The pure mark-up method of making a profit has me baffled. I understand material suppliers only have one option. They buy from a manufacturer and then deliver to the contractor for a profit. I once worked for a manufacturer and got to see what price dealers actually paid for these materials I routinely used. I was surprised with the razor-thin profit margins they operated on. This was eye opening and more eye-opening events followed me through my career in the industry.
The CEO for that same manufacturer made another revelation. He announced that the corporate goal was to develop a product line that he called a strategic “value-added” product enhancement program. And when a new product was about to be launched, we learned exactly what he meant. He asked, “Is it idiot proof?” and went on to explain that he wanted the product to be so easy to install that any worker could put it in with no real training required.
Since that time, I have seen many products developed with that same premise and it isn’t exclusive to the wall and ceiling industry. The flooring industry for decades installed a cement- and sand-based under-bed. The value added enhancement was to use epoxy as the binder rather than cement. The benefits were many but a specific one was the lower requirements in skill level it took to install. Epoxy eventually supplanted the use of cement as the binder. The cost of the product is significantly more than cement. However, recently many subcontractors began to reconsider going back to cement as the binder. The problem is that after a few decades of dominance by epoxy, the knowledge, skill and pool of skilled installers that were trained in cement applications are few and far between.
Money Money Money
What does this have to do with making money? This trend reaches further than just material choices. It is related to a loss of skill-based production. Old school subcontractors once relied upon the skill of their workers and management teams to make a profit. Recently, it seems many are shifting to rely on material mark-ups to make profit. When I was a plastering contractor, I made money, even as a signatory contractor and our profit was never based on marking up the materials. Profit was made by production of the crews and it could be substantial—certainly more than the razor-thin margins I saw dealers dealing with. Profits relied on a strong focus of the field crews and supervision to optimize productivity.
Making money is simple. Supply goods and services, add a mark-up and make a profit (Okay, it's not quite that simple). Then comes overhead, taxes, bureaucratic rules, insurance and overcoming management issues. These issues may not be just within your company—others can and do kill your profits. But with a hard-working crew you can rely on, making money is simple. Or at least it should be.
Crew + Hard Work x Exceeding Estimates = $
Production can be a complex formula. As a signatory contractor, it was a day of work vs. what was produced. This formula works well when we all get paid the same rate. For example, if you had a crew of ten and estimated 100 yards per man day, the crew must put up 1,000 yards to make the calculated gross profit of 20 percent. We, like others, would routinely exceed that 1,000 yards a day.
Now getting your crew to exceed estimates, well, that can be done in a variety of methods. Some supervisors used yelling or bullying of workers, which I ultimately found less effective. What worked for me was clearing a path for the crew. Making sure the job was actually ready and not taking the general contractor’s word that it was. I would visit the site the day before, remove impediments and make sure the substrate was ready. I would check on materials and equipment, and even follow my checklist. A checklist was handy as it is easy to forget things, such as remembering to check the water pressure.
I assume today workers’ memories are far worse with cells phones and constant interruptions. I found that most workers wanted to produce. They felt a sense of accomplishment and slept easy at night knowing they made the boss money. If there were any bad apples amongst the crew, my job was to eliminate them from the job. And most times my crew was glad I did.
Are today’s contractors too focused on mark-ups on products to make a profit? While this can work, it will not work for long. Anyone can buy and sell material but not everyone can walk the job, spot problems and have the knowledge to resolve issues to ensure production rates. I like to call these “tricks of the trade.” It’s not cheating or taking shortcuts but rather enhancing production without impacting quality. In some cases, they can actually enhance quality but that’s another column for another time.