I Almost Lowered My Price on a Job That Finished at a 52% Margin

One of the easiest times to make a pricing mistake as a contractor is when you need the work.

I know this because I still catch myself doing it.

We recently completed a project that included two tiered retaining walls, sod, river stone, mulch and flagstone stepping stones. The total contract price was $16,835.

When I estimated the project, I was targeting approximately a 32% job-level gross margin before company overhead.

The job ultimately finished at approximately 52%.

What makes this one interesting isn’t just that we beat the estimate.

It’s what happened before we ever started the job.

We Needed the Work

At the time I priced this project, we needed another job on the schedule.

That’s never the best mindset to have when you’re negotiating price.

The customer liked our proposal and wanted to use us, but she told me another company had priced the project lower. She also made a comment that stuck with me: she thought the other company probably had more experience with larger projects like hers.

So now I’m sitting there thinking about two things contractors probably shouldn’t be thinking about while defending a price:

We need this job.

And:

Someone else is cheaper.

I explained that we’re generally not the least expensive contractor. I also explained why.

There are certain parts of an installation that I’m simply not willing to eliminate to make a number look better. On a retaining wall, for example, proper base preparation, drainage stone, drainage pipe and geotextile aren’t the places I want to find savings.

If another contractor’s price is lower because they’re more efficient or simply willing to make less money, that’s one thing.

If it’s lower because we’re proposing two different installation standards, that’s something else entirely.

I knew all of this.

And then I did something I know better than to do.

I Started Throwing Things In

I didn’t slash thousands of dollars off the proposal.

Instead, I started making the little concessions that can be very tempting when you’re trying to close a job.

We agreed to install about a half-yard of river stone without charging additional labor for the installation.

We also agreed to spread approximately a yard of mulch on one of the retaining-wall tiers without charging labor for that either.

Neither concession was enormous.

But that’s not really the point.

The reason I gave them away wasn’t because my estimate told me I should.

I gave them away because I was worried about getting the job.

That’s an important distinction.

And it’s exactly why I wanted to look closely at the numbers after the project was complete.

What I Expected the Job to Produce

The contract price was:

$16,835

My projected costs were approximately:

• Materials and fuel: $4,880
• Labor: $6,200
• Portable restroom and other accounted job costs: included in the overall projection

My projected total job cost was approximately:

$11,405

That left approximately:

$5,430 in projected job-level gross profit

On a $16,835 project, that’s approximately a:

32.3% projected gross margin

That was the goal.

And importantly, when I say “profit” throughout this article, I’m talking about job-level gross profit before company overhead.

That money still has to help pay for insurance, vehicles, shop expenses, software, advertising, administrative time and all the other expenses required to operate the company.

Then We Actually Built the Job

This is where job costing gets useful.

My labor estimate assumed approximately:

270 total man-hours

Rather than counting only the hours employees are physically working at the customer’s property, I track labor from clock-in to clock-out.

If an employee clocks in at the shop, loads equipment, drives to the project and then begins working, that time is still costing the company money.

So I want it included when I analyze whether a job actually performed as expected.

The crew ultimately used approximately:

237.3 man-hours

That’s about 32.7 fewer man-hours than projected, or roughly 12% under the labor-hour budget.

Projected labor cost:

$6,200

Actual labor cost:

$5,051.92

Labor alone came in approximately:

$1,148 under budget

And there was another interesting lesson hiding inside those hours.

Crew Size Changed, But Total Man-Hours Are What Mattered

I originally estimated the project essentially as a three-man crew working ten nine-hour paid days:

3 employees × 9 hours × 10 days = 270 man-hours

That’s not exactly how the project unfolded.

Different employees worked on the project at different times. Some days had fewer people. Some had more. There were partial days and changes in crew composition.

But none of that really matters as much as the final number:

237.3 actual man-hours versus 270 estimated man-hours.

That’s one reason I’ve become increasingly interested in tracking man-hours rather than simply crew days.

Four employees working efficiently for a shorter period can cost less than three employees allowing a project to drag on.

Ultimately, the company pays for hours.

Materials Beat the Estimate Too

This was the other major win.

I had approximately $4,880 allocated for materials and fuel in my projection.

Actual purchased materials and fuel came in at approximately $2,980.

There was also about $100 worth of flagstone stepping-stone material already sitting at our shop that was used on this project.

I still count that.

Just because I bought a material on a previous date doesn’t make it free when another project consumes it.

