Have you ever faced dilemmas and conundrums resulting in difficult decisions for your contracting business? Yes, you have, of course!  According to Merriam-Webster, a dilemma is defined as a usually undesirable or unpleasant choice, a situation involving such a choice, a problem involving a difficult choice and a difficult or persistent problem.

A conundrum is defined as an intricate and difficult problem, a question or problem having only a conjectural (unproven) answer.

The difference is that dilemmas are more of a Catch-22 situation, while conundrums are puzzling situations.

Regardless of which you face, your business is affected by either. You must make sound decisions for your business to succeed. 

As a contractor, you must develop prices allowing you to recover your true cost of performing any task in an excellent manner while giving you a profit above those costs for the delivery of excellence.

Delivering excellence allows you to build a loyal clientele rather than a cadre of anybody’s customers who bounce from contractor to contractor. 

As a contractor trying to deliver excellence to build a loyal base clientele, I would sit in my office wondering how my competition was arriving at their prices. I was certain I had properly identified and calculated the cost I would incur for any task before quoting a price.

However, I competed against contractors charging $800 for tasks that should have been closer to $1,400 in the geographic area.

In my calculations of the $1,400 price, I concluded that the task would cost my business $840. I’m sure you have run into a similar situation — unless you are the contractor charging $800. Unfortunately, that would make you the problem as well as the catalyst causing the dilemma/conundrum, not the solution. 

In that instance, the unpleasant choice must be whether to charge an amount closer to the $800 price or stick to your decision to charge the $1,400 price. The $800 choice, dependent upon your true operational business costs, does not allow you to recover your true cost to perform the task, let alone make a profit above that cost.

The $1,400 price would allow you to recover your true cost for the task while earning the reward you deserve for the delivery of excellence to the consumer. 

It seems simple enough: The choice is to lose money or make money. Within the Catch-22 or puzzling situation is the amount of tasks you can sell to consumers so your business can succeed.

To help you make a choice, you must understand how successful contracting businesses arrive at their prices.

Handling Material Costs

Contracting businesses can keep prices artificially low through the delivery of mediocrity rather than excellence since mediocrity costs less to produce. However, mediocrity causes yet another contractor problem; consumers who want excellence will not accept mediocrity. Let’s face it; all consumers want the services contractors perform for them to be done in an excellent manner.

Another dilemma arises as it presents mediocre contractors with the unpleasant choice of whether they want to grow their businesses with repeat clientele who will want to avail themselves of excellent services. Or deal with those who will be one-time customers, looking for low prices for excellent workmanship they can’t get from mediocre contractors.

Wise contractors identify and calculate their true operational business costs in totality. They can then analyze the costs they expect to incur for any task and apply a proper profit margin to that cost. This allows them to recover their true cost for the task while earning a profit above it.

Let’s look at the $800 and $1,400 aforementioned task prices. Keep in mind that when I quoted the $1,400 price, I estimated the true cost to perform the task would be $840 if I sold all my available tech hours all the time.

Since I have always known that no contractor sells all available revenue-producing tech hours all the time, my profit margin would need to reflect this business fact of life. 

As a plumbing-heating-cooling service contractor, I was aware that under normal economic conditions in the United States, PHC service contractors typically only sell 70 percent of available revenue-producing tech hours in a normal, economic fiscal period, providing that their technical staff is properly balanced. 

This means I would need a 30 percent profit margin on my labor and overhead costs to recover those costs based on selling all my potential revenue-producing tech hours. However, I also knew I did not enter the business arena to break even. 

Some services don’t have material costs. Therefore, I would need to apply a higher profit margin in order to make a profit on my labor and overhead for those types of services. After all, it doesn’t make sense to take the risks associated with performing services for no potential gain. 

You might be thinking that on tasks with material costs, I would make a profit on the material costs. However, as I have stated, not all tasks have material costs. And I wasn’t in the supply house business, I was in the contracting business. 

So, up pops another unpleasant choice. Do I apply a higher than 30 percent profit margin to the cost of tasks with materials?

Taking into consideration that I deserved to make a profit on the material I sold as well as my labor and overhead, I had to stand behind the task in totality after it was completed, and to make my pricing methodology consistent, I decided to use, at minimum, a 40 percent profit margin.

The aforementioned task had a cost of $840 to my business to perform, inclusive of labor, overhead and material: $840 ÷ 60% = $1,400. It would give my business a potential $560 profit: $560 ÷ $1,400 = 40% profit margin.

Revenue-producing Tech Hours

Before you start thinking that I made $560, you must remember that my $840 cost was calculated by selling all my available revenue-producing tech hours all the time. Also, I had to stand behind our craft for the warranty period. 

The $840 calculated cost for the task rises to $1,097 when only 70 percent of all available tech hours are sold. This means I only earned a profit of $303. It’s a 21.64 percent profit margin — not 40 percent.

If the contractor who charged $800 for the task delivered excellence, his cost would have been close to ours because we were in the same area. If his cost were $840, he would have lost $40 if he sold all his available revenue-producing tech hours all the time. If he didn’t, he would have lost more yet.

This means that if he performed the task once every day for a year consisting of 244 workdays, he would bring in $195,200 annually while it cost his business $204,960 to perform those tasks. In turn, he would shortchange his business by $9,760 per task annually.

The contractor would need to make a great deal of money on the other tasks he performed to make up for the $9,760 shortfall. However, since he was already arriving at his prices in an erroneous manner, making up the difference was probably not going to happen.

If my contracting business only performed the task 122 times annually, not the 244 times he performed it, my business would bring in $170,800 for the task in a year. That’s less than he brought into his business. 

However, the performance of that task would only cost my business $102,480: $840 x 122 tasks. I would have $68,320 more than it cost my business to perform those tasks. Keep in mind that I would have done 50 percent less work than he had to do for those tasks.

I, too, could bring in more revenue for the other types of tasks my business performed. And I would have more time to do so since I only spent 50 percent of the work time he expended.

In theory, if I had performed as many of that type of task as he had performed in the same time he expended, I would have brought in $341,600 at a cost to my business of $204,960. The result would be a potential profit of $136,640. 

The pricing dilemmas and conundrums contractors face are self-inflicted problems caused by poor management decisions and the implementation of those flawed decisions. 

So, the next time you are faced with a problem/conundrum, look for a simple solution instead of compounding your problem by continuing to operate in the same manner. The solution is that simple. Two plus two equals four; it certainly equals no less or no more.