Another example of thinking we know vs. knowing is when you're involved in a car accident. After the accident, you find out that the guy that hit you didn't have car insurance and you don't have uninsured motorist insurance. You thought you did.
How many times have you argued an issue without really knowing the truth? All of us form our own opinions on issues based on the information given to us. For example, Randolph Hearst played a large part in inciting the American public to go to war against Spain with his many stories of abuse and about Spain sinking one of our ships.
You and I can read the paper as many American's did in Hearst's day and argue in favor of war based solely on the limited information we were provided. When we read or listen to media reports, we have to keep in mind that conflict or deferring opinion sells. For you and I to base an argument on slanted or incorrect information is an argument having to do with opinion rather than fact.
There are certain things you know. For example, knowing how much money you have in your checking account. You can know how much money you spent on airfare in the month of November. You can know how much you pay in property taxes each year and you know how much it cost to send your kid to college.
There are many other things you can know for sure. You can know how much it costs you each year to operate your business. You can know how much you paid your superintendent last year. You can also know how much money you need to do a job.
There are things you know and there are things you think you know. In construction, if you don't know three things, you will either die quickly or slowly.
Killer costsNothing kills a business quicker than not knowing what your costs are. If you don't know what it will cost you to do a job, you shouldn't be in business. You shouldn't be in any business if you don't know your costs.
There are two types of costs. The first type of is direct cost. Direct cost in construction is the cost associated with performing the work on the job. It may include material, labor and equipment, as well as other things directly related to doing the work.
Labor is normally the most expensive item we sell, therefore knowing how much a worker can produce in a day is critical in determining your direct job cost. We can think we know which production rates we should use in preparing an estimate. However, thinking and knowing are two different things.
We must know how much a worker can produce in a day. Thinking we know is no better than guessing. When we guess, we increase our risk of killing our business.
The second type of costs is indirect costs, which are costs associated with non-job costs items, such as your office rent, utilities, management salaries, insurance as well as advertising. Indirect costs are normally referred to as overhead.
If you run a one-man office and your salary is $5,000 per month and all other overhead runs you another $5,000 per month, your total indirect costs are $10,000 per month.
If your indirect costs are $10,000 per month, you must earn $10,000 per month in job profits in order to pay $10,000 in indirect costs. If you were to take $10,000 per month and multiply it by 12 months, your total indirect costs for the year would be $120,000. To break even for the year, you must earn $120,000 in job profits to pay $120,000 in indirect costs.
Any business will die a quick death if the owner doesn't know his or her direct and indirect costs.
Slow deathJim Davis is the CEO of a commercial bank and has been in the construction lending business for more than 25 years. He believes most businesses fail because the owners don't know their costs. He also said something that was very interesting.
"I've seen businesses that have been successful for many years fail because they didn't adjust to the market," Davis says.
Not adjusting to market conditions is the slow death of successful businesses. What are some market conditions that can change over time?
- Material market
- Labor market
- Equipment market
- Managerial market
- Not enough work
- Too much work
- Slow payment
- Labor costs
- Union transitions
- Lack of demand for your specialty work
- New products taking place of old legalities
Old, once successful, businesses keep doing business the way they have always done it without realizing the market is changing. Material prices are going up, labor is producing less, competition is moving in and the cost of labor is going up.
If there is a lot of work in a particular market, the direct and indirect costs begin to creep up until gross profits start slipping. The once successful business keeps doing business the same way it has done for years and before long the owner realizes that costs are higher than income in a hot market.
Although Boeing is a huge company, it is getting better at anticipating the market. Personally, I believe Boeing had good reasons to move much of its work and corporate office out of Washington State. It was a cost cutting measure to adjust to market conditions. Boeing was in business for many years without having what I would call a major competitor. Airbus is now a major competitor and Boeing had to adjust to the market.
If Boeing has to adjust to market conditions so do we. How do we know market conditions are changing? How did Boeing know that the labor market in Washington would eventually impact the company's profitability? I believe the reason the company knew is because it's in the company's best interest to know.
Know the marketIf I moved to Kentucky and started a drywall business without knowing the market, how well do you think I would do? If I didn't know what my direct and indirect costs are, I most likely wouldn't last very long.
To find out if you really know your market, ask yourself the following questions:
- How much will I pay for material?
- How much do I have to pay for labor?
- How much can a worker produce?
- How much can I charge for overhead and profit?
- How long will I have to wait to get paid?
Finding out how much the material will cost is pretty easy. Finding out how much the cost for labor is also easy. Determining how much an average worker can produce in a day is difficult in a new market. It's also difficult to identify how much you can add for overhead and profit.
Again, thinking you know how much a worker can produce in a day or thinking you know how much overhead and profit you can tack on to your costs is much different than knowing.
Consider the estimator who keeps bidding work in the same market year after year. Suddenly, there is a labor shortage and lots of work. Do you keep pricing the work as you did in the past?
In business, you don't have a lot of time to adjust but you do have time to be in the know. Thinking you know and knowing are so different from one another. Many people, including myself, have been deceived by thinking we know.
If you really want to know-rather than think you know-ask yourself and accurately answer these important questions:
- What are my direct costs?
- What are my indirect costs?
- What is the most I can charge and still get the job?
After answering these three seemingly simple questions, you will know everything that makes up your market and your market trends. The other option is to die a quick death or a slow death.
Remember: Teamwork begins with a fair contract.
If you read this article, please circle number 330.