Pricing question

[Jim Becker]

I never want this hobby of mine to seem like a job so if the guy wants to use my services he's going to have to make it appealing to me to give up my shop time for the next few months.

This is very important and is exactly my own feeling about doing work for others, especially now that I'm retired from full-time work and actually have time available to "do work for others" if the right opportunity comes along. If I'm going to do "pro work", I expect to get paid "pro rates" to make it worth my while to get up earlier in the morning and eschew other things I might enjoy doing instead. That also I will not be hurting the local trade, either, through extreme undercutting...I know too many folks in the area that do this for their full time jobs and I respect the trades accordingly.

[Julie Moriarty]

Lots of interesting discussion on pricing and bidding on the front end of a job.

I'm interested to know how many of the pros make a habit of evaluating the profitability of a project after the fact. In other words, tracking and allocating hours, overhead, materials, unforeseen costs and then comparing them against the revenue collected on the job. Basically this would be creating a mini P&L on the job itself.

Does anyone do this or work for someone who does this?

You have to or you're just throwing darts at a board.

A contractor has labor hours figured for each job performed on site and attached codes to each of those jobs. These labor hour estimates are arrived at over time. How it works is on the job, the foreman is given job codes for pulling wire, installing conduit, demolition, installing panels and switchgear, etc. There are dozens of job codes and it's the foreman's responsibility to attach those codes to the man hours worked every day.

All that goes back to the shop where the estimating department actual compares labor hours to estimated labor hours. From there they estimating department can make adjustments to their bidding or look into why the numbers are off. That's the theory anyway.

I've worked for contractors where they give you access to their bidding program and all the labor hours are already plugged in. There are even adders for working on higher floors in a building. All the estimator has to do is perform a take off from the drawings submitted for bid - How many fixtures, how many feet of each size and kind of conduit, how many feet of wire, etc. Plug them into the program and the program spits out the number.

If the contractor has good numbers from the field and a good feel for the market at a given time, they will usually be successful. Most contractors that have been in business a while know there's a feel one has to have about bidding jobs. The hard numbers for labor hours attached to a given task may have to be fudged in order to get a job. The whole thing is part science, part crystal ball.

[Jim Becker]

Adding to Julie's excellent response, contractors/pros also learn to "read the customer" so they can also factor in "project angst", "propensity to interrupt" and "mind changing" that can affect profitability.

[Martin Wasner]

I'm interested to know how many of the pros make a habit of evaluating the profitability of a project after the fact.

If you don't, you aren't going to be in business very long. You can't track just a year, a month, or a job. You need to be on top of every process and every person, every single day. What is their weakness, what needs to take place to make that person better at their job. What are the bottlenecks in the process, is it because of timing, inadequacies in equipment or tooling. Every single day I try and figure out how to make things better, faster, and more efficiently.
I know basically to the minute what every basic item in the shop takes to build. A drawer on average is 45 minutes start to finish on virtually every job. You should be able to have a flat panel door machined and assembled ready for the widebelt in 5 minutes if it's a batch (a single door take a bit longer). Gluing up panels for drawer parts shouldn't take more than two minutes per set of clamps in the rack, and filling the entire set of 30 clamps can be done if you hustle in 23 minutes. I time myself at things regularly. When I hear a machine that should be end to end machining lumber, I'm usually yelling across the shop "EMPTY MACHINE". We get paid to cut wood up, and put it back together, standing there looking at a machine spinning is doing neither. For instance, dovetailing drawers. The dovetailer has a 2hp spindle, and a 2hp feed motor. It also requires compressed air, which is another 15hp (plus the dryer). Then the dust collection is another 20hp. If you do it right, there is almost no empty time between cycles. I don't know what 39+hp costs per minute to run, but it's enough. If she ain't a cuttin', we're just spending, not making.

Training people is tough. I didn't really start examining every movement I made as a cabinetmaker until I started working with a coach when I was racing catamarans. Because in racing, seconds count, and mistakes add up quickly. You examine every single movement you make and hone it to perfection because the last thing you want to have happen is a blown race because of a mistake in handling you boat. I took that attitude that I took to racing to my job. Why take two steps when all you need is one. "What am I doing, and why am I doing it?" is my mantra. Never do one thing when you can do two.

At night when my wife is watching tv, I'm usually sitting there researching something. Tooling, methods, equipment, software. Take your pick. If you handed me half a million dollars tomorrow morning at 10am, it'd be spent by lunch and I'd be wondering if the electrician could squeeze me in before everything showed up.

There's always bottlenecks to be eliminated or negated, there's always processes that can be refined with what you have. Sometimes its a matter of moving a cart a foot so you don't have to move your feet as much. What are you doing, and why are you doing it?

I'm pretty sure every small manufacturing business owner goes through the same thinking. Where can I invest, and where can I save. I don't know how you couldn't.

Adding to Julie's excellent response, contractors/pros also learn to "read the customer" so they can also factor in "project angst", "propensity to interrupt" and "mind changing" that can affect profitability.

