Once you get your crews are moving at industry average speed, savings in field costs tend to be quite small and have minimal ability to grow your income. The coming example will drive home how great you'd have to be at reducing field costs to make a significant improvement in your bottom line.
Selling Minimizes Price Competition
To refresh your memory. In our industry, selling should be defined as winning work when you're not the low bid. Ideally, you would land the work without any price competition but that's not really the point. Your sales goal is to get paid a premium for your services.
My New Example Should Ring the Bell For You
I call this my "1% GM = 2,000 Man-hrs? You've got to be kidding me!" example.
Your ratio will be different, but it will probably be stunning. Here's how to calculate your ratio.
1. Grab last year's income statement.
2. Subtract your labor, materials, equipment, and subcontractor costs from your revenue. The result is your gross profit.
3. Divide your gross profit into your revenue. That is your gross margin.
For my client, we're going to say his gross margin was 26% (not the real number).
I wanted to see how much impact a slight increase of price would have had on his net income, so we calculated the revenue that would have created a 27% gross margin, assuming costs stayed the same. Turns out it would have meant an extra $50,000 in revenue! All of which would have dropped right to the bottom line!
We were both quite surprised by the impact 1% GM made on his income. Then we got curious about how much improvement in the field would be needed to produce a similar improvement. I asked him what his average wage was with burden and insurance. We cranked some numbers and came up with $25.00 per hour.
He would have had to save 2,000 man-hours to equal the income gained by raising his margin by 1%! Which do you think will be easier for him? Getting his crews to work 10% faster or raising his price a little more than 1%?
How to Increase Your Gross Margin
There are three basic ways to increase your gross margin.
1. Focus on the right clients - those who value your services.
2. Improve your selling skills.
3. Eliminate bad clients and bad projects.
Since the how to tips for these three methods are presented in my special report, The 10 Biggest Mistakes Contractors Make (available at www.FilthyRichContractor.com) I will not repeat them here.
Ron Roberts, The Contractor's Business Coach, teaches contractors how to turn their business into a profit spewing machine. To receive Ron's FREE Contractor Best Practices Newsletter visit www.FilthyRichContractor.com.