0326: Understanding Other Construction Company Costs And Opportunities To Increase Your Profit

This Podcast Is Episode Number 0326, And It Will Be About Understanding Other Construction Company Costs And Opportunities To Increase Your Profit

 

Many contractors are having trouble adapting to the new economy. I have made more mistakes – than ten of the average contractors put together. I've learned a great deal of hard, hard lessons, and worked my way through several "Character Building Moments." What I am about to ask you to do is something I have done for many years during my contracting days, and it still works.   Understanding Other Costs:   Marketing Cost   The cost your company spent to acquire and maintain the job. Depending on how you allocate marketing dollars as a percentage of sales or a fixed budget will have an impact on your marketing cost per job. Your cost-per-call, closing ratio, and other related information is all part of your operations, accounting, and bookkeeping reports.   Mobilization Cost    Are the costs you incurred to get a crew to the job site in terms of travel time and vehicle operating costs; and then the labor costs to unload tools, equipment, and material and put everything in place for easy access and not in the way of the work to be done. These costs are generally high and fixed.   Demobilization Cost   Are the reverse and generally lower because it takes less time to load the truck or van since you know where everything goes, and you know the quickest route back to the shop or office. These costs are also generally high and fixed.   Add these costs together and you will understand the value of staying on each job and solving all of your customers, or client's construction and maintenance issues are so much more profitable than windshield time.   Some contractors prefer not to offer "add on" sales, change orders, additional work orders whatever you call them because they feel it is a disservice to their clients and if it makes you uncomfortable don't do it.   Let's Run The Numbers Starting With The Cost To Acquire A Customer:   Step #1 – Generate a Profit & Loss Report from the previous two years and isolate total income. (Note: All companies are only two years old regardless of how long they have been in business because what happened more than two years ago doesn't matter when developing a financial forecast).   Step #2 – How much money did you invest In Marketing? Not investing money in marketing is like winking at a pretty girl or guy in the dark, you know you are doing it, but they don't. Relying on word of mouth means being in a race for the championship of low price leaders!   Step #3 – How many new customers or clients did you acquire during the past two years?   Step #4 – Divide Total Income from step #1 by the number of customers or clients in step #3, and you will have a rough idea of your sales per customer.   Step #5 – Divide The Amount Of Money You Invested In Marketing by the number of customers or clients in step #3. Just know that 80% of the marketing is done to keep current customers, and only 20% is designed to attract new ones. I have studied marketing extensively and will offer this one hint. Why do you suppose the car manufacturers invest so much money advertising their products when most people continue to purchase similar makes and models over and over?   Step #6 – Multiply The Net Profit Percentage shown on your Profit & Loss by the sales per customer in step #4 to generate a rough idea of the net worth of a customer to your Contracting Company. This is one of the numbers that become very important if you ever want to sell your Contracting Company.   Step #7 – Customer Gross Profit in step #6 minus marketing cost in step #5 = Customer Net Profit.   Step #8 – Where MR > MC,  when the Marginal Revenue is greater than the Marginal Cost and risk is manageable, do the deal.    Step #9 – Where is Break-Even or how far can I go before it is time to quit doing it?   Step #10 – When you know how much a client is worth, you will know how much you can invest to acquire a new one and as many new ones as you want.        Profit Opportunities:   Add-on Sales   Your Customers And Clients - Are depending on you to give them good advice and help them protect their real estate investments.   I cannot begin to tell you the number of times people have come up to me at social and networking events to relate stories about how they did everything but get on hands and knees and beg their contractor to do a little extra work while they were already there. When I asked if they expected it for free all of them said no, they planned and were willing to pay extra.   You can choose  to provide add on sales and services for your customers and reap bountiful profits or wait until your customer calls one of my contractor clients who are learning how to grow a profitable and successful business and they will take your customers off your hands and turn them into high-profit clients.   Service Agreement   Service agreement holders are more likely to be clients that add more value to your construction company because they represent the most loyal segment of your customer base. Every service agreement client represents future work. In the meantime, service agreement clients are a source of cash flow and are predetermined to call you instead of your competition when repairs are necessary.   Non-service agreement customers are more likely to be customers and fickle. They may call your contracting company for future work, or they may decide to shop the competition and use the information they find to negotiate for a lower price. In some cases, they may not even remember you or your construction company name.   Also, your replacement sale close-ratio usually is higher with service agreement clients and your overall pricing and related service care level can be much higher, resulting in even more raving fans. Service agreement clients trust you, follow your recommendations, and do not frequently shop around.    Accept Credit Cards   Unplanned Emergencies are stressful, now add "how am I going to pay for this" to the mix, and the anxiety increases exponentially! For most people short in cash supply, it leaves them using a credit card, getting a bank loan, or selling something to raise money as their best options.   For Example: Homeowner with a leaking roof is going to get it fixed right away because rainwater is damaging the interior of their home including some irreplaceable sentimental treasures such as items passed down from parents and grandparents.   Who will they call? - You, I hope! If you are their contractor and you are actively working and the contractor they like and trust.   Accepting all credit cards makes you the hero because they get instant financing and your Electronic Armored Car takes your money to the bank.   "Everybody wins, your client gets roof fixed, they earn airline miles and other perks, and you made a sale which you could have easily lost to a competitor that accepts credit cards."   Conclusion:   Two Easy Ways: to massively increase cash flow and profits is to cut costs or increase revenue. One is limited the other one is not. Money is not everything; it is merely a way for you and your family to enjoy the good things in life. By serving your client base effectively giving them what they want, your wealth will provide opportunities for other people who help you to do the same.  

About The Author:

Randal DeHart, PMP, QPA is the co-founder of Business Consulting And Accounting in Lynnwood Washington. He is the leading expert in outsourced construction bookkeeping and accounting services for small construction companies across the USA. He is experienced as a Contractor, Project Management Professional, Construction Accountant, Intuit ProAdvisor, and QuickBooks For Contractors Expert. This combination of experience and skill sets provides a unique perspective which allows him to see the world through the eyes of a contractor, Project Manager, Accountant and Construction Accountant. This quadruple understanding is what sets him apart from other Intuit ProAdvisors and accountants to the benefit of all of the construction contractors he serves across the USA. Visit http://www.fasteasyaccounting.com/randal-dehart/ to learn more.

Our Co-Founder Randal DeHart - Is a Certified PMP (Project Management Professional) with several years of construction project management experience. His expertise is construction accounting systems engineering and process development. His exhaustive study of several leading experts including the work of Dr. W. Edward Deming, Michael Gerber, Walter A. Shewhart, James Lewis and dozens of others was the foundation upon which our Construction Bookkeeping System is based and continues to evolve and improve. Check out our Contractor Success Map Podcast on iTunes. 

 

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