Best of Blau: November 1996

Sooner or later it happens to everyone in the business. A disgruntled customer notices the prices of parts and merchandise sold at the retail stores and complains about the big markups charged by the contractor. This is a bigger problem for time and material firms, whose prices are itemized for all to see at a glance. However, even we flat raters face it from time to time.

An East Coast contractor recently sought my advice pertaining to this situation. He was authorized (in writing) by a woman to furnish and install a 12-inch, white, round-front Mansfield water closet for the flat rate price of $297.24. A little later the husband came across a Home Depot ad showing the same Mansfield closet on sale for $50. Then it hit the fan.

"You ripped us off!" he wrote the contractor. "How can you charge $297 for that toilet when Home Depot sells it for $50? The way I figure it, you are charging close to $250 an hour. I want a breakdown for that job."

The object of flat rate pricing is precisely to avoid laying bare one's costs of doing business for the world to see. After all, does the butcher, the baker, the candlestick maker, etc., break down their labor, material, overhead and profit in setting the selling price for their goods and services? Nobody would even think of asking them such a thing. It would be a breach of social etiquette, sort of like asking a stranger what his salary is and how much he spends on his mortgage, groceries, recreation, etc. Sad, isn't it, that because of our industry's senseless time and material tradition, the public has been trained to think they are entitled to see our finances.

Nonetheless, in the real world this is what happens. So how do you handle requests like that?

Give them what they want. That's my advice. No need to lie, to argue, to deceive. If a customer wants to see a price breakdown of your flat rates, then give it him.

Only thing is, make sure you give a thorough enough itemization. What follows is a typical breakdown of the job just cited.

Overhead Explanation

To make it even better, I would attach a separate sheet breaking down how this contractor arrived at the $65 hourly overhead. This would, of course, necessitate a compilation of all overhead expenditures from a profit and loss statement, broken down by total billable hours.

Many customers will stop you here with a comment wondering why overhead is so high. Here we've found it helpful to commiserate a bit, with comments along the lines of

"You know, we think it's too high as well. We've tried everything we can to bring it down, but no matter what we can't get a handle on it. We're even willing to pay a consultant good money to help us out in this area. "Do you have any ideas about how we might bring overhead down?"

A couple of other things about this sample breakdown are worth examining. For instance, note that the Mansfield water closet cost the contractor $61.11, which is actually $11 more than advertised at Home Depot. This affords an opportunity to launch into a discussion with the customer about loss leader merchandising, in which the big retailers like Home Depot offer a certain item - in this case, the Mansfield toilet - at cost or even below just to lure people into the store.

Showing your cost of purchase helps the customer understand the true economics of operating a contractor business.

Secondly, I would not hesitate to reveal to a customer our targeted profit margin of 20 percent. Most consumers are economically illiterate. Surveys show that they believe the average business makes profit margins well in excess of 50 percent. Rather than thinking 20 percent too high, I believe that most consumers would be surprised to learn that most businesses make far less than they thought.

Where people get upset is when they find out that parts have been marked up two or three times, which is commonly the case with most time and material pricing, as well as with some flat rate systems. The logic escapes me as to why so many people in our industry think it's ripping off customers to apply a 20 percent markup to every cost of doing business, yet it's OK to sell your labor at a loss while marking up materials 200 percent or 300 percent. High markups on material cost only invites confrontations with the customer.

Finally, I suspect that many of your customers - as well as many of you readers - may be puzzled as to how this sample job ended up with a price of $297.24. The way you figure it, 20 percent of $237.79 added to the job cost totals $285.35.

If you fall into this category, call me to discuss what you are doing wrong and about booking a

"Business of Contracting" seminar in your area.

Further Explanation

Will this kind of price breakdown satisfy every customer? Unfortunately, it will not. In every market there will be plumbers willing to do the job for half the amount or less. Then it comes time to explain to the complaining customer why you are worth more than the low-cost slugs, i.e.:

  • Can you count on them to show up on time?

  • Will they guarantee their labor and materials? For how long?

  • Will they pull a permit if required?

  • Will they abide by all other applicable codes and regulations?

  • Do they have insurance?

  • Do you know what can happen if they are uninsured and sustain an injury on your job?
The struggle continues for the hard-working contractors of our industry to achieve proper selling prices and a level of personal and business compensation they deserve.