I try really hard not to deal with homeowners. When I do, 25% is tacked on instantly. I can spend 12 hours going over layout and design on $75k worth of cabinets on the front end with a contractor's designer, or spend 12 hours going over $15k worth of kitchen cabinets with a homeowner. I tell all of my contractors, dead minimum they need to be marking my product up 25%, so I justify it by calling it wholesale pricing. A lot of it has to do with the relationship too. I know how to talk to the people I work with on the regular, they know how to talk to me. I can flat out say, that is a horrible idea and no one is butthurt. We find a solution, and move on. The new relationship with the homeowner, there's tiptoeing that needs to be done. I don't have time for that.

[Mike Tagge]

I've been in "business" for about 3 years now. I've done about 1 project a month, although I don't do kitchens. I find this line is not my niche as my work is based less on production and more on custom. Being said, I have often been pricing out the market. I have encountered and searched for any idea of what market rates are. Big Box stores are a good way to find out something concrete. Their prices might seem high even. Compare that to more customized offerings from other cabinet companies and you will see they are on the low side of things. To get a fully custom job done takes a lot of work even before your first cut. It's not just a material markup - you get to charge for your expertise. Any basic production shop can cut 24 x 34.5 x 24" cabinets day in and day out and they will beat your pricing every time. You should be ok with that. If you are just getting started, you might need to build yourself out a bit and have something to show but when you do, make sure your prices are higher than the junk out there.

My shop rate is targeted at about 125/hr in the Chicago area. I get this on most of my jobs because I stick with it and never negotiate pricing, only features. I don't include my design time in this figure but I limit freebies by requiring a design retainer prior to any designing on my part. I do have a free initial consultation but that's all I lose on jobs I don't get. My worst jobs have been the low priced jobs. It seems that the lower pricing you go with, the greater the expectations are - and usually uncommunicated.

If you are just starting, and have no clue of your setup, I would recommend hedging yourself even or slightly more than a big box offering. You sell that on the custom aspect and higher quality materials. Then measure everything you put into the project as close as possible - especially hours spent designing, fabricating, and installing. Subtract out your materials and figure out your hourly earnings. Make sure you build in your own employment overhead like benefits - figure 30% more than your pay. Then figure in a 25-30% markup for company profit/overhead/improvements/maintenance. Soon that 125/hr rate doesn't seem too high. You have to work fast enough to justify it, however.

The biggest takeaway is find your niche and sell your product. There are people who pay 15,000 for a new car and those that spend 200,000 for one. Home improvement work is often the same.

[Rick Malakoff]

Mike,
Your line rang true for the 40 years I spent in the business " My worst jobs have been the low priced jobs. It seems that the lower pricing you go with, the greater the expectations are - and usually uncommunicated".

Rick (OP),
Listen to what everyone has said as there is merit to all this knowledge!

Rick

[J.R. Rutter]

Adding to Julie's excellent response, contractors/pros also learn to "read the customer" so they can also factor in "project angst", "propensity to interrupt" and "mind changing" that can affect profitability.

I've named this the PITA factor and agree that you need to apply this as a multiple to discourage problem clients from working with you, or if they don't blink, then you can still come out OK in the end.

[Edwin Santos]

If you don't, you aren't going to be in business very long. You can't track just a year, a month, or a job. You need to be on top of every process and every person, every single day......

Very impressive Martin. I realize the thread is about pricing, but pricing and cost are connected and to me the contractor who is going to win the marathon is able to run an efficient operation and can price competitively without sacrificing margin. Let's face it, all customers are cost conscious at some level, and the shop who is driving down their costs through efficiency and innovation without compromising quality is at a big advantage and capable of scaling. Do you practice LEAN techniques? I think someone else mentioned it also. The more sophisticated shops are into Lean and Kaizen and it's amazing how a multitude of little efficiency steps can add up to huge dollars. The Fastcap owner is a Lean evangelist and dedicates a lot of their product line to it.

I totally get the theme of many responses advising not to undersell oneself. At the same time, it's easy to stand there with arms folded waiting for only that business that meets your criteria while your ship sinks. It's a complicated balancing act. Most of the time, the flow of incoming work can be unpredictable while the need to feed the machine is constant. Some contractors with capacity are willing to take limited amounts of work at low(er) or even zero margin when the pipeline slows, the theory being that diluting the fixed overhead essentially makes the other jobs more profitable. Others would consider doing so unthinkable. On a unit basis, the fixed component of your overhead is radically different depending upon the % of capacity you are running, that's just math.

I'd say the success triangle is built on a sound marketing strategy, efficient and reliable operations, and a solid cost accounting system including collections/billing. I'm not sure any of those three functions is more important than the other, but interestingly only one has anything to do with the underlying trade.

