You would not charge a customer $10.00 per hour and pay your employee $20.00 per hour. Would you? Of course not! Yet it occurs every day when it comes to overhead. The problem is that companies don’t know that they are doing it. Most of the companies we talk with or evaluate state that they charge a flat rate of 10% for overhead or don’t even know what it is. If you are a small shop, overhead is going to be a lot more than just 10% in most cases.

The first step to a profitable job is in the estimate. Each estimate has crucial steps that can make or break your business. First pick the right job - if you are bidding on a job that you have no chance in winning, you’re wasting money. Then completing a thorough, professional and accurate estimate is completely necessary to make sure you can win the project and complete the project on that budget. After that is calculating all of your numbers into the estimate so you can make a profit - but make sure you’re using the right overhead numbers or you’ll lose money and never see where it goes! Finally turn in that bid to everyone who needs it; if the winning GC never sees your number, what good does that do you? And stay on that project to see where you place. All of these pieces are critical parts of a proper estimate, which is critical to the growth of your company.

If you want to survive this economy, if you want to grow your business, you have to change your marketing techniques and you have to change your estimating procedures to bring in more revenue. If you need help with any of these steps, you can always call our experts because we provide every one of these services, many of them are included free for plumbing contractors, and information and advice are always complimentary.

So the first step in the growth process was change. You have to realize that what you are doing right now does not work. If it did then your company would not be looking for survival techniques to make it. The second step was realizing that cutting your labor hours doesn’t solve the problem; it only spikes the per hour cost of overhead.

Now in the third step, we have to make your company recession-proof. And that starts with throwing out every negative thing you have learned about marketing and the costs associated with marketing.

Most contractors undervalue marketing and many completely ignore it as a source of customers. It is one of the first costs that is cut out when times get tougher when what really needs to happen is more marketing.

Marketing is one of the keys to creating growth - even in a downed economy. You have to let customers know who you are and what you offer or else they will not call. The days of getting all of your business from word of mouth is over while the economy is down. People are not spreading the word about you or your business. You have to reach them new ways.
Plumbing contractors’ favorite marketing venues historically have been phone book ads and graphics on the sides of company vehicles. These are good marketing venues when the economy is good, and consumers are searching for plumbers, but they don’t work as well when people are watching how much they spend. Try proactive marketing. Email marketing and phone marketing are new methods that cost little and have high customer return.

Take another look at your marketing plan to fight this economy. This slow market will only affect your business if you don’t have a plan to grow, and one of the keys to growing your business is more marketing.

Let’s talk about your first option, cutting costs (See option two on Step Three). The problem with trying to cut costs is that, believe it or not, it is an extremely difficult thing to accomplish.

Unless you do it in a way that will truly reduce your costs, it does not make any sense to attempt it. For example, laying off a field worker may seem like you’re reducing costs, but the truth is you only reduced payroll for each week and in turn your overhead has increased.

Some may not agree yet, but look at it this way. If you have 10 field workers and each of them work 40 hours a week for 52 weeks a year, that equals 2000 hours of work per field worker.

The total hours are then (A) 20,000 total hours that your workers can produce for your plumbing business. Now let’s say your overhead costs (Rent, Utilities, Office employees pay, Owners pay) are (B) $200,000 dollars.

Now your overhead per hour would equal $10.00 dollars per hour for every hour worked by each employee (Overhead per hour = (B) / (A) ). Now if you layoff five field workers, then your overall working hours would equal (A) 10,000 total hours, but your overhead has stayed the same, it is still (B) $200,000 dollars.

Now if you recalculate with the formula, your overhead jumps to $20.00 per hour. That’s $20.00 you will have to apply to each labor hour on every project. Then you have to add the cost of the employees’ pay and add profit to that number. And companies that want to stay competitive or try to turn a profit may have just shot themselves in the foot.

Cutting costs is difficult like I said because it has to be balanced between overhead and labor. Most of the time unless you’re willing to sell almost everything and downsize every aspect of your business, it is too challenging of a task.

Option two, growing your business, will be addressed in Step Three’s blog.

It is easy to say yes, but saying yes comes with a price. Most plumbing contractors are set in a comfort zone bubble that may seem comfortable where you’re sitting, but in reality it’s an insanity bubble.

