Watch Out for the One Bad Job
Does this sound familiar? I have written tips similar to this. However, I don't think it sunk into a lot of contractors' minds. So, here it comes from another angle.
During my visits to contractors throughout the country, I not only like to show what my four companies do to prosper, I like to listen to what other contractors do that makes them successful. On a visit with Chandler Swope, a general contractor, I asked him what his secret was to making a profit.
He said, "All we focus on is not taking on ‘the one bad job' as at 5% net profit, it takes 20 more jobs to get our money back." This really stuck in my head. So much so, I have repeated to my staff so many times, "Don't get us the one bad job." They are probably very tired of hearing it.
How bad is "the one bad job?" To drive this issue home to my estimators and project managers, I did some research on what Chandler told me before presenting the facts. Here is what I came up with: Let's say you take a job for one of these reasons: 1) to keep your people busy, 2) because it is close to home, 3) for pride to keep it out of a competitor's hands, 4) hoping you can get a change order to make up the difference, 5) or just due to a bad estimate.
You lose $100,000 on "this one bad job." Sound familiar? (It sure does to me as I have done jobs like this in the past for all the reasons mentioned above.) Wondering where Chandler got the 5 percent net profit figure, I researched to find what the average mason contractor earns. I found that during the five-year period of 2007-2011, net profit among mason contractors was 1.9 percent.
Using this historical data, you must do $5,263,200 in other work to get your $100,000 back. This $5,263,200 x 1.9 percent equals $100,000. Yes, based on this data, if you are a mason contractor doing $5 million a year, you must work more than a year for free to break even, since you took "the one bad job." All the while, you are donating your time. You are at risk of someone getting hurt, being sued, walls blowing over, and, among other risks, your health failing during the same period. So, are you still willing to work a year for free because you took "the one bad job?"
During my travels, over a drink with North Carolina mason contractor Freddie Koontz, he called me out on one of my articles on this same topic: "Damian, I have been reading your articles and I haven't been taking work under costs. Now I don't have any work! What do I do now?"
We have joked about this several times when we see each other. However, I don't think I ever gave you the answer to your question, Freddie. So here it is: During that slow period, you lost way less money than you would have if you took on the work under costs. On top of that, you did no work and had none of the job-related risks. It may not have felt like it at the time, but I am certain you minimized your losses in this case.
So, the next time you put a bid out and your customer offers you the job at less than your costs, go ahead and have a little fun running the many reasons through your head about why you would love to take the job. However, make sure you do your own math to see how many months or years you will have to work for free, because you took "the one bad job," and let me know how it works out for you!