Of course many of these comments are less applicable for the one man, or very small operation. Interesting discussion,

[John TenEyck]

Edwin, the price a customer is willing to pay for something and your cost to make it have absolutely nothing to do with each other. If you base your pricing on your costs plus some multiplier you will often leave money on the table, at least an efficient shop will. An inefficient shop might get rejected on a frequent basis because their quotes end up higher than the customer is willing to pay. But at least they know from those rejections that their pricing exceeded what the customer was willing to pay and they can do something internally to lower their costs. The efficient shop has no clue the customer would have been willing to pay more. I'm not saying you can always quote what you perceive to be the maximum price a customer is willing to pay. You have to consider what your competition will bid, if in fact there is any. If you are making stock cabinets, well, you likely have lots of competition and not much of what I'm talking about applies because price is king - better get efficient. But if you are shop that solves a customer's problems with custom design, color matching, etc., things that separate you from the rest then you will have little competition, and none if the same customer comes back to you for another project. If that's you you will likely leave money on the table if you base your pricing on your costs. Said another way, if that's you and those are your customers, you know I'm right if you never get a quote rejected - you are always underbidding.

John

[Edwin Santos]

Edwin, the price a customer is willing to pay for something and your cost to make it have absolutely nothing to do with each other.

John

I agree completely. However, I believe there is a market for almost everything, including cabinetry. There might be differentiation in services here and there that may insulate one from some of the market competitive forces, but by and large, customers are savvy and rarely willing to grant carte blanche. What I was trying to say is that a good contractor develops a good sense of the market price for his work, and if his operation is more efficient than others, he can confidently operate at the market level or maybe even a little lower and not compromise his margins. I was not intending to suggest his price should be based on his cost in the literal senses, what I was trying to express was that more efficient costs allow that contractor to either command a higher margin, or keep the same margins but with some competitive flexibility in price.

I also agree with you that some % of rejected quotes is healthy. I was also taught that some % of bad debt is healthy also, even though it never feels like it at the time.

[Martin Wasner]

Very impressive Martin. I realize the thread is about pricing, but pricing and cost are connected and to me the contractor who is going to win the marathon is able to run an efficient operation and can price competitively without sacrificing margin. Let's face it, all customers are cost conscious at some level, and the shop who is driving down their costs through efficiency and innovation without compromising quality is at a big advantage and capable of scaling. Do you practice LEAN techniques? I think someone else mentioned it also. The more sophisticated shops are into Lean and Kaizen and it's amazing how a multitude of little efficiency steps can add up to huge dollars. The Fastcap owner is a Lean evangelist and dedicates a lot of their product line to it.

I'm not sure my operation would fit the lean discipline as I know it. I haven't read the books and I don't have a thorough understanding of it. Small bits and pieces. I keep meaning to buy the books.
Mine is a custom shop, but I've tried to build it as a production shop even though there is just two of us at the moment. As I understand it, my approach to equipment doesn't fit the lean ideas. I believe in LOTS of equipment to minimize setup time to zero. I'm also in an 8k sq/ft building, pretty wasteful at the moment, but I'm in serious need of another body and if I had the time to sell I could easily add the work to add a few more.

[John TenEyck]

I agree completely. However, I believe there is a market for almost everything, including cabinetry. There might be differentiation in services here and there that may insulate one from some of the market competitive forces, but by and large, customers are savvy and rarely willing to grant carte blanche. What I was trying to say is that a good contractor develops a good sense of the market price for his work, and if his operation is more efficient than others, he can confidently operate at the market level or maybe even a little lower and not compromise his margins. I was not intending to suggest his price should be based on his cost in the literal senses, what I was trying to express was that more efficient costs allow that contractor to either command a higher margin, or keep the same margins but with some competitive flexibility in price.

I also agree with you that some % of rejected quotes is healthy. I was also taught that some % of bad debt is healthy also, even though it never feels like it at the time.

Thanks for the follow up Edwin. I am in complete agreement, except maybe for the bad dept being healthy part.

John

[Edwin Santos]

Thanks for the follow up Edwin. I am in complete agreement, except maybe for the bad dept being healthy part.

John

John, your reaction to the bad debt comment is like mine when the doctor pitched the prostate exam as a good thing.

[Rick Alexander]

Well guys - the contractor I'm working with advised me to up it by another 1K at least. That got me a little nervous but I did it anyway - I won't ever regret a job I didn't get for sure. They took the offer instantly - which makes me think it might be a little low but hey - this is a learning process for me. I don't have much overhead as I'm pretty much a tool collector for fun, I have very good tools to work with and I don't owe money on a thing out there and I know I'm capable of doing a very acceptable job. Call this one an experiment I guess in pricing. I'm going to keep very careful notes to see just how many hours this takes and my "real" costs for the next time. Meanwhile - plenty of shop time for Rick for the next few weeks. I will update this post with the results.

Thanks again everyone for their input - very interesting reading for me at least.

[Sam Murdoch]

Rick - does that mean you are now at Ten Grand for labor? Excellent!