So for job-costing purposes, I treated actual materials and fuel as approximately:

$3,080

Compared with the $4,880 allowance, that’s approximately:

$1,800 under budget

I wouldn’t look at one job like this and immediately decide that my future material estimates should be $1,800 lower.

Some of that difference came from markup and estimating cushion. Material quantities vary. Waste varies. Prices change. Small items get forgotten. Sometimes you need another load of stone.

The cushion exists for a reason.

But if I analyze enough completed jobs and discover that I’m consistently estimating certain materials far above actual usage, then I have useful data to improve future estimates.

The Job Finished at About a 52% Margin

After adjusting for the shop-stock flagstone, the project produced approximately:

$8,703 in job-level gross profit before company overhead

On $16,835 in revenue, that’s approximately a:

51.7% gross margin

I had projected about 32.3%.

That’s roughly $3,273 more job-level profit than expected.

And here’s what’s important:

The additional profit didn’t come from one lucky break.

Labor beat the estimate.

Materials beat the estimate.

The crew completed the work efficiently, and the project’s actual direct costs came in substantially below what I had allowed.

That’s exactly what I want to know when I review a completed project.

I don’t just want to know:

Did we make money?

I want to know:

Why did we make what we made?

A 52% Margin Doesn’t Mean I Charged Too Much

This is probably the biggest lesson I took from this project.

Looking backward, it would be very easy to see a 52% job-level margin and think:

We could have charged less.

I think that’s the wrong conclusion.

I didn’t know when I submitted the proposal that we’d finish approximately 33 man-hours under my labor allowance.

I didn’t know that actual material usage would come in substantially below the amount I had budgeted.

Those are risks the company assumes when it gives a customer a fixed price.

Had labor gone the other direction, I wouldn’t have been able to go back to the customer and say:

“We weren’t as efficient as I expected. I’d like another $1,500.”

If materials had cost more than expected, that would generally have been my problem too.

The contractor assumes the estimating risk. The contractor should also benefit when the company executes better than the estimate.

That’s one of the reasons good job costing matters.

And Then I Read the Customer’s Review

This is the part that made me laugh.

Before the project, I was concerned that our price might be too high.

The customer had told me another company was cheaper.

I had explained more than once why we aren’t normally trying to be the cheapest contractor.

I had even thrown in some labor because I wanted to get the job.

We finished the project.

She was extremely happy with the work and left us a five-star review.

And one of the words she used to describe our company was:

“Inexpensive.”

There I was worrying that we were the expensive contractor.

The customer finished the project thinking we were inexpensive.

There’s a lesson in there.

Customers Don’t See Your Estimating Spreadsheet

Contractors can become obsessed with their own number.

We know what the materials cost.

We know what employees make.

We know how many hours we allowed.

We know the other contractor is $1,500 cheaper.

The customer doesn’t experience the project that way.

They experience the value they received for the money they spent.

Was the contractor dependable?

Did the crew show up?

Was the work performed correctly?

Was the project managed professionally?

Did the contractor communicate?

Did the finished product meet or exceed expectations?

Price matters.

But price and value aren’t the same thing.

This customer apparently finished a $16,835 project believing she received very good value for what she paid.

Meanwhile, before the project even began, I was negotiating against myself.

The Lesson I’m Taking Into My Next Estimate

I’m not going to pretend this one project cured me forever of wanting to sharpen the pencil when the schedule gets light.

Running a contracting business has a way of making pricing discipline much easier when you’re busy than when you need work.

But I’m going to remember this job.

Another contractor being cheaper doesn’t automatically mean my price is too high.

A customer questioning the price doesn’t automatically mean I need to reduce it.

And:

Needing the job doesn’t change what the job should cost.

If I believe the estimate is fair, the installation is correct and the company needs the projected margin, I need a better reason to reduce the price than simply being nervous about losing the work.

Because sometimes the job you’re worried you’re charging too much for ends up being the job where the customer calls you inexpensive.

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The Bigger Reason I’m Tracking This

I’m starting to analyze completed projects like this more deliberately.

Not because I expect every job to finish at a 52% margin.

They won’t.

The purpose is to build a record of what our company actually does.

How many man-hours did I estimate?

How many did we actually use?

What did I budget for materials?

What did we actually consume?

Where did we beat the estimate?

Where did we miss it?

Over time, those answers should make the next estimate better.

That’s the goal:

Estimate → Perform → Measure → Learn → Estimate Better

One profitable project is nice.

A system that helps produce profitable projects repeatedly is considerably more valuable.

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