Contractors Want To Reduce Risk?
What a silly question. Of course any contractor wants to reduce risk! Really? Then why do so many contractors try to substitute low priced commodity products in place of higher quality, higher priced specialty products before a project even goes out to bid?
It’s puzzling when you stop and think about it. For a contractor or any other person in their daily lives, the fear of the unknown is considerable. The goal of most individuals is to minimize the unknown, however, day in and day out, contractors are asked to provide budget pricing for high end, pre-engineered products, and in many instances simply double the cost of the material to develop the budget price. Quoting the budget price without taking a moment to develop an understanding of the product or system specified! In many instances that’s the end of the specialty product on that project and a cheap low priced alternative is substituted, before the project even goes out to bid!
How does that approach help a contractor make more money? Its one thing to substitute a lower priced, lower quality product after securing a contract, but why in the world would a contractor want to do it before the project even bids?
If fear of the unknown results in higher bids, if fear of the unknown creates uncertainty, and if labor is the most significant unknown in the contracting business, why not support higher priced pre engineered products that significantly increase the ratio of the known to the unknown?
In simple terms, if a project has a 50/50 ratio of labor and material, and that ratio could be 75% material to 25% labor; wouldn’t that benefit the contractor? Doesn’t that significantly reduce a contractors risk on a project, resulting in increased profits?
Many factors contribute to this common misunderstanding in our industry. Habit. Contractors are accustomed to shopping a project. Lower prices mean increased profits, right? That may be true after a contract is secured, but not before a project bids.
In addition to reducing the unknown factors on a project, higher priced materials equal higher markups of known quantities. Higher markups generally result in increased profits. What is the benefit to a contractor to push for lower quality, lower priced materials, before a project even goes out to bid? Nobody really wins. The owner receives a lower quality finished product. The contractor has more significant competition from less sophisticated players. The markups and resulting profits are generally vastly diminished.
Old habits are difficult to break. Education is necessary to enlighten contractors to the benefits of higher quality materials. It’s the responsibility of manufacturers, Independent Manufacturers Representatives and others in our industry to continue to promote the benefits of higher quality, pre-engineered interior construction products. It’s really surprising to note, that often, the use of these higher quality materials and systems do not actually result in higher priced projects but almost always result in a higher quality finished project. Higher quality finished projects result in happy owners and happy owners result in more work in the future.
Another key approach to reduced risk in your business is the development of repeat, high quality customers. Do you think repeat customers are best developed by incorporating low quality, low priced materials into their project? Very doubtful. Virtually all clients want the highest quality materials for the most competitive price.
There is always a lower cost product available, for any material. It doesn’t take much experience to find a lower priced lower quality product.
It takes a competent contractor to provide their client with a high quality project at competitive prices. Working closely with the named manufacturer or your local Independent Manufacturers Representative will enable you to fully understand the intricacies of the product or system selected. Assuring that you have the appropriate technical information and understanding. Guaranteeing that you have the appropriate pricing, to provide the client with the desired material or system at a competitive price.
Want to reduce risk in your contracting business? Try working with the architect and owner to provide them with the material they really want for their project. Strive for reduction of unknown factors in the project. Understand that a high material vs. labor ratio is profitable and reduces less competent competition. Don’t immediately dismiss the use of new and more sophisticated materials and systems. Lower priced commodity materials usually mean lower profit margins and less satisfied customers.
Try this approach; you may be very pleasantly surprised.
William L. Shannon CSI, CISCA
President of Shannon Corporation
Recipient of the 2004 De Gelleke Award