? The needs of the clientele simply would not match your skills, therefore you see few culinary experts working in fast food. Contracting works much the same way. You must strive to attract customers who want and are willing to pay for your services. Always remember:

• It is not your customers’ responsibility to determine the difference between you and your competition. Develop a good company story and marketing packet.

• Target market to people who are less price sensitive. Maybe you have outgrown your old customer base but failed to develop a new one.

• Make sure your organization is as productive as necessary. Maybe you have lost your production advantage or edge.

• Quit bitching about it and focus on what you can do to change and compete with the problem. Complaining about things you cannot control is bad for business and your attitude. Change or quit; it’s really pretty simple.

Question: I have been a contractor for 20 years but I still struggle with back-charging customers for things like damages from other trades. How is the best way to handle this?

Answer: For consumers with whom you work directly, it is always a sales and communication issue. You simply have to communicate with them.

When dealing with new construction, this all takes on a new light. Most general contractors and builders resist such charges. They do not want to pay damages because they eat into their profits. And since they are holding your money, they leverage payment.

Many trade associations and some specs have information on what is and is not acceptable. Using these guidelines at the beginning of the job is very important. Establish up-front rules. Never do the work unless you have signed change orders from the appropriate party and an understanding regarding getting paid. As a subcontractor, all you have to offer is your ability to do the work. Once the work is done you have lost your bargaining position. Play the documentation game well, take pictures, send memos, read and understand what your contract says about such issues.

Yes, the general contractor or builder holds your money but they also hold the other subs’ money. This is a case where the meek do not inherit the money, and you have to plead your case so the pain and suffering comes out of the offending sub’s pocket.

I know all of this is easier said than done but the only way to collect the money is to defend your position and new construction is not a place for the timid and weak. Remember: If you were awarded the job strictly on price, you will probably get the next one on price. If you were paid a little more and price was not the only issue, then you have to have to work to manage that relationship.