With more than 30,000 electrical contractors in the United States, competition is fierce. Successful contractors must know how to manage their projects so they can compete profitably in today's market.
You want to deliver quality service at a reasonable price; after all, that's what keeps you in business. Like you, most contractors are concerned about their ability to be competitive, make money, and stay in business through reasonably priced quality service. To accomplish this, you must develop accurate estimates and keep overheads to a minimum.
The estimate is the foundation for project management. The estimating process generally dictates which contractor receives electrical work. The contractor with the best-perceived price, but not necessarily the lowest, usually wins the bid. Because of these demands, profit margins are limited. This permits you to have only a small margin for error in the estimate. A proper estimate must accurately determine your cost in completing the job according to the customer's needs.
Estimating versus bidding. Determining the selling price for a job is actually two separate components: estimating and the bid process.
• Estimating. The purpose of estimating is to determine the cost of a project before you actually do the work. When estimating, you must take into consideration variable job conditions, the cost of materials, labor costs, direct job expenses, and management costs (overhead).
• Bid process. Once you know the estimated cost of a project, you can determine the bid of the job.
A good estimating system. A good estimating system should help you quickly and accurately determine the cost of a project. Sometimes it's easy to inadvertently omit an element or make other errors when estimating. These can combine to exceed the job's profit margin, resulting in a net loss for the job.
Job management ultimately controls the cost of a project. Proper project management is often the difference between profit and loss. You must realize effective job planning; labor scheduling, and material purchasing are all factors in determining the cost of a project. The cost of any project correlates with how well you manage the job. To properly manage a job, you need a budget.
Let the foreman know the details of the estimate. There must be continuous communication between the electricians performing the work, the project manager, and the estimator.
Without a proper estimate, you won't know what materials or tools you need. You might not get the material on time. Or, you might have too much material, which increases the likelihood of waste or theft.
Can I be competitive? Factors affecting a contractor's competitiveness include: competition, cost of power, experience, labor cost and productivity, management skills, overhead, and selling the job at your price.
Let's look at the details.
Competition. Know who your competitors are and consider the number of contractors bidding the job. Try not to bid jobs with more than four contractors. However, if there are less than three contractors you can probably raise your profit margin.
Small contractors are often less competitive because of inexperience, inefficiency, and poor management. They're also less competitive because they have a higher overhead per job as compared to the larger contractor. But, many small contractors offer excellent service to their customers.
Cost of material. Suppliers typically offer different prices to different contractors for the same material. What can you do to get the best price? A few simple rules in getting the best price are: shop around and check your prices; pay your bills on time; and take advantage of the 2% discount.
Did you know it costs more to buy or pick up your material at the supply house, than it does to have it delivered? But, low price isn't everything. You'll want to develop a relationship with suppliers who will help you solve your problems and who will be there when you need them.
The factory sales representative, at a set percentage above cost, sets lighting fixtures and switchgear prices. The "street price" is the price before a contractor receives the bid. Once the customer accepts a bid, some suppliers cut their price to the "buy price." This can be as much as 7% to 10% lower than the street price. Be sure your supplier includes the cost for accessories, freight, and delivery.
Experience. The more experience you and your employees have, the fewer mistakes you're likely to make. You should be able to complete the project more efficiently.
If you want to be competitive in a market you're not familiar with, find how you can gain the needed experience. Talk to other contractors, attend seminars, read trade magazines, and watch training videos. Do whatever you can to reduce losses as a result of inexperience.
Consider the profit margin of a job, particularly labor. The greater the perceived job risk, the higher you need to place the profit margin to accommodate possible losses. Experience helps here. If you bid work in which you are experienced, your profit margin can be lower and the bid will be more competitive.
Labor cost and productivity. The impact of competitiveness between contractors because of the difference in pay scale can be significant. Some contractors pack rock bottom salaries, and others pay above union scale. Your electricians' salaries should compensate for their abilities and contribution to your company's bottom line. Pay top dollar, and you'll probably get skilled, motivated, educated, and trained electricians. The result is an increase in labor productivity. Paying a low salary may lead to Code violations, increased supervision requirements, and lower productivity.
Providing your work force with proper training may help to expand your business. Many of today's successful contractors have an apprenticeship and continuing training program for their employees.
Management skills. If you don't manage jobs according to estimates, you're not likely to make the profit that was anticipated. If you don't have the necessary skills to properly manage your jobs, attend management seminars, watch training videos, and get involved with a local contractors' organization. By joining a contractors' organization you'll learn from the experience of those who have been there before you.
Overhead. Overhead cost represents between 20% and 40% of a contractor's total sales. To become competitive, you must keep your overhead cost as low as possible.
Selling the job at your price. Confidence and professionalism are critical when selling the job at your price. If you offer excellent service at a reasonable price, then you won't be hesitant when justifying the prices to the customer. Is it a quality installation that you're selling, or is it low price? With proper management, it only costs a little more to provide a quality installation.