We recently discussed general and industry-specific inflation. As the economy picks up, it will be more important to assess your costs to make sure you still have your desired profit margin. Once you build a system for entering job costing accurately, you should review this report and assess the lowest margin jobs or customers.
Staying Ahead of the Cost Curb
There are several areas to consistently review to stay ahead of the cost curb:
- Vendor pricing review
- Sales pricing review
- Inconsistent cost review
- Seasonality review
Vendor Pricing Review
Create a vendor pricing comparison sheet to understand how costs are changing over time. This may seem tedious and will require a little data entry; however, you will find this information will eventually save time and help you negotiate pricing. Sometimes there are small upcharges and fees that add up significantly over time. It is helpful to compare the agreed-upon prices to the invoice received to ensure you are not overpaying. In some cases, increased charges can be passed onto your customer. Other times you will have to adjust pricing to account for surprises.
Sales Pricing Review
You can increase prices up to 7% a year, and customers typically will not be bothered. This increase may seem high, but overall, customers expect price increases every year. You should increase your prices annually.
The current economic situation is more unstable than usual, so sales pricing reviews may need to be scrutinized more frequently. I always suggest looking for ways to decrease materials, subcontractor costs, and inventory costs. If you see price increases across the board, there might be little you can do. Make sure that any job quote has an expiration date of 30 days or less. Make sure that your customers are aware that increases are happening, which may give them a sense of urgency. If you are increasing prices next month, make sure your sales team is aware so that they can use this to get customers to move forward before prices go up.
When we were getting a pool in our backyard, the pool company explained how prices were going up each year, and there was pent-up demand. This made me more inclined to buy the pool. We are glad we did as we recently discovered that the cost of putting an in-ground pool in Texas had gone up 20% in the last year.
Inconsistent Cost Review
Why do costs change across different vendors? I talked with one of my clients, and they said that depending on where the job is located, even within the same area, there could be additional fees. How do you price all the nuances? One solution is to make vendor costs more consistent with vendor agreements. The more work you give to one vendor, the more they will be inclined to work with you on lowering costs. Also, if the vendor is going to increase fees in a change order, they have to let you know in advance so you can discuss with the customer. Make sure you similarly price your jobs relative to what the vendor is charging you.
Finally, make sure you have a clause in your customer contract that allows for changes to the price in certain circumstances. You certainly can’t think of everything ahead of time. Good pricing upfront is essential.
Many businesses have seasonal increases in prices. One of my clients usually has more new jobs in the summer. This means that the cost for materials and subcontractors increases in the summer. If you have more cash available earlier in the year, you can buy materials at a lower price. As your business grows, in-house crews could be the solution if subcontractor costs increase too much, especially in certain months. It is important to have a forecast model to model out these scenarios.
Importance of Job Costing Procedures
Customer or job profitability is essential at any time. You would be surprised how costs change over time. It seems every time I review this for a client, there are surprises and action items to take.
As the economy picks up, it is important to have a good procedure for job costing and review these reports and take steps to improve your margins. I am sure you are no different from most business owners. You did not go into business to break even or lose money.
If you need any help with your Vendor Pricing Comparison Sheet, BenderCFO is ready to help.