Instincts can be very good; they can also cost you a lot of money. Every integrator talks about setting a minimum mark and maintaining the discipline necessary to stick with it. Yet it still happens, contractors quickly meet the lower price without first building a true cost model to support the decision.
We find ourselves on that day when we have the “last look” wondering what to do. Should we take a chance that the project will go well and we have opportunities for change orders and ongoing service, or do we walk away? Can we get relief pricing from the suppliers after-the-fact?
Here’s my advice on how to feel more confident with your decision. Stop bidding jobs based on what you hear from others (except me of course!) and build yourself a fully-burdened cost up pricing model. This model takes the guessing out of the picture and allows you to develop a more systematic pricing structure for your projects.
Now remember not all projects are the same. There are factors that go into the more complex jobs and for the most difficult working conditions. Payment terms become factors. Is your first instinct to apply a degree of difficulty to your pricing model based on the type of project before discounting? Can you quickly account for the unique requirements of that project like surety, additional insurance, safety meetings, storage and delivery challenges, prevailing wage, and so on?
Emotional pricing can be an ego thing, a fear of no growth, pride, or even a compassion for the employees who may not have work if the job slips away. I’ve actually seen the employment factor be the major factor of late. And I’m ok with that as long as you know what you’re doing. It’s the not knowing that gets our members into trouble. They discount margin from an unknown starting point.
We’re getting much better at this but the truth is, most of our members still don’t know what their true cost of doing business is as it relates to each project type they bid. With the harsh competitive environment that exists, it’s worth knowing. Many simply convince themselves that they will make up the discount they offered in better purchasing or more efficiency. Therefore, they’re transferring the burden for profitability to others.
We rationalize discounting to save peoples jobs. We convince ourselves we can buy the materials cheaper six months from now. Our gut tells us we can find ways to make up on the labor we already know is too low. That may be true, but to really know, you must build each project from the ground up knowing the true overhead burden, cost of sale, variable and fixed costs, etc. Too many of our members base this on instinct rather than the numbers and later wish they hadn’t. — CW