Do you think your market is different? Are you convinced that those fly-by-night competitors are the main reason your margins get dragged down? Based on the facts from 22 cities across the country, I’ll bet you a buck it ain’t so.
If I had a dollar for every time I have heard “this is a different market,” I wouldn’t be so worried about the struggling economy or my sparse retirement fund. Granted, there are nuances to every market, but ultimately we discover there are more things universal than unique. And those maligned fly-by-nighters get more than their fair share of blame for creating a “cheap market.”
Over the years, I’ve only met one brave contractor who had the courage to openly admit he was the low-price operator. Sad, but at the least he is to be commended for having the wisdom to know his sales and marketing strategy. So where does that leave all of the other contractors? Without exception, we find that in every market there are contractors who get double the “going rate” for their work, then there are others working for mere wages, and those everywhere in between making various levels of profit.
In contractor workshops that were held in 22 cities this year, we addressed all aspects of running a roofing business and conducted an impromptu anonymous job-costing training exercise on the following sample residential re-roof. The job is a 30 square, one layer tear-off which gets re-roofed with 30 year laminated shingles. The home is a two-story colonial with a one story attached double garage and both roofs are 6:12 gables. Standard underlayments, flashings and ventilation are installed as part of the job.
One would expect a normal degree of price variance among professional contractors due to different levels of overhead and target profit margins. However, this exercise revealed that the variances were quite astonishing. In 77 percent of the cities there was a variance of over $5,000 for the same re-roof job!
Based on the job costing exercise above with contractors in 22 cities, we aggregated the results, showing the average job price for each city as well as the difference between the highest and lowest bidding contractors. The results are shown in Figure 1.
Most professional contractors believe they are selling their jobs at a “good number,” but it is painfully evident that the fly-by-night contractor is not the sole reason for lower profit margins. Some contractors are visibly uncomfortable with the thought of “overcharging” their customers. I am not suggesting you should gouge customers or agree with other contractors on what price to charge (both illegal activities), but I do advocate a fair profit that provides healthy compensation for owners, employees and subcontractors. Enough profit to provide for benefits, taxes, insurance, 401(k) plans, and a standard of life akin to those customers who demand your job price is competitive.
Think about it. The math is fairly simple. To do the job right and stay in business, it takes a gross profit margin that delivers a net profit of about 10 percent or more. Sad, but true, a lot of contractors aren’t achieving this. Why? The reasons are many and complex, but unlike some other trades, we have a tendency to compete in a battle for nickels. It’s nonsense!
You need to determine what level of profitability is appropriate for your marketplace, but contractors should keep pace with the cost of living and the true costs of doing business for a profit. If you want to do work on a non-profit or break-even basis, I suggest you contact Habitat for Humanity, the Red Cross, or join the Peace Corps.
Now think of a consumer who is reviewing multiple proposals from different professional contractors and there is a price spread of $6,000 or $10,000. With such a significant spread, it can be difficult for a consumer to decide which contractor to hire. Is the high-price guy a thief or worth every penny? Is the low-price guy a danger signal or a bargain?
Times are tougher and consumers are getting more estimates than ever and shopping for price bargains harder than normal. Yet, the indisputable statistics remain that consumers make their purchase decisions based on trust and value. It defies consumer logic for anyone to hire a contractor they don’t trust to do a proper job or one who will deliver poor value for the price. Rather than default to low price, I suggest you sell the value difference - professional image and sales proposal, strong base of customer references, trained crews that are neat and polite, respond and follow up with customers, etc.
As a business owner, you face tremendous risk. Only 4 percent of all small businesses survive more than 10 years. Does an entrepreneur deserve to earn $100,000 or more annually for providing employment and an invaluable service to consumers? Roofing installers dance around on steep slopes, risking life and limb on a daily basis. Do qualified craftsmen deserve a livable wage, benefits, paid vacation and holidays? You’re darn right they do. I think you get the point, but if not, you may as well save yourself the heartburn and heartbreak and go to work for a contractor who does. So to borrow a phrase, the burning question remains … what’s in your wallet?