By Ron Pestone
This job costing book is written for those who have strapped on a tool belt and ventured out on their own hoping to make it. It is for the small contractor who not only wants to stay in business but wants to turn a profit and hopefully grow. It is also written for the subcontractor who wants to climb to the top of the heap and is desirous of building a business that will bill millions yearly all at a healthy profit.
For contracting, especially subcontracting, nothing is more important than job costing. It is truly the path to success and anyone willing to live by it will be quite pleased with its results. The job costing method in this book ELM is a proven method and can be utilized by the small independent doing his books by hand all the way up to a contractor who is billing tens of millions of dollars per year. ELM’s mantra says it all, KNOWING IS EVERYTHING.
Most single independents and small contractors never really make it. Some struggle for years and despite all their hard work and their skill wind up packing it in and going back to work for someone else. Others continue the struggle and after years of intense effort have very little to show for it except overdue vendor bills and a large IRS bill all of which somehow must be paid. To be successful, the small independent start up contractor must be able to separate the tool belt from the business. He can never deviate from this. While you might be great at your trade, unless you can start thinking like a businessman, it is unlikely you will ever make it. And to be a businessman is to understand cost.
KNOW YOUR COST
Andrew Carnegie the great steel magnate said it best, “Cut the prices, scoop the market…watch the costs and the profits will take care of themselves.” Knowing your cost is the single most important piece of the puzzle in any business venture because if you know your cost, profits will follow. Every great business owner has known this simple truth from the time of the industrial revolution and nothing is more important in contracting.
The major reason for business failure can be attributed to the owners not knowing their costs. In the private residential market where so many start, it is common practice for the homeowner to give his contractor a percentage of his contract value up front to start the project. The percentage can be as high as 50%. As the contract starts and the contractor is financially ahead he sits on the false assumption that everything is ok. More often than not he does not look at the hours spent on the project in relationship to his estimate and the percentage of the project that is complete. He is just doing what he does best, building the project. As the project continues and the money starts to dry up and he finds himself in the dubious position of using his own money to advance the job and he is still hopeful everything will turn out all right. If he has a few employees it is not uncommon that he starts dipping into their payroll taxes to continue the project convincing himself he will pay it all back when the project is complete. It is only when the project is nearing completion that reality sets in. The job is not only going to not make a profit, it is going to lose money and there isn’t going to be enough money to pay all the supplier bills and more important Uncle Sam. A common solution is to take more work and to use the new upfront money to pay for the bills and Uncle Sam on the old job. It’s called cash flow and once you are on that merry-go-round, if it ever stops you are dead. While this solution might appear appealing in most cases, it only succeeds in digging a bigger hole and in the end, more money will be owed his suppliers and Uncle Sam then he ever dreamed of, and he may enter the nightmare called bankruptcy.
This would have never happened if he knew where his cost was from day one and he had made all his decisions based on his costs. If that had been his blueprint, at the end of the day his bank account would be showing a balance instead of appearing in the red.
The job costing method in my book ELM which is an acronym that stands for Equipment, Labor and Material; and ELM’s mantra says it all, KNOWING IS EVERYTHING. The following story best illustrates just how important knowing is.
In upper New York State, there was a small privately held electrical utility company that was run by an old time electrical engineer. For many years the company provided quality electrical power at very reasonable rates, while always generating a handsome profit. As its principal owners aged a decision was made to sell the company and to move to a warmer climate. A large conglomerate purchased the company and after a brief time sent in a small army of engineers to evaluate each component of the plant and to assume the responsibility of running the plant. As a consequence, the old time electrical engineer was unceremoniously let go. For some time, the plant ran smoothly and then one day for reasons unknown it stopped running. All the electrical engineers who had been hired to run the plant worked day and night to get the plant running again all to no avail. Additional experts were bought in and no matter what anybody tried, no one could get the plant running again. Customers were complaining and the local newspaper blasted the management of the plant with giant headlines. Unable to resolve the problem and faced with mounting criticism and the possibility of a hearing before the power authority, the president of the conglomerate asked, “What about the old man who had been running the plant for years, maybe he knows something?”
They searched out the old man who had retired to a little fishing cottage in Maine and he agreed to come in to fix the problem for a fee. When he arrived at the plant he was surrounded by all the bright young engineers who had been hired to replace him as well as top management. As he started to walk through the plant with this group he asked someone get him a small sledge hammer.
When he reached the bowels of the plant he took the small sledge hammer, and to everyone’s astonishment walked over to a large valve and gave it a hard whack. Miraculously the plant started running again. The old time electrical engineer smiled and quietly left. Two weeks later the president of the conglomerate received a bill for two million and two dollars from the old time electrical engineer. Outraged he personally called the old time electrical engineer and asked him to explain his bill. The old time electrical engineer responded, “The two dollars was for the hit with the sledge hammer and the two million dollars was for knowing where to hit.” As in many things in life, knowing is everything and that is the power ELM job costing gives you. You will really know.
Don’t Forget: We Build America