Albert Einstein once said “The definition of insanity is doing the same thing over and over again and expecting different results”

If you’re in the “if it’s not broke, don’t fix it” mentality then you’re not in the right mindset to survive the economy crisis we are facing.

First you need to know that the number one failing business in this country is a restaurant. Almost 90% of new restaurants fail. At the same time the most successful business in this country is a restaurant - a franchise restaurant. 70 to 80% of franchises are successful. Now I am not telling you to franchise your plumbing business or go and purchase a franchise. But my point is that the businesses that do make it out there have a complete system in place with policies and procedures set up so the business can run itself no matter who is in the driving seat. By setting your company up to run itself without depending on you as the owner to run everything, you have put in place the necessary components to creating a successful and profitable plumbing business.

If your business is a veteran to the industry and has beaten the odds, you still need a full set of policies and procedures in place. Here’s why: If you wanted to sell your business today, do you know what it would be worth? Well if you don’t have it set up to run itself, it is worth almost nothing except for the assets you have paid for. What I mean is, if you do 1 Million in sales a year, and you have about 300 thousand in paid assets, your business is worth 300 thousand. It does not matter that you did 1 million in sales because you are the value of the company. If you leave then it is not worth really anything, because no one knows what you know.

But if you set up your company to run itself and put together all the manuals with policies and procedures, now you have established value. No matter who is thrown in the driving seat of the company they can make it work without you. Now an investor can come in, with no plumbing background, and make profit. That same company that did 1 million in sales and has about 300 thousand in assets is now worth around three to four times the annual sales. Wow! That is about 3 to 4 million. It’s the franchise mentality.

The problem is most plumbing contracting business owners were trained to be a plumber but never trained on how to run a plumbing business. Doing the plumbing work and running a business that does plumbing work are two totally different things. Most of the time plumbing businesses are started by exceptional plumbers who were working for someone else and one day said for what ever reason, “I am going to start my own business.” It’s the American Dream!

Did you know that most millionaires are made from owning their own business or through real estate? Bill G. Page an author of Making Money Work wrote, “Most millionaires have made their own fortunes in one generation—they did not win the lottery, win money on a TV game show, or pick the next Microsoft on the stock market. Many are self-employed in small businesses working in “dull-normal” areas like pest control, paving, contract work, or welding. Most millionaires work 45 to 55 hours per week. Most marry once and are still married. Most typical millionaires do not score well on their SATs for college and were not voted most likely to succeed while in high school. Most millionaires are self-made, receiving no inheritance and little financial aid from relatives.” (Emphasis added).

If that is the case then you are on the right track to being successful and having financial freedom right? Wrong! But don’t panic there is a solution. Find out about what can help in our next blog.

(If you need help figuring your break-even rate with overhead or burden, there is a website that is very helpful: www.myoverhead.com .You will want to check your overhead every week if you can, and if not, at least start with every month.)

Also you need to find your own break-even rate. It is impossible to make your company successful if you try to mimic or copy another plumbing contracting business. The numbers don’t match up, and your numbers are crucial to making profit. If your break-even rate is say $95.00 per hour and another contractor that you may be thinking of copying is $75.00 per hour, you will lose money faster than you will make it. Your business plan will only work if you structure it around your company’s specific needs.

When you’ve been staring at the same project for so long, everything starts to blend together. And when that happens, despite your best efforts, errors slip through. The problem is that even though it may be a good estimate, one missed item or qualifier in the estimate or proposal can be disastrous. A professional plumbing estimating service will deliver concise, clear and detailed estimates with checking procedures in place performed by many different estimators, reducing the possibilities of errors.

Deadlines must be met. Every time. No exceptions. Unfortunately, deadlines are set according to a project’s needs, not complexity, and sometimes there’s just too much to be done to get it all out in time. You never have to miss a project out for bid with a quick turnaround time, and you can devote your time towards growing your business.

Also, as an added bonus, professional freelance plumbing estimating services pay for their own taxes, overhead, equipment and software. You pay them for the estimate and that’s it. They also work on estimates only when you need them, therefore you avoid paying an employee when there is down time when the market is slow or when you have been awarded enough work.

It’s a win-win situation.