Busy electrical contractors doing their estimates and administration on the run seldom think logically about the profitable outcome.
Here is a definition of profit according to Investopedia:
A financial benefit that is realised when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity. Any profit that is gained goes to the business owners, who may or may not decide to spend it on the business.
Therefore profit is more than the figures on the balance sheet, it is the lifeblood that keeps the organisation in business and protects the owners from bankruptcy.
Contracting is a gambling business – the bid is made and the risk is taken that the job will follow the anticipated schedule.
So many risk factors come into play even in the most basic installations: weather; availability of labour, tools and equipment; accidents; strikes; availability and delivery of materials; and access to work areas all affect the bottom line.
And a greater profit usually equates to greater risk.
These are just the everyday hazards that can affect your job. Other areas that have a significant bearing on profitability are outlined below.
Time is a vital element in maximising profit, and it’s the hardest to assess.
Any tradesperson worth their salt should be able to list the materials required for a specified job. However, when it comes to labour, the estimator must take into account the aforementioned variable risks, which all affect labour time.
Most projects that go belly-up financially do so because of labour overrun triggered by many of these factors.
Do you have enough money to finance the project?
Many contractors believe that this is not a problem, because of progress payments, and their exposure is minimum. But even working with a customer who pays on time, there is a delay between lodgement of the progress claim and the payment.
Most construction contracts have a payment clause stating that the monthly claim must be lodged by a certain date and it will be paid 21 days from receipt of claim. So, from the beginning of the month until payment, seven weeks will elapse during which you must fund the project.
If you have to go into bank overdraft or borrow money for this funding it will eat into your profit. Even with small service jobs, if you allow your customer credit by sending an invoice after leaving the job, you will be funding this account until you receive payment.
I always advise new contractors to take a leaf out of the appliance servicing industry and demand payment at the end of the job – in cash or EFT – because every unpaid day has an effect on your expected profit.
Also, be sure to pay your suppliers on time. Poor payers get poor service and this will have an effect on your jobs if you cannot get materials when required to meet deadlines.
This is basically the money required to keep your business operating whether you have any paying work or not.
Electrical contractors’ overheads generally run between 15% and 25% of total sales, but this can vary dramatically depending on the type of work undertaken. To establish the most realistic percentage for your business it is wise to consult an accountant.
The overheads for an electrical contractor include administration and office expenses, vehicles, telephone and internet, depreciation, bad debts and collection expenses, industry subscriptions, licences, advertising and promotion.
However, there can also be job-specific overheads, which are incurred on particular job sites. These may include travel beyond the usual radius, hire of specialised equipment, site storage, accommodation, site transport, site lifting, site allowances, and utilities fees and charges. All need to be included in the final selling price to maintain profit.
Does your team have the expertise to complete the job?
As mentioned, the jobs with more risk – and those that include new technology – are greater profit makers. If you do not have the expertise, how much will it cost to hire or sub-contract this work?
If any new technology is going to mean regular business, will a training program be worth the investment in time and money?
Degree of difficulty
In sports such as surfing and gymnastics, higher marks are given according to the degree of difficulty, and the same applies in business.
Tasks involving a degree of danger would reduce the number of rival tenderers. However, you would need high levels of expertise to consider submitting a tender for high-voltage installations, putting floodlights on a high-rise building, working 500m underground, or installing expensive and sensitive equipment in a multimillion-dollar laboratory.
Is your customer base growing each year, and are you generating repeat business or continually marketing to new possibilities?
You will need to identify customers that generate the most profit and concentrate your marketing strategies on them.
Their jobs are usually those for which your team has the most expertise and can carry out the work with maximum efficiency.
Estimating is fraught with potential disaster when tender deadlines are extremely short or when multiple tenders are due on the same day.
Adding to these difficulties are 11th-hour variations and additions to the project, very late supplier quotes and a wide-ranging break-up of prices and schedule of rates, causing the final selling price to be calculated too quickly and resulting in omissions
Another regular mistake in underquoted tenders is the omission of prime cost, provisional and contingency sums; EBA; GST; site allowance; travel; site accommodation; or failure to include sub-contract prices.
These mistakes can cause prospective customers to lose faith in your company.
A good, well thought out selling price assessment sheet will flag up these specified sums and service costs, acting as a double check to ensure you don’t omit them from the final selling price.
The customer is the person who pays your wages, therefore ‘no customer, no job’.
A profitable company maintains good customer interaction and provides an outcome with a quality consistent with the customer’s requirements.
The old adage ‘the customer is always right’ is only partly true. The customer may know what the desired outcome should be, but in many cases will have no idea how to arrive at it.
This is where the electrical contractor becomes an advisor, to work with the customer to provide the highest-quality installation for the price.
Profitable tenders are often won due to the electrical contractor offering alternatives that produce a more aesthetic outcome or a more efficient installation.
In any market segment there are electrical contractors who are more profitable than the rest. They secure the best jobs, they have an amicable customer base and they maintain a dedicated team.
These companies plan their operations and follow through with the plans. They have established benchmarks of excellence that they continually practise, and it is reflected in their bottom line.
Some essential tips:
Tip#1 Pay your suppliers on time – late deliveries can eat into profits
Tip#2 Consider the risk factor – does it outweigh the opportunity?
Tip#3 Monitor cash flow – long payment periods have a detrimental effect on profit
Tip#4 Do not willingly deceive yourself by underestimating your overheads
Tip#5 If you don’t have the expertise, consider the most economical way of acquiring it
Tip#6 Identify your profitable customers and concentrate marketing strategies to them
Tip#7 Use a tender checklist to ensure all costs are accounted for
Tip#8 Remember: no customer, no job – keep the relationship strong
Tip#9 Profit is the lifeblood of the business
Brian Seymour, MBE, is an industry consultant and author of Electrical Estimator’s Labour Unit Manual, Starting Out and Electrical Contracting in Australia. He conducts regular industry training programs throughout Australia on behalf of the electrical and air-conditioning industries