16 Apr How overheads kill tradies!
ATTENTION: Trade based businesses – Beware of overheads in your quoting!!!
The 3 step plan to ensure it never happens to you!
I recently had a trade based client (tradie) who had a nasty surprise when they discovered that the overheads they allowed for in their quotes was too low! In this particular case, this client was losing approx. $50 an hour for a job that still had 3-5 months to go.
Owwww!!!! Do not do the calculations on this, as it is very scary and uncomfortable
For tradies, the quality of your quoting equals the quality of profits.
The 5 main issues you have to contend with when quoting are;
- Keeping the price within the “accepted” norms or expectations of the industry
- Not lifting your rates too much from the precedents you have set with existing clients
- Allowing enough “fat” in the job for mistakes, weather delays, changes of plan, etc
- Keeping it low enough so it is attractive to the client, so you win the job and not your competitor
- Including all your costs to ensure you are not leaving subtle ones out
It is this last point I want to address so that you can ensure this is covered for YOUR business. Here are the 3 steps you need to take to ensure you cover your butt going forward …
- First thing to do is segregate your overheads from you COGs accurately. NB. What is a COG? These are expenses you ONLY incur as a result of DOING a job. What is an overhead? Expenses you incur EVERY month/quarter IRRESPECTIVE of how many jobs you are doing or do
- Once you have identified your total overheads for a month or a year, calculate it down to a daily or hourly unit, whichever is appropriate to your specific business model you operate through. For example if you charge day rates, then bring your overheads down to a day rate.
- Now bring this day rate (or hourly rate) down to the per person amount, so that you know how much each person needs to cover on an hourly rate in your business.
Monthly overheads of $15,000
Work on average 21 days a month = $714.29 p/day
7 tradies working for you = $102.04 p/day p/tradie
8 hour PAY days = $12.76 p/tradie p/hour
Hence you need to make sure that you have included in your hourly rate per guy this amount (whatever it is for YOU). If you do not, get ready to lose money on each of your jobs and/or breakeven on most.
NB. If the job you are quoting is going to go on for more than 12 months, make sure you are able to change the rate in the second 12 months to reflect the increase costs of things (e.g. overhead rate increases by 5%). If you DO NOT, then who has to absorb the extra costs for doing the job the next year, YOU!!!
I can hear you say now that if you included these costs, your hourly rate would be too high and you would not get the job.
Do not do work for jobs where the margin is too small in case you have enough buffer to cater for contingencies.
My benchmark I set for tradies that I work with is a minimum of 10%, and understand it is industry specific and size of the business dependant.
DO NOT DO WORK for the sake of keeping guys on while breaking even or losing money, as 80% of operators who take this approach FAIL in business eventually.
This is scary for you, but if your business model does not fit in the industry, either the industry needs to change or you need to change; and it is much easier to change YOU!
Being a great tradesman is one thing, being a great business person is another. This is a very simple technique you probably already knew YET if you look through your job costings of recent times and take the 3 or 4 distinctions out of this article, you will find some changes you need to make to ensure you achieve a profit and then protect your margins!
Best of luck with it and if you need help with any of the other 5 main issues above, book in a 15 min chat with me directly into my diary by clicking here and we can discuss the sure fired and most simple ways to fix these.
Thank you for reading and go and make some profits