Copyright 2012, Business Directors New Zealand Limited, Graeme Owen,

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2 Welcome Thank you for visiting the successful builder site and for downloading this e book. In it you will find three of the reasons I have found that builders lose money and how to fix these in your business. I wrote this e book just for you, to highlight some of the challenges I have found that prevent business. You may be working long hours but you are disappointed by the low returns you are getting. One builder put it to me this way, I was taught how to build a structure and I became a great tradesman, but no one taught me how to build a business and become a profitable owner. You know deep down you can do it, but you lack the strategy to get there. You are not alone. From my own surveys, 55% of business owners want to drive their businesses forward but just don t know how. So congratulations on taking the first to step to finding out how identifying the areas where builders lose money and doing something about it. As you read on you may like to make some notes on actions you will take to make a difference. You see, it s not what you learn that matters, but what you DO with what you learn. Feel free to dig around my site for other helpful information. Graeme Owen Builders Success Coach (New Zealand) Graeme@TheSuccessfulBuilder.com 2 of 13

3 Three Reasons Builder s Lose Money and How to Fix Them I have met way too many great builders who are in business, but only making enough money to survive, and certainly not making enough money to get ahead. They start a job, but before it s finished they know they have made little or even no money. Know the feeling? It s demoralising. The guys you employ get steady money, for far less worry than you. And the sub contractors all seem to do OK. You see tens of 1000s of dollars going through the bank account yet there is so little left at the end of the month. Then at the end of the year, when the accountant does the books, you are disappointed again because any net profit seems to get eaten up with tax, depreciation, fees etc. So why is that? Below I talk about three reasons builders lose money and consequently get low profits. Get a handle on these and you are well on the way to identifying the challenges that you need to overcome to become a successful building business owner. Let s go into the three reasons you re probably losing money. 1. The First Reason Builders Lose Money: You re Not Pricing Your Jobs Correctly. This may be because the job is not accurately quantity surveyed. Some guys take up their suppliers offer of free quantity surveying. It nice of them to make the offer but actually there s no free lunch. A Suppliers QS doesn t know your team s skills, and so can t accurately price for your unique business. Or it may be that the builder didn t have enough time to do it correctly. [ For Pete s sake! I hear you say, If I spent all my time on checking the pricing I d never do any work! ] You know the routine here. You have several guys on the tools, but you are doing everything else all by yourself. Running from phone call to phone call, at the beck and call of your customer(s), paying bills and doing invoices, juggling bank accounts, and all the while trying to keep the family happy. 3 of 13

4 Or it may be that the builder just doesn t understand the numbers involved. Yes it s true! Most builders I know expect a carpenter to work a rule and a tape measure it s basic to building. Yet those same guys will start up a business without a clue as to how to find their break even point; they don t know their Gross Profit as a percentage, nor the difference between mark up and margin! So how can they price for profit? You see, when a job is not priced properly, it is never going to make money. So why would you take a job that is going to lose you money? The only reason I have found is ignorance. The guy just doesn t know the job is a lemon! So, he starts the job all excited and bushy tailed. and then near the end when he can t quite pay all the bills the reality sets in another loss making job! I will never forget the plumbing company I met that had to complete a large commercial job knowing they were not going to get paid, because the developers had gone bust. It was hugely demoralising, and put huge pressure on the guy and his family. All because the developers were not careful enough in their pricing in the first place. Yet I have met builders who have no idea how to price their jobs to make money. They end up in the same place. And it is always the family that pays the price. Or it may be that because you are so poor at pricing, you have to add a huge contingency to each quote and you end up missing out on most of the jobs you quote for, because your quote is too high. You have to present heaps of quotes just to get one job! Sometimes it seems like a giant lottery Let me tell you that s it s exciting to see the difference it makes to the guys who learn how to use the right numbers to create winning quotes. 4 of 13

5 So, here s an example of pricing. A builder prepares a fixed quote for a client. He adds up the costs of the materials, sub contractors, project management, hirage and labour to arrive at the costs of the job. He then adds a mark up of say 15% to arrive at the quoted price. For example, TYPICAL QUOTE Materials $10,000 Subcontractors $10,000 Project Management $1,000 Hireage $2,000 Labour $10,000 Sub Total $33,000 Markup (15% of $33,000) $4,950 Contract Fixed Price $37,950 PROFIT $4,950 Right? Profit of $4,950, right? WRONG! This would be OK if these were the ONLY costs. But they are not. There are other business costs that must be added to the contract price to ensure that the job actually makes a profit for the business owner, viz: 1. Costs incurred in quoting the job. Say the job takes 20 hours to quote. Add quoting cost = 20 hours x $35/hour = $ Costs incurred in quoting all the other jobs that are not won. If we assume that this builder wins 1 in 6 quotes, each approximately the same value as our example. Then we need to add the time taken to quote these job. Add lost quoted jobs = 5 jobs x 20 hours/job x $35/hour= $3,500 5 of 13

