There are many reasons why contractors lose money; poor budgeting, low pricing, incomplete change order management, just to name a few. But one important thing to look at is the financial affect, both short and long term, which one bad job can have on a company. Most remodelers know that they have to price jobs to cover job costs, overhead, and profit. But they often fail to realize that the price of a job also has to build up a reserve for that one bad job that will happen. It’s inevitable; even with careful planning, there is that one client who will never be satisfied. Or perhaps circumstances beyond your control slow a job to a crawl.
While the remodeler who follows ”best practices” should have fewer bad jobs, there is still a good chance that one day, that bad job will happen. But the good remodeler will have cash reserves built up, so he is prepared.
Let’s look at some numbers. Here’s a company that has a gross profit of 37.5%, with overhead running at 30.5%. This company maintains a 7% profit. For many of you, a 7% profit sounds pretty good. Let’s look at a job that you were able to sell for $40,000 and complete on time and on budget:
If you did five of these jobs, your gross profit would be $75,000 and your net profit $14,000. But what happens if that sixth job is with a nightmare client? What happens if you end up making no money on the job — your costs equal your invoices? You compromised, and felt like you didn’t lose any money, but you also didn’t cover any overhead. Yet this one bad job is enough to wipe out all the profit you earned from the five previous jobs.
If you didn’t keep all that profit in the bank, you’ll now have a severe cash flow problem. It will take at least five more good jobs to make up that money, to bring you back up to your starting point.
What’s a remodeler to do?
- Remember the costs of the jobs that didn’t hit their target.
- Make sure that your budget includes provision for contingency dollars.
- Most important: Make sure that you don’t spend all your profit. The definition of “retained earnings” is earnings that you keep in the company and do not disburse to the owner. A good remodeler keeps some of the profits in the company for just those types of situations.