“The company has been bought out, you have been laid off.”
These words were given to my dad in the early 80’s after going from job to job of trying to build a career in food route sales. They are scary; but the culture of the companies he worked for was worse. Micromanagement seemed to be the name of the game. In retrospect, that final layoff was one of the best things that could have happened to him. After reading in a magazine that carpet cleaning was the most profitable new business to be in, he took his life savings and put it into a truck and a truck mount system. As most of you know, starting a business is one of the most difficult things to do and doing carpet cleaning has to be one of the most physical jobs one could have. Why did he do it? Why did he not go to work for another company? He certainly had a knack for sales and was a hard worker. He has told this story to me a few times with a lot more detail about all the difficulties working for a company that had bad managers and the toll it takes. He was ready to determine his own destiny. There is something about having the autonomy to make our own decisions, and our own mistakes.
Other Influences Staking Claim in OUR Autonomy
Today, I own the company my dad started and enjoy the culture we have as it is driven by determining our own destiny, with much autonomy, engagement, and accountability. While many of you reading this may also own your company, and/or work at a place that has a wonderful culture, things have changed in our industry since my dad first started the company, and even since I became the owner 10 years ago. Sure there are technological advances, equipment advances, and even updates to our standards. What I would like to focus on is the negative impact other shareholders have had on our autonomy as contractors and what we should be doing to be proactive about our situation.
We now have guidelines from every insurance carrier and third party administrator on:
- How to do the job
- How to estimate the job
- What software we should use (on which we now must train our employees)
- How much we can charge
- What we can’t charge
- Etc etc etc.
Plus, there are construction consultants who also get involved in these decisions, and the regulation on contractors increases all the time. I do recognize not all contractors necessarily subscribe to the guidelines that others try to enforce. However, I am certain all contractors are in some way affected by the negotiation tactics of entities with these same guidelines.
This article is not meant to be exhaustive of the things a contractor should do for their business. It will address some things that I have recognized in my business that allow me to operate with the autonomy that my employees and I deserve.
The Cost of Doing Business
This has everything to do with how a business is run, the financials, the pay, the benefits, the overhead, and absolutely the “costs of doing business.” If it is a “cost of doing business”, you must charge for it. I know this is a turn of phrase contractors hear on a daily basis as a tactic to negotiate not charging for something, as if the contractor has to do something in their business for free or it is lost in the big numbers of running a business and should not be charged to a job. This is completely false.
Contractors should be making their own prices and charging for all of their costs, whether it be in line items or included in their margin, and the software the contractor uses is inconsequential. It can be a lump sum, time and material plus a percentage, or unit line items. Any way this is done, the retail labor rate must be determined. One takes their worker’s wage, plus the labor burden (payroll taxes), and then a contractor must determine the margin to make on top of that from their financials. A budgeted gross profit can be determined by knowing one’s overhead and indirect costs plus the targeted net profit as a percentage. This margin will be put into the labor overhead. If one puts a markup percentage at the end of their estimate (O&P), then they would not include that percentage in the labor overhead.
This is not an arbitrary process nor is it a process that is not allowed. Xactware states, “Whatever the contractor selects will go into a Retail Labor Rate.” (Xactware Retail Labor Rates and Supporting Events)
The National Association of Homebuilders has a publication, “Remodelers’ Cost of Doing Business Study” (what an appropriate name) where they utilized a survey to determine the average, top 25% and bottom 25% of remodeling contractors’ overhead, net profit and gross profit. In this study, they utilize the overhead and net profit to determine the margin needed for gross profit. Contractors everywhere determine their own pricing; it is time for our industry to do the same.
When the profitability of a company is where it needs to be, there is certainly autonomy for decisions when it comes to pay scales, benefits and a good many other things that are needed to grow a business.
It seems like the burden of justifying any charges fall on the contractor. Not necessarily a problem, but when the negotiation turns to guidelines that are made up by a separate and biased party, then the burden falls on that party to substantiate their position. Negotiating phrases such as “complex”, “3 trades”, “cost of doing business”, “can’t charge for emergency service call”, and many others have no basis in fact and have no documentation to support it. It is what the contractor is being asked to provide, so turnabout is fair play. It is highly recommended that you do have documentation for the most commonly asked things, and hopefully all things, and make a library of this documentation for your company so all estimators have access to it and are all consistent in what they provide. It is not hard to imagine what technicians, job coordinators, estimators, etc. go through every day with these negotiations, feeling like they are stuck and being micromanaged by outside entities. Once they have the documentation and a whole library of it at that, they will feel the joy of negotiating with confidence and determining how they do a job and how to charge for it.
This is the one subject I am always tight lipped about. I did help write an article about eight or nine years ago about marketing. Those were the good ‘ole days when contractors got their own work and didn’t rely on a third party to get the work for them. I can’t stress enough how this subject alone has made contractors fearful, prompted them to make poor decisions, and made them increasingly unwilling to stand up for themselves. Why? When the work comes from someone that determines what you should charge and do, you may not want to bite the hand that feeds you. Without going into strategy (there are consultants and services available for this), the contractor must realize they can invest in themselves.
- Instead of paying a third party service to increase the visibility of their website, why not invest this in your own website?
- Instead of paying a third party a percentage for work, why not invest that into a strategy and people to do this within your own company which comes with the added bonus of not having to be restrained by guidelines that are not your own?
A person on the outside looking in might think that this is very common sense. It should to you too. Imagine the freedoms of getting work through your own efforts. A hint for your strategy: don’t make it about your company, make it about the market you are targeting and what keeps them up at night. Whatever you do, be consistent! You do not want to be busy and back off on marketing, then get slow and have to play catch up until you get busy again. Not a good cycle.
Each of these things, pricing, documentation, and marketing strategy all have crucial benefits for a contractor. It allows for the freedom of why we are all doing this in the first place: to determine our own destiny.