In the integration business, we are notorious for tightly scrutinizing our project margins by looking at the gross profit on our hardware, and then the performance of our labor (install, engineering, and programming) against the estimated hours when proposing the project. This is the typical way that we determine whether or not a project has made the grade in terms of profitability.
Like many things in business, I think this method of project measurement started back when room integration started growing exponentially for integrators in the ’90s; to some extent, I don’t think the methods have changed much since then.
Most integrators do the math like this:
- Equipment Cost vs. Equipment Revenue
- Labor Cost vs. Labor Revenue
The difference (hopefully) positive is the job profitability. However, after giving this subject a great deal of thought, I couldn’t help but think that this formula is missing something. Not because of its simplicity, but because there are too many costs (and revenue buckets) that integrators don’t always account for (but should).
Here are three buckets that integrators should specifically charge for in their project estimations:
- Project Management: Integrators have become much better at putting dedicated project management resources on jobs large and small; however, many integrators don’t capture any cost for this additional resource. While this is a cost that can be buried into the price, I think most customers would be open-minded and appreciative of an integrator that appropriately plans for and allocates expenses for project management. Project managers can often be billed out at as much as $75 to $100 an hour. I like the formula of including 1-2 hours per day of project labor in the estimate.
- Administrative Support: Between order entry, vendor management, and dealing with a large pile of change orders, the general and administrative bucket is too often excluded from pricing (or the amount charged is not enough). As a rule of thumb, I used to estimate 30 to 60 minutes of administrative time per project per day, with a fair going rate of $50 to $60 per hour.
- Logistical Expenses: Unlike the first two costs, this isn’t something that can be looked at as a sunk cost. When dealing with large items like screens, flat panels, and cable spools, logistics can add huge amounts to the cost of a job. Properly capturing these expenses is a responsibility that falls squarely on the estimator. Adding freight by line item is the best way to make sure that nothing is missed. Also, depending on the job, it is important to consider the multiple stops that a product may make: for instance, into your warehouse and then back out to a customer site. With ever-increasing transportation costs, it’s important not to miss dollars on logistics. It is also key to properly allocate rather than putting them in a giant slush fund, which can make certain projects appear more profitable than they should.
There are costs and revenues with every job that must be considered when estimating to make sure margin integrity is maintained. As projects have become more competitive, the first instinct is to think of ways to charge less … but, in the long run, companies that deliver successfully and profitably are better positioned to keep their customers happy, which leads to more sales.
Are you capturing all of your cost and revenue opportunities on the job? What are you doing that works when it comes to better managing job profitability? We’d love to hear from you. -Daniel Newman, BroadSuite Consulting