You’re Not Selling a Percentage

Recently a builder asked me how I would handle a conversation that he has often. You are sitting across from a client in your second meeting to discuss their project. You go over your estimate, and the client tells you that the other contractor they are considering is cost plus 18% and they want to know why you are at cost plus 20%.

Like many of us this builder does not consider himself a salesman. His preference is to be honest and sometimes that means that he’ll hand over a competitor’s phone number if he thinks that’s the better fit. But when the markup question comes, he feels like he’s been asked to defend his numbers against an unknown.

He can’t defend his numbers. None of us can. That’s the problem with this familiar client question and the reason the answer has to start somewhere else.

Start with what’s actually being compared. You know what your 20% covers because you built it. You have no idea what the other guy’s 18% covers, and neither does your client. Your competitor might run a leaner operation. Or some of his overhead & profit is mixed into his cost of goods where nobody can see it. His electrician who bid $10,000 but shows up on the estimate at $15,000 carrying $5,000 of your competitor’s overhead & profit.

While I can’t prove that about any particular competitor, I can tell a client exactly what I’m doing.

When I tell you the electrician is $15,000, it’s because he’s charging me $15,000. He isn’t charging me ten with five thousand of my overhead & profit buried in his number. And if you want to see his proposal, I’ll show it to you.

Transparency is the move. You don’t win the percentage argument by having a smaller percentage. You win it by being the only person at the table whose number can be opened up and checked. If you have the courage and the level of organization to put your numbers on the table a defensible 20% beats an unverifiable 18%.

I’ll admit, some potential clients won’t care. They’ll go straight to the total and the markup and nothing you can do will sway them. But I consider this a win! Someone who is laser focused on price alone is not an ideal client, and finding that out early is a good outcome. I like to call these “the best project we never got”.

This is the part that took us years to figure out and it’s what has made these conversations easier.

The fee/markup/margin isn’t a percentage of the cost of goods. It’s the price of a given amount of my company’s time and attention. It’s my overhead, my people, my scheduling, my relationships with the trades, my paying and checking and chasing the 100-200 individual transactions that encompass a project. Someone has to do all of that. A percentage is just the simplest way to express on paper.

Knowing your numbers and being able to express them this way to a client is a game changer

We often have clients who have done projects before and believe they know construction. They’ll wanted to procure all their own finishes and fixtures, and they want to know what that will take off the price.

The answer is probably nothing. You can absolutely do your own procurement. It doesn’t reduce our margin, because our margin was never a function of your project’s cost of goods. It’s a function of our capacity and in fact your desire to do your own procurement will require you to buy more of it.

When my team does the buying, I know my lumberyard’s delivery window. I know my cabinet shop’s shop-drawing turnaround, their load date, and the fact that a Thursday ship date means Wednesday delivery because their trucks don’t run on weekends. I can put all of that into a schedule and hand you a completion date I’ll stand behind. If you take the buying away from me, I lose control of when material shows up, which means I lose the ability to schedule your job and the next job, which means what you actually wanted from me; a reliable start and end date, and total price that is not a teaser is gone. I cannot give you a discount when you are causing me more work.

You can’t have that conversation based on a percentage. You can have it on a rate.

Say the total your business needs to generate this year; your pay, your taxes, your benefits, your whole overhead, comes to a gross profit of $450 a day. That’s the number I’d want to know before I ever quote anything. It’s built the same way the billing rate was in an earlier piece: cost first, rate last. Note the denominator is calendar days of duration, not days you swing a hammer. The job occupies the calendar whether or not anybody’s on site.

Using this math, a six-month project is roughly 180 days, and 180 days at $450 is $81,000. That’s your fee. Not 20% of something. It is $81,000 because that’s what six months of your company’s capacity costs.

When you start to price projects this way you may well end up in exactly the same place as your discount competitor, but the difference is that they got there by relying on blanket percentages and you got there by doing the math.

Percentage pricing survives because on an average job it’s roughly right. But the two methods come apart the moment the job stops being average.

This is what makes pricing change orders correctly so critical. A well written CO tells the client three things; here’s what it costs, here’s how many days it adds, and here’s your new completion date. Absolutely we’ll run power and blocking for the TVs. Here’s the price and it adds two weeks so your finish date will move from the 14th to the 28th. If the client understands they’re buying your capacity by the day your margin is an invoice line.

I believe that this is how you sell a project that provides for your company’s financial needs. Not by defending a percentage but by knowing the cost of your capacity. This lets you tell a client who is not a fit “I understand exactly what you want to do, and if that’s how you want to do it, I’m not your guy”. You can only say that when you know what your day is worth.