The current high demand for tradespeople provides opportunities to enhance your business but many businesses are still just getting by. Underquoting or aiming to be the lowest tender is a key factor in that.
Many trades businesses take a ‘cost plus’ approach. They give customers an estimate of time the job will take and quote their hourly rate, plus materials and 10 per cent.
Most charge around $70 an hour and don’t feel they can charge more in case someone comes along at $55. That downward spiral of price competitiveness is one of the biggest traps – becoming a race to the bottom. In this cost-based scenario, you struggle to create a profit margin because your charging does not reflect the value you are giving.
In our experience, tradespeople also often operate in isolation when quoting or tendering, without taking into account all the variables. While you can rely on your experience to assess how long a job should take, there are many unknowns. When that wall is opened up during a renovation, what is going to be there? If it’s the unexpected, suddenly your price is out and there’s potential for conflict with the customer.
Employing people is another variable. You might pay your employee $25 an hour and charge them out at $50. For a 40 hour week, that should mean a $1000 profit margin. But, with downtime and travel, your employee may only be working on the property for 30 hours, so you’re paying $1000 but only billing $1,500.
Add in Kiwisaver and ACC and now you are paying around $1,080 a week, so your profit margin drops further. Strange as it seems, tradespeople often don’t take these variables into account when providing quotes or tenders.
A common concern we hear from tradespeople is they are very busy but still not delivering a decent profit. To break that cycle one of the most important steps, one we find is often not addressed, is to ask yourself ‘who do I want to work for’?
Decide where you want to position yourself and what you want your business model to be - do you want to continue to provide the lowest quote or tender, or gear up to more high-end work and customers?
Whichever you choose when quoting, you need to take into account the full cost of your inputs - factoring in all overheads, variables, employee costs, and admin, because that is part of the service you are delivering.
If you want to position yourself for work your business isn’t currently structured for, you need to understand what changes are needed to deliver the work profit ratio you want.
There are professionals who are very good at helping you to make these changes, but when seeking advice make sure it’s from someone who understands your industry and your business. Test it - you want them to be talking about the future of your business, not the historical performance. They should be looking at who you want to work with, what you want to change, how you are going to do it, and when and how you will deliver that. If that’s the discussion then you have the right person.
Often trade customers come to RightWay knowing exactly where they want their business to be, but don’t know how to get there. With the support of strategy sessions they create the work-profit ratio they want. It’s not about working harder, it’s about working for the kind of customers you want to work for and ensuring that your quotes and tenders accurately encompass everything.
If you’re proud of your work, then you should know your value – and it might be $70 an hour - and if you know your value then quoting should be easy.