You have been blindly paying a silent partner ever since your first day of business. The “silent partner” is slippage, and it's time you met face to face.
Slippage is the difference between predicted and actual gross profit margin (GP). The formula is predicted GP dollars minus actual GP dollars divided by total revenue from the job as completed. For example, a job earning 27% GP instead of the 33% you estimated has “slipped” 6%. That's about the national average, and it often exceeds a company's target net profit.
Any amount of slippage, if consistent, will quietly and effectively kill your year. Some slippage is just bad luck, but here are eight causes that you can control.
Bad estimating. This includes rounding errors, faulty formulas, and out-of-date price books, plus failure to buy from the suppliers quoted in the estimate. Solution: Put a percentage or fixed dollar amount in your bids to cover the unexpected. Institute a purchase order system, or at least include particular suppliers in the project specs.
Blank line items. Every cost that is not in the estimate — whether it's client meetings, cleanup, or whatever — will cause slippage because they will all come as a surprise. Solution: Use a checklist, and put some amount in for everything, even if it's a guess.
Crew matching. A-level carpenters shouldn't cut ridge caps or install siding. Solution: Match employees and teams to tasks according to skill level and the quality level promised for a particular job. Also make sure that the crew you figured into the estimate is the crew that does the job. Be sure to include labor burden in the billable wages, not in overhead where it will get lost (see BenchMark, July 2007).
The headache factor. Needy or demanding clients are costly to satisfy. Solution: If you can't avoid these people, charge a premium for the extra time and effort it will take to keep them happy.
Weather. Rain, snow, and extreme heat or cold can create extra expenses. Solution: We can't control the weather but we can add a fudge factor to account for adverse conditions. That's not illegal, just smart.
Site conditions. Many remodelers don't price what they can't see, such as buried utilities or a soil stack that will need to be rerouted. And ignorance of the code won't get by the inspector or justify a paid change order from the client. Solution: Stay current on codes, use a checklist for unknowns, and exclude specific hidden conditions in your contract.
Seasonality. You estimated in June, signed the contract in July, finished selections and permitting in August, and started work in mid-September. That means inflation has grabbed 2% of your margin. Solution: Assume suppliers and subs will charge a premium when they are busiest, and price accordingly.
Optimism. Most of us estimate to the best of all worlds and assume perfect performance. Solution: Budget for slippage (see table at left). It's a cost of doing business.
We have found the enemy and it is us. Reduce slippage and stop paying your silent partner. —Alan Hanbury is partner with his brother, Bob, in House of Hanbury, a third-generation Newington, Ct., remodeling company.