6 3. A share of overhead. Allow for vehicle, phone and some rent, etc., say $2,000 per month. Let s assume that this builder runs 2 jobs this size per month. Add share of overheads = 0.5 x $2,000 = $1, Finance charges to cover the cash gap between paying suppliers and getting paid by client. Say = $100 Additional Costs $5,300 Now when the job is finished and we do a back quote we have: TYPICAL QUOTE (is really a loss) Income from client $37,950 Materials $10,000 Subcontractors $10,000 Project Management $1,000 Hireage $2,000 Labour $10,000 Additional Costs $5,300 TOTALS $38,300 The quoted Contract Fixed Price (before) $37,950 PROFIT/LOSS $350 Loss!! Yes, the reality is you ve got a loss of $350! 6 of 13

7 How should we have priced this job? Here s what the estimate looks like if we include the additional expenses before our markup. BETTER QUOTE (corrected) Materials $10,000 Subcontractors $10,000 Project Management $1,000 Hireage $2,000 Labour $10,000 Additional Costs $5,300 Sub Total $38,300 Markup (15%) $5,745 Contract Fixed Price $44,045 PROFIT $5,745 Now that s better! If you are in a bidding war and feel you need to reduce your markup a little to ensure that you are competitive you can move a little and still be sure you will make a profit...provided everything goes as planned! THE FIX FOR HIGHER PROFITS > To summarize, there are additional costs which you don t account for that without you knowing are actually hurting you rather than helping you. Be sure to include the additional costs to arrive at a better estimate and more profits! 7 of 13

8 2. The Second Reason Builders Lose Money: Your Team Is Not Working to Time. This is such a common problem. The job runs a few weeks overtime or sub contractors fail to turn up when required and suppliers are a little late delivering. I heard of a builder who overlooked the 8 week lead up time it took to get the joinery made for a renovation he had started! Imagine the frustration of his client and the extra costs in scaffolding hire etc. while they waited. Small delays can be worked around, but there are occasions when timing is critical, and a delay costs money. Another building company I worked with sub contracted a large landscaping component. Unfortunately the landscaper was not able to get through the work on time. So in order to finish on time and avoid penalties, the whole team of builders and apprentices, labourers and office staff had to be deployed, and to work through the weekend (at overtime rates) to complete. Needless to say that job did not run at a profit. You will be pleased to know that company put in place a project management strategy to prevent that from happening again. Or maybe bad weather holds the job up and there is little else to do. You need to keep the team on, or you have a worse problem later, but you have no other work for them! While your contract may allow you additional time for bad weather, it does not cover the team s wages while they sit around. So, during bad weather months, you need to plan to have additional jobs available that are not so time critical, or at least take other precautions. Or it may be that the carpenters are slower than they should be, because of poor project management skills. A job estimated to take 12 weeks takes 13 or 14 and the profit is lost to additional time. Or no one knows exactly how many hours each part of the build should take. The building plans are clear but the build programme is a rough guess. The reason for this can be that no one has kept accurate records in the past from which to make accurate predictions. So, it never ceases to amaze me just how much more money can be made when a builder knows if a job is running on time or is running late, and if it is running late taking action to correct 8 of 13

9 the problem. THE FIX FOR GETTING THE TEAM WORKING TO TIME > To summarize, your profits are eaten away by poor management (and performance) of your team and your subcontractors. Be sure to put in place a site time management strategy that enables you to stay in control. 3. The Third Reason Builders Lose Money: You Don t Understand The Business Numbers. In any modern motor racing team there is at least one engineer whose duty it is to get the information feeds from the vehicle while it is racing, and to interpret them so the team manager can make informed decisions. For example, Can we wait until the next safety car to change the brakes? Exactly how far are they worn and how much is left? Does the driver need to reduce top speed by 10 kph to keep the temperature of the oil below absolute maximum, or will 5 kph be enough? Can the tyres take 5% more pressure? What was the last lap time, and how much did it change? Without these numbers the team manager is at a huge disadvantage. Imagine if there were no live feed and the team manager had to wait until the end of the race to know if any of his decisions were good ones? Would you put your money on such a team? It s no different in a small business. If you don t know the numbers you ll never know if you re making right decisions. You may think you are but can you be sure? And that indecision can prevent you making the right call when an opportunity presents itself. Imagine if the only report on the score of a football game was what? you ask. You see, without the other number you have no idea if your team won or lost. This is the same as judging the success of a job by its sale price only...or the success of a company by its turnover. You are only looking at one number. The more important number is the profit made for the owner...the wallet share as some know it. To assure this you need to record and understand the important 9 of 13

