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Buy Right to Build Profits

05/15/24

Many contractors have the same person estimate projects in addition to acting as the project manager. As a result, they often get busy pricing too many jobs or running too many projects at one time. When an issue comes up on a project, they usually take care of putting out fires rather than working on the bids at hand. Consequently, estimating new projects, bidding, and taking time to secure additional quotes get put on the back-burner. When they are overworked running projects, they don’t spend adequate time securing enough price quotes from more than the same few suppliers and subcontractors they are used to doing business with. As a result, contractors tend to buy materials from, and award contracts to, the same companies year after year without getting additional quotes from new or different suppliers or subcontractors. They use excuses such as ‘we like to use people we trust.’ There are a lot of other choices who you can trust if you take the time to get to know them.

Get Another Quote

To stay competitive, contractors must continually seek new suppliers and subcontractors to do business with. When you have companies competing for your business, the price you pay will go down by a few percentage points. And in today’s competitive marketplace, a few points advantage on your bids can significantly increase your revenue. What suppliers or subcontractors have you been using exclusively for a long time without checking their prices? Why haven’t you taken the time or made it a priority to get other quotes? You are probably using the excuse that you want to use the same companies over and over again to avoid problems, when the real reason is you’re too busy to hassle or take time to get more prices. After all, they might give you a few tickets to the football game every year too. Are you positive they’re giving you the best possible price on every item you buy from them or project you bid on?

Trust and customer relationships are important, but you’ll get the same service at a better price if you keep them honest. Go to Home Depot or shop the internet and look at what retail buyers pay for the same products you use on a regular basis. Call three other suppliers and get quotes on items you buy all the time. A few phone calls and meetings with different suppliers and subcontractors will boost your bottom line, even if you decide to stay with the suppliers that you’ve used for years and trust.

To ensure you stay competitive with your pricing, incentivize your estimators to get as many quotes as possible. Over time, if you get a minimum of four to five quotes per trade or supplier, your overall price will significantly go down and you’ll get awarded more jobs to build. To keep focused on staying competitive, consider paying estimators a $100 bonus when they get at least four quotes on every trade on major projects. This small incentive will keep your focus on what it takes to win more work.

Double Every Discount

Another way to stay competitive in your construction business is to seek discount opportunities with subcontractors and suppliers. Start a policy to ask discounts and always take every discount offered to your company. When negotiating a purchase or subcontract terms, make it a point to ask for three to five percent discount for prompt payment or no retention withheld. If you don’t ask, you won’t get it.

When offered a discount for prompt pay from subcontractors or suppliers, always take it. For example, if you purchase $10,000 of material for a job and get a five percent discount for full payment by the 10th of the next month, you’ll pay $500 less than what you bid and sold the job for. If materials add up to 40 percent of your total job costs for the year and you get discounts on all material purchases, you’ll increase your bottom line by two percent. This is big.

Professional business owners must have a bank line- of- credit to help them make money and grow their bottom line. I recommend a bank line equal to two months of sales volume for most construction companies. If you don’t have a bank business credit line, get one. Most banks charge an interest rate of prime plus one or two percent on borrowed funds.

Always ask subcontractors and suppliers for discounts for early payment. Often they want or need to get paid faster than the contract or standard terms require. Offer to pay early in exchange for a three or five percent discount off the full amount owed.

Amount Owed

 

$40,000

Discount

 

5%

Amount Saved

 

$2,000

Cost Of Borrowed Money for 30 days @ 5% =

-

$166

Net Amount Saved

 

$1,834

Do the math. When you pay a subcontractor $40,000 before you get paid by your customer, and get a five percent discount, you save $2,000 and get to keep it. On most jobs, you’ll likely get paid back by your customer within 30 days. To calculate what you actually made on an early payment, figure the cost of money. If you use your bank line-of-credit to borrow the $40,000 so that you can take advantage of a five percent subcontractor discount, and you pay a five percent interest rate to your bank for the borrowed funds, your cost of money on borrowing the $40,000 for 30 days is only $166. Wow. You just made $1,834 on your banker’s money. Do this twenty times in a year and boost your bottom-line by another $36,680.

To make more money, buying right from the right suppliers and subcontractors must be a priority.

Business - Commercial Real Estate Industry

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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.