It’s a basic principle: Cash flows into
your construction business when you
sell a job. Cash flows out when you
pay the costs of the job and your overhead
expenses.
If you sell jobs for less than what it
costs to build the job and pay your overhead
expenses, you’ll get behind. You
won’t have enough cash to flow.
Pricing your jobs correctly is the first
step to positive cash flow in a construction
business. It’s easy to do if you know the
math. Determine your markup — the
markup you need based on your overhead
expenses and your profit needs.
Apply that markup to your estimated job
costs, and use it every time. Now you can
rest easy knowing that if you make the
sales and if you build your jobs the way
you have estimated them, you will always
have enough to pay your bills and make a
minimum profit on that job.
I’ve championed the cause of 8
percent net profit for many years. I know
from long experience that construction
companies who consistently price their
work to obtain an 8 percent net profit
are always able to pay their bills on
time. They can pay their suppliers, their
subcontractors, their employees, their
taxes and themselves. When the bills
are paid on time, they are free to focus
their time and effort on building a profitable
business instead of worrying how
to make payroll next Friday. And when
a problem happens on a job, they have a
cushion to tap if needed.
During the last few years, we have
seen more and more contractors cut their prices to obtain work. That is foolish
mischief at its worst. Think about this:
Where will the money come from to
pay your bills after you cut the sales
price of a given job?
## Stop Undercutting Yourself ##
I recently read a post from a
contractor who said he would cut his
price up to 10 percent to get the job.
OK, if he was pricing jobs to make an
8 percent net profit, he’s now given
away all of his profit and 2 percent
more that was needed to pay overhead
expenses. He will be taking money out
of his own pocket to build that job.
on the next one.” Right. I have yet to
meet the contractor who will cut his
price to get a job and then increase the
sales price on subsequent jobs to make
up for the loss on the first job. It’s a
great theory, but it doesn’t happen.
Why do you think it will be easier to
get a higher price on the next job to
make up for the low price on
this one?
Don’t do it. Recognize
that when you cut your
price, you are putting your
company at risk. Spend time
polishing your sales presentation
instead of worrying
about your sales price so you
won’t have to cut your prices.
Calculate the markup
your construction business
needs to apply to all job estimates,
and use it without
fail. Positive cash flow
can only happen if there’s
enough cash to flow.
For more on how to calculate
your markup, visit www.
markupandprofit.com/book.
