With a looming recession about to hit the country, many contractors are looking to start cutting profit margins.
The thought process seems to be one of “I will profit a few dollars less, but I will still have work.” While on the surface, that may seem like an easy fix to a complex problem, it could actually do more harm than good.
The main fault with this strategy is that we will most likely be dealing with record high prices for building materials. The production cutbacks or complete stoppages will cause current inventories to deplete, before production, once started again, can catch up.
So, cutting your profit margin temporarily won’t offset the increased material prices that we will all have to deal with soon. A much better strategy is to work to reduce the company overhead, which will lower your pricing on every project that you bid.
Lower Your Overhead, Not Your Profit Margin!
Every contractor has to deal with overhead expenses. They are the cost of doing business, but the overhead rate varies wildly from one contractor to another.
In good economic times, lower overhead costs allow you to increase your profit margins, and still get the project. In a less favorable economy, a lower overhead will allow you to remain competitive, without the need to lower your profit margins.
The smartest move is to lower your overhead costs, by getting the same amount of work done in a shorter timeframe. For most contractors, overhead expenses are made up of the same 3 components, bidding, accounts receivable, and accounts payable.
Preparing your bid is the first step in eventually receiving a contract for a project. But the process can be time consuming, to say the least. Here are some suggestions for improving your bidding process to lower overhead costs.
Consider moving to an online plan room, instead of chasing down plans and specs for each project. This way the plans, specs, and any addendums are always just a few clicks away, whenever you need to see them. You will save large amounts of time (and of course money) by being able to access the plans, while sitting at your desk.
Spend less time doing take offs, by using an estimating software program. There is a myriad of estimating programs available today, ranging from simple to complex, with all the bells and whistles you could ever possibly need.
Most estimating programs include a customizable proposal form that you can create for the project. And most of these programs use “auto fill” to complete the fields of the proposal form for you.
Simplify your material quote process, by creating a simple material list once your take off is complete. Then you can send the same material list to several supplier options, and easily compare the quotes once they are returned.
Digitize your old bid files and store them on your computer or company server. Storing them electronically allows everyone easy access, at a moment’s notice. You will also be able to access them via a smart phone or tablet, without having to return to the office to pull the hard copy from the filing cabinet.
Accounts payable can be streamlined as well, by using an online service provider to take care of submitting paperwork and making necessary payments.
Most of a contractor’s accounts payable can be done online now. This eliminates the need to print and fill out forms, write the checks, and rely on snail mail to get them where they are going on time. You can also avoid the penalty associated with late submissions as well, saving yourself even more money.
In most areas of the country, you can file and pay for the following costs online:
Lastly, you can also use an online payroll service to calculate and create paychecks for all of your employees. Once you have completed the initial set up of entering each employee, and their withholding allowances, you simply enter the hours worked for the pay period, and the program does all the work for you.
Then you can load your blank checks into the printer and your payroll will be done in no time!
Improve your accounts receivable process to further minimize your overhead costs as much as possible. This is true, especially when we are looking to prepare for an impending recession. When the money supply gets scarce, lenders and GCs will always pay their subs, whose paperwork is accurate and correct, first.
The reason for this is that if you have filed all your paperwork correctly, you have legal recourse towards the non-payer. Your company could potentially file an NOI, and if that doesn’t get you paid, you can file a mechanic’s lien.
As a contractor you should always;
As you can see, there are several ways to lower your overhead costs, and make sure that you get paid for every project, at the same time.
With a recession looming in the not-so-very-distant-future, it is imperative that your company is prepared for the worst. The length and severity of the recession won’t be fully known for some time, so why not get started on preparing for the looming recession now?
This article was written in March 2020. It's now a writing sample for demonstrative purposes.
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