picture of a commercial business park

Buy Low and Sell High

05/15/24

Most construction business owners focus a lot of energy on trying to cut costs by being more efficient, working faster, buying cheaper, not wasting any money, keeping their crews busy, or doing all the pricing and ordering themselves. Spending all your time focused on cutting costs won’t improve your bottom line unless you keep some of the savings for yourself. Most contractors add up their material costs, and mark them up at the same rate.

What should you do when you get a 10 percent better price on material, or a lower bid from a subcontractor? By always passing along the entire cost -savings generated by your hard work or negotiating skills, you are actually hurting your bottom line. By using the lower cost in your estimate, and then adding a 20 percent markup for overhead and profit, the actual gross profit and final selling price is lower than if the materials or subcontract had been ordered at the original higher price. Look at these examples:

 

Original Quote

Lower Quote

Sell Higher

Material Price

$1,000

$900

$900

OH & P Markup

20%

20%

33%

Gross Profit

$200

$180

$300

Sales Price

$1,200

$1,080

$1,200

Gross Margin

16.7%

16.7%

25%

Review the three examples. The ‘Original Quote’ mark-up example shows the result of getting a material price of $1,000 and then selling it at $1,200. The next ‘Lower Quote’ example shows what happens when you work hard to get a lower price and then pass all of the savings on to your customer. The ‘Sell Higher’ example shows what happens when you get a lower price for material and then still sell the item at the market value or what the customer is willing to pay for the work. Should you always offer your customer the lowest price on every bid and purchase on the job? On the ‘Sell Higher’ example, you purchased material or subcontracted work for $900 and still sold it for $1,200. Your gross margin increased from 16.7 to 25 percent— A huge difference in your bottom line.

What if you buy in bulk?

An owner was remodeling their home and the contract with an electrician included an allowance for the number of light switches and power outlets anticipated. When the walls were framed, the electrician said the final number was larger than the amount that had been included in the contract. They had already bought the switches and outlets included in the contract at a quantity discount and would now have to charge more per extra outlet because they could not get the same price from their supplier.

If you were an electrician, wouldn’t you buy the switches and outlets by the case, pallet, or car-load to get the best price possible and then store them in your warehouse? The selling price would still be the same but you would make more money by buying them at a lower price in bulk. What else can you buy in bulk to save money? Wealthy drywall contractors buy their drywall and metal studs by the train car load. The same for rebar, lumber, irrigation pipe, copper pipe, and all the other materials subcontractors and contractors need on every job. When you buy small job amounts from wholesale houses, you pay five to 20 percent more for materials. Want to boost your bottom line? Look at your annual purchases and start buying items you use over and over in bulk. This method should make you at least two to five percent on your bottom line.

Should you always pass the lowest cost along?

There are many instances when you work hard to get a lower price. Should your customer always get the full benefit of your efforts? What about on change orders? Should your change order cost include the cheapest price you bought the materials for, or what the market price is for the item? Should you always pass your contractor discounts along to your customers? By presenting a lump sum or a cost-plus price for changes using the market versus the cheapest price for materials, you can increase your gross margins significantly.

Think about how you price your work and sell your services. Bidding with the cheapest price you buy materials for is not always the best way to approach your customers. Want to make more money? Decide how you will estimate your jobs based on what your customer is buying. It is not always about being the lowest price contractor to get work or keep your customers happy.

Business - Commercial Real Estate Industry

Ready to explore how Sunflower Bank can assist you? Speak to a personal banker at a branch near you, contact a specialist on our Wealth Management team, or find the right financial partner on our Commercial Banking team for your business needs. 

Back to Resource Articles

This article contains general information only. Sunflower Bank is not, by means of this article, rendering accounting, financial, investment, legal, tax, or other professional advice or services. This article is not a substitute for such professional advice or services, before making any decisions related to these matters, you should consult a qualified professional advisor.