10 numbers and how they influence your business. So what are the top three important numbers? The First Important Number. In my experience, the most important number is the percentage of Gross Profit (GP%). Industry standard for a smaller building company is around 25%. How well are you doing? Do you know? And do you know your likely GP% when you are partway through a job? Can you measure if your company is slipping behind? Do you know what actions to take to if you are slipping behind? You see, a building businesses is really three businesses rolled into one: a labour hire business (your builders); a building materials retailer (your materials) and a contracts management company (your sub contractors). As a rough rule of thumb a typical build will cost out at around one third labour, one third materials and one third sub contactors. But you can t make a 25% GP off your sub contractors. So how much do you need to make on your materials and on your labour to reach the overall goal of 25%? And what happens when a job is mainly sub contactors? Or mainly labour? What targets do you need to hit then to assure you make enough Gross Profit? When I work with you, I set up a financial reporting structure so that GP percentages are measured monthly, three monthly and annually. This gives an excellent tool for tracking the direction your business is taking. After all, wouldn t you rather know now if your business is in trouble so you can take action? Rather than finding out in 12 months time when it s way too late? The Second Number. The second important number to take into account is your monthly fixed expense. This includes the overheads that you pay even if you are not doing any work. This number should be fairly constant from month to month. Once you have budgeted this, you can then monitor it on your monthly report, to make sure there are no blow outs. More importantly, once you know your fixed expenses and your GP%, you can then work backwards and calculate how much work you will need to get in the door to break even, or to make a target profit. This is important because it helps you set your business goals. 10 of 13

11 Here is an example of a break even calculation: Fixed Expenses $15,000 GP% 25% Revenue Required to Break Even ($15,000 divided by 0.25) = $60,000 So, to pay expenses of $15,000 this business needs to generate revenues of $60,000 at a GP% of 25% Here is an example of a target profit calculation: Fixed Expenses $15,000 Target Profit $5,000 GP% 25% Revenue Required for Target Profit (($15,000 + $5,000) divided by 0.25)) = $80,000 So, to pay expenses of $15,000 and make a profit of $5,000 this business needs to generate revenues of $80,000 at a GP% of 25% The Third Number. A third important numbers is the rate at which your company converts leads into clients. Usually this is a combination of two contributing rates the rate at which you convert leads into quotes AND the rate at which you convert quotes into jobs. With this number (and more so when you have the two contributing rates) you can calculate the effectiveness of your marketing and sales, and determine where you need to place your focus in order to grow your business. Further, as you record these numbers you can track to see if changes you are making in your marketing and sales are really improvements or just changes. THE FIX FOR UNDERSTANDING NUMBERS > To summarize, not understanding the key numbers of your business leaves you out of control of a winning performance and robs you of profit. Be sure to identify 3 5 key indicators that you can read to ensure you make informed and profitable decisions. 11 of 13

12 Are you ready to lay down the tools and pick up more cash? If you re ready to learn how to generate better leads into your business, price and work your jobs for profit, and you are ready to master the numbers in your business then take the next step. Let s chat. Fill out my form here: next step OR, contact me by phone or , here: Phone: Graeme@TheSuccessfulBuilder.com I look forward to hearing from you. Graeme Owen Builders Success Coach (New Zealand) Graeme@TheSuccessfulBuilder.com 12 of 13

13 About Graeme Owen I have been a successful business coach for the last seven years. In 2008, all three of the companies I entered into the ActionCOACH Business Awards won their respective divisions. Although I specialise in coaching builders to build successful building businesses, I have coached over 60 companies (builders and others) and understand the things that work at the core business level. My academic training in engineering, theology and leadership and my experience in teaching and management give me a wide set of tools to draw from. There are few situations i have not met before. I specialise in working with builders because they not only deal with customers, but with suppliers and sub trades (one job can have 40). So, when builders do well, many businesses benefit. And...when they fail, many suffer with them. So, as we strengthen building businesses we underpin many associated businesses, and contribute to making our communities better places. Graeme Owen Builders Success Coach (New Zealand) Graeme@TheSuccessfulBuilder.com 13 of 13