| So, how do you achieve a 70% COGS? Well, first you need to be sure you are marking-up your labor, material and subs appropriately. Generally, I recommend that you have labor marked-up 100% (a 50% margin), subs marked-up 50% (a 33% margin) and materials marked-up 25% (a 20% margin). If you can achieve these margins, your gross profit should fall in line. If currently your COGS is higher than 70%, I would first look at your mark-ups to assure they are aligned with mine. I would also look at your estimating to see if you are under-bidding your jobs — this is why good job costing is so important.
And lastly, I would look at your operations to see if there are areas needing improvement. You may need to work with your crews to make them more efficient, ask your subs to tighten-up their bids, and keep an eye out for any excessive materials spending. If you address these three things, I am confident you can achieve — and even possibly exceed — a 30% gross profit.
6. Inadequate Job Costing
Proper job costing is one of the most important keys to assuring solid gross profit. Without good job costing capabilities, it is very difficult to track if you are estimating and managing your COGS properly. This is why I am discussing topics four, five and six together. As a business owner, you need to be able to tie all costs – labor, materials and subs – to a job. Good job costing will allow you to find out if you are estimating correctly and not under-bidding, to determine which projects are the most and the least profitable, and to reveal which employees are the most and the least productive. All-in-all, not only is good job costing important to a healthy gross margin, but it is also critical to the organization’s growth and direction.
If you do not have good job costing capabilities, I would suggest correcting this sooner than later. If you do not own software that can do this easily, I recommend purchasing one that can. There are a number of good products on the market that are tailored to the remodeling and trades industries. Secondly, if your current bookkeeper isn’t strong at job costing, I suggest getting him/her better trained or even possibly bringing in a bookkeeper who is.
7. Poor Workmanship
Bad workmanship can harm a contractor’s reputation. If not addressed promptly, it can make it very, very hard to grow or even maintain a contracting business. Poor quality work can hurt your business in two ways. First, it increases your cost of labor on the job, thus lowering your gross margin. Second, and more importantly, it diminishes your chances of getting referrals from your customer as well as using them as a reference, consequently hampering your sales and marketing efforts.
If you are facing work quality issues, I suggest getting to the root of them. These problems could be related to limited employee skills (where training may be helpful), lack of good management and direction, or improper tools and materials. Once you have determined the cause(s) of your quality issues, do your best to address them right away to prevent them from doing further damage.
8. Low Productivity
Happy employees are motivated employees and essential to your business’ success. When employees are happy with their circumstances, they are more productive, thus improving your gross margin. They attract other good people to your company, thereby lowering your hiring costs. And, they create a strong advantage that your competition will be unable to imitate. If you want your organization to excel, you must create an environment that allows your people to be their best.
If you are experiencing poor morale, there are several things you can do to improve the situation, such as good strategic planning, sharing your company vision, strong company communications, promoting a positive attitude, praising employees’ performance, goal-setting, empowerment, quarterly employee assessments, clear job descriptions, yearly employee reviews, ongoing training, team-building, and instituting an employee bonus program.
I write an article almost every month for Contractor Power. If any of you have a business-related question you would like me to answer in one of my upcoming articles, please feel free to contact me at info@paradigmstrategies.com. Also, if you would like to read any of my previously written Contractor Power newsletter articles, you can view them at our Web site www.ParadigmStrategies.com.
About the Author
Kevin Lister, founder and president of Paradigm Strategies, the business advising firm to the trades, is a leader in the field of business performance improvement. He possesses nearly 20 years experience in business management and consulting, effectively operating his own ventures and assisting others with realizing business success.
With an entrepreneurial spirit and CEO’s point of view, Kevin brings hands-on expertise to helping building contractors, sub-contractors, and suppliers. Kevin has deep knowledge and understanding of the trades, based on 14 years in the construction industry, a family history of owning trades businesses, and a genuine interest and enjoyment in helping blue collar enterprises.
Kevin possesses a Masters of Business Administration (MBA) from Olin Graduate School of Business at Babson College and a Bachelor of Science in marketing from Bentley College. He teaches management and marketing for the University of Phoenix Online.
Kevin is a member of several professional and business organizations, including the Institute of Management Consultants (IMC), the Builders Association of Greater Boston (BAGB), the Boston Chapter of the National Association of the Remodeling Industry (NARI) and the Associated Subcontractors of Massachusetts (ASM).
Kevin has been awarded the Certified Remodeler Associate (CRA) designation from NARI. He has also been named to the board of directors of the Eastern Massachusetts Chapter of NARI. |
