Remodelers wage a constant war to find just the right price. Charge too much and you're accused of gouging customers or you won't get the job. Price it too low and you run from job to job without making money — and go out of business. Finding the right price requires knowing all your costs so you can mark them up appropriately and ensure that you receive the proper margin and don't give away all your profit.
The biggest problem that remodelers face in setting prices is failing to understand all the costs they incur in conducting business, says Leslie Shiner, president of the Shiner Group, in Mill Valley, Calif., which works with remodelers on business management. "You have to look at what each activity truly costs you in materials, labor and variable costs."
Here are some of the key areas where remodelers accrue costs that never make it into their estimates:
- Employee costs. "I'm a big proponent of remodelers' understanding what it takes to really put one employee in the field," Shiner says. The costs include the employee's wages, payroll taxes and all benefits, of course, but they also extend to vehicle use, cell phones, small tools, supplied uniforms and other expenses. In some cases, a contractor can look at subcontractors’ charges for parallel work on another activity to see if his own labor charge is sufficient.
- Variable expenses. Many remodelers make the mistake of loading up their overhead category with costs that aren't set but vary with the job. Expenses that change if more jobs come in or if the jobs have different needs should not be counted as overhead, Shiner says. Rent and utilities, for instance, remain the same each month, but workers' compensation, liability insurance and gasoline expenses vary. Charging off a set amount for travel expenses to a job may not cover jobs further away that require longer travel times and more gas. Taking these variable costs out of overhead allows remodelers to more accurately charge for the expenses each job incurs.
- Waste. Calculating board lengths, plumbing runs and other materials as if they can be installed in just the right quantity means their true costs are underestimated. Running 12,000 linear feet of wiring, for instance, may require 13,000 or 14,000 feet to make the installation work properly. That extra 2,000 feet often isn't accounted for.
- Consumables. The cost of staples, nails, caulk and a wide range of other consumables that are used while installing fixtures and other materials sometimes seems too small to include in the estimate, but if the cost isn't accounted for, it comes out of profits.
- The owner’s salary. Too many small remodelers don't allocate a cost for their own salaries, taking their pay from the company's profits or not at all, Shiner says. "This time isn't free. It's fine to consider it 'sweat equity' you're putting into the company, but it's still a cost." The remodeler thinks he's making money because he deletes this expense, along with his wife's time for handling his books, making out invoices and similar activities. But at that point, he's giving it away for free, not putting it back into the business.
If no salary is included in estimates, there will be no way for the remodeler to later hire someone to handle these duties and allow the owner to expand the business. "Determine a cost if someone else were doing what you do, and factor that into your estimates," Shiner suggests. "You don't have to take the money; you can put it back into the business. But unless you charge for it, you'll never change it."
A similar problem arises for remodelers working out of a spare bedroom or basement room. They're saving the cost of rent, but they aren't charging a sufficient amount to ever save enough to afford a separate location. Once the company is established, such cost - cutting keeps the owner locked into a situation with no funding to change it. Charging less than rent would cost — but charging something — ensures a better profit on the job.