Something To Chew On

Not too long ago, I was talking with a potential client, and the person made a statement to the effect that the economy must really be forcing down our prices, right? While it’s true that things are much more competitive than they were a few years ago, the truth is that remodeling; at least the kind that I do, is not a commodity product, like sorghum, or pork belly futures.

There is a lot that goes into a remodeling project…many different vendors, the field labor I provide, the supervision and expertise I provide, along with the work of a number of different subcontractors. Far from being something you buy straight off the rack, it is more like having a suit altered just for you…..while you’re wearing it. That’s a skill set that is hard to find. In short, it’s not bushels of wheat.

So, does the economy dictate my pricing? The short answer is yes, but not as much as you might think. The price of building materials hasn’t changed drastically, nor have things like liability insurance, fuel, tool repairs, etc. In fact, some costs have gone up, like advertising, for instance. I mean, how else am I going to get people to consider me for their project?

This is as true for me as it is for my vendors and subcontractors. Cutting overhead is something that all of us have to do, but, as a small company with no staff but myself, and an office in my home, my overhead is already pretty modest.

So, while overhead expenses have not dropped significantly for me, my total annual sales HAVE dropped quite a bit from the same period last year. What does this mean for a company like mine? Well, for one, it means that my overhead expenses are a much larger percentage of total sales than they were a year or two ago.

Like all contractors, I mark up my costs by a certain percentage. That markup, or gross profit, allows me to pay my overhead costs (including my salary) and, if I’ve done a decent job of estimating, make a modest profit as well. When my overhead costs increase relative to the price of the job I’ve just sold, there is still, hopefully, enough gross profit to pay for my overhead.

What there is less of though, is NET profit. In fact, in many cases, a project that I might have sold for the exact same price two years ago, at a profit, will now, at the same price, allow me to break even at best. This is not a recipe for long term success, as you might imagine. Profits are what allow me to salt away money for tough times, or to expand and take advantage of new opportunities. They are truly the life’s blood of a business…..certainly of mine! When I price the work I do, even now, there has to be SOME profit in it, or I question why I would want to do the project at all.

What keeps me going is the belief that this won’t last forever, and that the profits I DID manage to salt away when times were better will see me through, as they have so far. So, will I lower my price? Probably not, since I know what I’m giving away. Building a project whose revenues won’t even cover my overhead is not appealing! Like the old saying goes: “I can go broke working on a money losing job, or I can go broke sitting at home…..but sitting home is more comfortable!”

Something to chew on.