The Two Profit Killers for Contractors

The math

Getting the math problem solved is actually not that hard, fortunately. But before we get to the solution, let’s talk about what we’re facing.

Here’s what I mean by the math problem being one of the profit killers for contractors:

You are bidding on a job, you have $10,000 of cost in materials, and you estimate it’ll take 200 man-hours to complete.

Now, the math question is: how much do I need to mark up my material and labor costs to also recover my overhead expenses (trucks, insurance, advertising, etc.) and make a profit?

Now it really gets tricky.

The answer to that question is unique for every business.

Because if you compare two different businesses, and they bid the exact same job with the same materials, man-hours, and everything, they still each have different overhead costs. No two businesses are exactly alike.

Which means you can’t use someone else’s markups and labor rates. It doesn’t work.

Even your own business’s overhead costs will evolve, meaning the answer to this question of “What markup do I use?” will also need to evolve with your overhead costs.

The answer is not a static number.

The budget

The solution to profit killers for contractors is to build what we at SynkedUP call a “budget”.

A budget is essentially a glorified spreadsheet where you plug in all your expenses for the year. Labor, material, overhead, equipment, subcontractors, everything.

The budget tool will then calculate the answer to “how much do I need to mark up my labor, material, etc., to ALSO cover my overhead expenses.” and find my break even.

Simple example using simple numbers:

If my annual cost of labor is $100,000, and my annual overhead costs are $50,000, then I need to mark up my labor cost by 50% to arrive at $150,000, which is my break even.

Now I need to add my profit to that breakeven. If I add a 20% margin, I’ll get $187,500, which is my customer-facing price. Or the revenue I need to generate to cover my labor cost, and my overhead, and generate my profit goal.

When fuel goes up, I buy a new truck, insurance goes up, etc., my overhead changes, and I need to recalculate my math to find my new markups.

This is what budgeting does for you. Plug your expenses in, it spits your pricing back out.

We have a free budgeting tool on our website, that goes really in-depth.

We also have a simple man-hour price calculator that does the same math, just quick and dirty, not have as many detailed inputs as the budget tool.

I’d recommend the man-hour price calculator tool to get a 2-minute answer to your question of what should your rate be, and the budget tool for a detailed answer that’ll take an hour or so to dial in.

This should definitely deal with the profit killers for contractors.

Quantities and Production Capacity

I said it gets tricky once already. Well, buckle your seat belts because now it REALLY gets tricky.

You could do all the math as described above perfectly…

…and still get it wrong. Still, lose your profit.

Let’s talk about the 2nd profit killer for contractors.

Here’s how you could do the math perfectly, and still lose money:

You bid on a job, you estimate it’ll take 100 man-hours, you do the math perfectly, and get your price.

But then it takes you 150 man-hours to complete the job.

That labor overrun whacks you twice:

• The additional unexpected cost of the labor overrun.
• The opportunity cost. You lost the opportunity to use those 50 man-hours of labor, or production capacity, on your next billable job, you had to delay the start date of that next job to complete the first one.

Of course, material, equipment, and subcontractor cost overruns are also profit killers for contractors. But those are usually easier mistakes to avoid, and, they only hurt once. Labor overruns hurt twice. Cash cost and opportunity cost.

You do labor overruns too often, and that’s how you miss your sales goal. You projected $1,000,000 of revenue for the year, but because of all your overruns, you only got $800,000 of that work completed. The other $200,000 worth of work, or production capacity, got sucked up in those jobs that you ran over on.

And because you only completed $800,000 worth of work, not the million that was in your budget, now you didn’t bill out enough revenue to recover all your overhead.

What was SUPPOSED to be your profit, goes to pay for the difference. All those overhead expenses that you didn’t do enough production to cover.

And that’s the two main profit killers for contractors. All the other labels I considered including in this article, like inefficiency, poor processes, not the right equipment for the job, etc., all rolled up into “production capacity”.

For contractors to be profitable, it’s all about getting the math right, and then making sure you don’t overrun on labor/miss your required production capacity, to make the math work, and recover all your overhead.

And actually see that profit in your bank account.

I’ll take the opportunity to speak on my “why” with SynkedUP a bit.

This is “why” we built SynkedUP.

Both of these profit killers for contractors are sneaky and are very very hard to pin down by looking at a P&L or your bank account balance.

And it’s not like you can just take the magic number from someone else. Every contractor has to figure out their math and production capacity on their own.

Otherwise, you’re priced too low, not making any money, too high, and potentially losing jobs.

It’s got to be dialed in. Just right.

And dialing it in is an ongoing process. You’re never able to set it and forget it.

How we do it

So, with SynkedUP, we built an app to automate the math, allowing you to build a budget, that automatically calculates the math for you as you build the estimate in the app.

And then track your costs and hours, to start clanging the warning bells when you overrun on labor and begin falling behind on your production capacity. So you can react in real-time.

No making the same mistake twice.

No getting to the end of a hard long year and having nothing to show for it.

Hit reply or leave a comment if you want to talk to me or one of my amazing team that I get to work with every day, about it.

I’m on a mission to help more contractors thrive, not just survive.

I wanna see you profitable.

Cheers,