Do you know your REAL Business Costs?
Find out what you SHOULD be charging and HOW to go about pricing your projects.
Watch the video now, or read the transcript below.
Duayne
Many builders we work with are surprised at the true cost of running a building business.
Amelia, one of the big things in our industry is a lot of people out there are putting percentages onto what builders should be charging. How would you suggest that builders deal with clients, designers, architects suggesting to them what they should be charging?
Margins and Markups
Amelia
It’s really interesting, isn’t it? Because, there’s this kind of magic figure of 10% that gets bandied about, and that oftentimes, a lot of homeowners that I work with, and architects and designers, think is the magic figure that a builder should be charging. So they’ll actually look through a contract and if a builder is charging a different amount to that, they’ll start to interrogate them and question why are they charging more. What does this margin actually mean, that kind of stuff.
I think that it’s really worth understanding the work that we do with builders. We have our operating costs and expenses spreadsheet that we take builder members through. It’s the first thing that we do.
We’ve never had a builder fill that out and say, “Yeah, I’ve been covering my expenses properly”. All of them are always undercooking their margins.
Educating Clients and Designers
Amelia
So you know, it is this thing of builders not necessarily understanding the cost of running their building business. And then once they do, the importance of actually educating clients, and designers and architects, what it actually costs to run a building business as well. And I think too, having worked in the industry for a long time, and having co-owned an architectural practice, I don’t know whether architects and designers also necessarily understand this in terms of their own margins in their businesses as well.
I don’t think it’s necessarily fair for an architect or designer to be telling a builder what they should or shouldn’t be charging. But you can’t expect people who don’t know what it costs to run a building business to think any differently, unless you as a builder actually are talking it through with them, as to what’s involved in running a building business. I know you have this conversation with clients and designers, how do you find that in those early conversations?
Duayne
It is something that comes up all the time, and not just with clients, with architects and designers as well. My thing is, there is this perception within any business in the world that you put this certain figure on it. But my thing is:
Every building business is different
Duayne
For me, it’s all about educating our clients that I run a professional business. I understand what it takes to run my business, and I know what margins I need to put on my jobs. I put those margins on there to run a sustainable, successful and profitable business so that I can deliver them a great product.
The other big part of this is if homeowners are looking for different builders, every builder is different. You’ve got the ‘one man’ band that’s still on site doing stuff on the tools, you might have a guy that’s got a few guys working for him. Then it just keeps growing. They might have an admin staff, and then the next person might have a couple of admin staff and an office premises and then vehicles. It just grows and grows and grows. So besides the fact that people are trying to put an actual figure or telling builders that, “hey, this is what you need to be putting on your jobs”, it’s a little bit rubbish, to be honest.
Amelia
What’s interesting is at the end of the day, you’re not asking the homeowner “how much money do you earn every year”. So it’s not really a homeowners’ business to know what you’re charging in order to make your business run.
I know that homeowners want to know that they’re getting the best value price for the home that they’re going to create. But that doesn’t mean that they have to know all of the nuts and bolts of what it costs you to run your building business. So when we say, it’s important to educate homeowners, that doesn’t mean that you need to sit down and say well, it costs me X to do this, and it cost me X to do that.
I know that you do it by actually demonstrating, “look, I have an admin team that helps out, that means that we’re more organised, that means that you’ve got another point of contact in the office, that means that, things run more smoothly. I’ve got supervisors, I’ve got all of these kinds of things”.
All of that starts to actually indicate to a homeowner that there is a different metric in a way. And look, that is a big part of it, because a lot of the time we’ll find that when we educate our clients on that, that is what they want. They want to know that if something comes up, they’ve got someone that they can talk to. Many clients don’t want a builder that’s on site, trying to slog it out and get the job built and they’re trying to get in contact with him, he’s not answering his phone and those types of things. What would your suggestion be? What can builders do to take this question out of the equation? I think it’s really important.
Building Relationships With Your Clients
Duayne
The whole process of actually creating a relationship with a client really needs to build in that opportunity to get to know them better, and for you to be able to create a trusting relationship so that they’re not just choosing you on price.
Sell the fact that you’ve got a good business that is going to still be alive to finish their project
Amelia
If you’re working with clients that are literally trying to pit builder against builder, and push everybody down to what the cheapest price is to build their home, then chances are you’re attracting and working with the wrong clients. I think that the more that I work with homeowners, and the more that I see what they’re trying to achieve, particularly if they’re building their long term family homes, they may say that they’re choosing on price. They’re not though.
They’re actually choosing a builder that they feel that they see eye to eye with, that they can get along with. That they feel that they can have trusting, open communication with. That they know is going to be around for the long term, that’s going to build them a quality home. There’s a whole heap of other things that come into it. When you’re finding those kinds of clients, price doesn’t end up being the main metric that they make a choice with, and generally ends up being quite down the list of priorities as well.
Duayne
That can all come back to marketing. You want to market yourself to sell your business, sell the fact that you’re going to meet the client’s expectations.
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Check out this post on profitable businesses and project sheets: https://www.livelifebuild.com/blog/projects-profitable-project-sheets/