Frequently I speak at value-added contractor meetings sponsored by progressive manufacturers and distributors. I recently held a series of financial seminars for Willoughby Supply as part of their Willoughby Supply University program. At that program, I asked attendees to bid a roofing job. The job was approximately 33 squares, but it was not up and over. It had a fair amount of hips, valleys and other details. The numbers, while not surprising, were indicative of the pricing problems the roofing industry faces. Most contractors do not understand their overhead and arbitrarily price jobs by the number of squares rather than the time it takes to do the job.
Prior to asking the class to quote the job, I had five different experienced professional roofing contractors from our networking groups bid the job based on their costs and what they would sell it for. Their average price was just over $17,000, but the class results were much lower. By the way, these roofers sell at over a 40 percent closing ratio, are honest and know what they are doing. The bids from those in the class broke down as follows:
- Under $12,000 — 33%
- Between $12,00 and $15,000 — 57%
- Over $15,000 — 10%
Since this job was already performed by one of my customers and the others bid it knowing their costs, we estimated the hard cost to install the job at about $12,000, which included dump fees, all materials, and labor installation cost including workers’ comp. So why did a third of the class bid the job for less than cost? They guessed.
Too many in the industry merely priced the job so much a square, and to price at more than $500 a square seemed unbelievable to them. But such a high price is not out of line for a complicated job with lots of details. Too many roofers price jobs so much a square and think the job will be profitable. The problem is that a per-square price is merely an average. It’s like saying if I had one foot in a bucket of ice water and another on a hot stove, on the average I would feel OK.
The growth of subcontractor usage in the residential roofing industry has contributed to this problem. In addition to using incorrect averages, many sub crews just look at income per day and have no idea of what the real cost of installation is. They also may not be paying overtime and may be cheating workers’ compensation.
Another factor is contractors think that since their prices are per square and their sub or piece rates are set, they can’t lose money. This is just not true. Suppose a contractor’s overhead was $800 a day, and that is what it took to the keep the doors open. Let’s also suppose you were a one-crew operation. To illustrate the point that you can still lose money with set per-square prices, I created some imaginary numbers that are easy to follow for this example.
Suppose material is $100 a square, installation is $50 and gross profit to cover overhead and profit is $50, making your overall per square price $200. Again, this is just to make the math easy.
If you did a 20-square job in one day, you would have $1,000 gross profit ($50 x 20) and you would have made $200 that day.
If the job went to 25 squares, you would have gross profit of $1,250 per day ($50 x 25) and $450 profit for the day.
Suppose now the roof goes to 30 squares per day. Your total gross profit is $1,500 ($50 x 30), but you have to divide that by two days because now the job is two days, not one. So at $750 gross profit for the day, you lost $50 because you did not have enough gross profit to cover your $800-a-day overhead costs. Remember, most overhead is a function of time; it’s not calculated per square. We don’t pay our rent, truck payments and bookkeeper by the square but rather by the day, week or month. Overhead costs should be estimated and related to time. Profit should be related to risk. If a job is simple or complicated, the cost to send a crew out for the day is the same. If the job is risky, more profit should be added to the job.
Contractors have a tendency to bid using unit costs that are easy to estimate, such as roofing by the square or concrete by the yard. Many landscapers double the cost of a tree. But just because something is easy to use does not make it accurate.
So the next time you bid a job, think about what you need to have to cover costs for the period of time the job will take and how much of your capacity it consumes. Just because everyone else doesn’t know their cost doesn’t mean you have to guess. Worried you will price yourself out of the market? Learn to sell a roof system and how to communicate value. Pricing jobs correctly eliminates the losers. You work just as hard — if not harder — on the jobs that lose money.