Michael Stone is the author of Markup and Profit: A Contractor’s Guide Revisited, Profitable Sales: A Contractor’s Guide, and the DVD class “Profitable Estimating.” He has more than five decades of experience in the building and remodeling industry. Michael offers training and coaching and can be found at markupandprofit.com.

Why Transparency Is Bad for Business

Are you tempted to reveal your costs to homeowners? Think again. 

August 08, 2018

Surgeons, attorneys, and other professionals aren't expected to open their books for you, so why should contractors be any different?

I’ve read many articles telling me that the best way to sell construction services today is by being transparent with your pricing. The argument is that owners are more sophisticated today, and they know what things cost. “Price is the most important aspect of the sale,” they say. “When you’re fully transparent about how you price a project, you’re showing that you can be trusted.”

“Transparency” is the usual buzzword, but it’s also called itemization. Itemization is providing a line-by-line breakdown of what you’ll do and how much you’re charging for each item. 

There are multiple problems with this approach, and I’m going to outline them here. 

A Focus on Price

When you offer to be transparent in your pricing, you’re focusing on the price of the project. This, in turn, tells your prospective clients to focus on price as well. You’re also offering to share details that are considered proprietary information in any other industry.  

It’s absurd to believe that a doctor who would tell me everything about their pricing is the best surgeon. If my attorney suggested that he was the best attorney in town because he’d open his books for me, I’d find another attorney. How does disclosing all of your pricing information make you the best contractor to build their project?  

The truth is that most homeowners don’t consider price the most important issue when choosing a contractor. They want to know you’ll do the job right, in a reasonable time frame, and at a fair price.

How do you show a potential client that you’re the one for the job? By listening and asking questions. The more questions you ask, the more they’ll see that you care about the project, and that’s when trust begins. Asking questions isn’t telling them how much you know. It’s finding out what’s important to them.

Most owners don’t consider price the most important issue when choosing a contractor. They want to know you’ll do the job right, in a reasonable time frame, and at a fair price. 

The more detailed you are, both in your presentation and in your contract, the more likely you are to close the deal. Price transparency has nothing to do with it. Project transparency makes the sale. 

I believe many things should be disclosed to clients. Your contract should include a detailed scope of work, and that’s why one- or two- page documents don’t cut it. But your cost structure is proprietary, and when anyone asks for an itemization of your costs, overhead expenses, and profit margin, sorry—that’s going too far. That’s no one’s business except yours.

If clients want to know what items cost, they can visit one of the big box stores, prowl the aisles, and look at price tags. If they want to know your overhead expenses, they can start their own company and find out.

A Numbers Game

It especially disturbs me to read about the need for transparency in industry magazines. (Professional Remodeler, “The Big Reveal,” May 2018, and “From Opaque to Clear,” Oct. 2017) You’d think that publications for the construction industry would be looking out for contractors. Instead, they often seem to promote transparency as the best thing for consumers. Their thinking appears to be, “If we give homeowners everything they want, contractors will win.” If only that were true. 

In reality, contractors who claim to be transparent are usually playing a numbers game, moving what is often considered overhead into job costs. Clients can see the details on specific job items, but the remaining costs of the project are far from transparent.

Price is not the top priority for most clients. Too many contractors make price their number one priority. They’re hurting themselves, and they’re hurting the industry. Giving potential clients a pile of numbers doesn’t inspire confidence. Being apologetic about your price or your method of pricing doesn’t inspire confidence. 

The best type of transparency is presenting a clear and detailed definition of what you’ll do, including a clear sales presentation and a detailed contract.

Clients want to know that you will do the job they want done, in a timely manner and at a fair price. They are hiring you to work on their largest financial asset, and need to know you’ll do it right.

Transparency Done Right

The best type of transparency is presenting a clear and detailed definition of what you’ll do. That means walking through a sales presentation that explains what can be done within your client’s budget. It involves writing a detailed contract that includes a clear scope of work. That’s the type of transparency that I can fully support

Comments

Comments

When a customer asks me to detail my costs & profit, I ask them if they do the same thing with the purchase of a refrig. Do they demand to know what it cost GE to make a refrig? I doubt it , I do not share a break down of my cost sheet. I also figure that if they persist they will be a pain!

It's been this way for a long long time. Price is 4th on a list of five. First, you need to define the scope of what they want. Second qualify yourself as the company that is qualified and brings experience and expertise. Third is to qualify the products and explain the difference between the cost of acquisition v/s the cost of ownership. Define price estimating cost for them. Fifth, Explain the outcome and how it matches their expectation and the benefits of having this done while asking for their OK to proceed. There are many variations of the same footprint. Jim Pigott. Easier done that said when you have confidents.

I bought 14 window blinds a few months ago at a big box store and paid $45 each for two pieces of plastic, some string and corrugated paper. While installing in our home I wondered what the markup on those things had to be...200...300...600%? I’ve never seen or would ever expect to see info on the tag of those blinds that shares markup and profit. If people want to spend that on paper blinds they will. It’s fear that drives contractors to give up this info, and I’ve experienced that myself. It has been a discipline to live by the numbers and not the heart and it continues to be a challenge but life has to be rooted in the truth not feelings. The truth is that if the numbers tell you your mark up, then that is what you charge no matter how you feel about it or what your client is going to say. I’ve gone the “transparent “ route out of fear and it’s always a shell game which Mr Stone stated in the article. We can’t afford to sell out.

First off, I have great respect for Michael Stone. There are a number of luminaries in our industry, and we're all working towards the same goals; improve it. That said, this article misses the point of the Transparency article, which focuses on a system I've developed and deployed for a number of years in my firm. It isn't surprising. The industry resists change in certain areas. I've found the more defensive the reaction, the more emotional the reaction, the greater the knowledge gap. There are some hard truths out there, and we can spend as many hours chatting on forums that support our silo of thought, and harden those walls of righteousness, but it does little to change the facts.
Itemization is not transparency. Don't confuse the two.
Retail sales is not Remodeling or Building. They follow very different rules.
Selling on price is never a good idea unless you are dealing in volume.
Volume base pricing cares deeply about pennies. I've yet to meet a remodeling contractor who's operating at that level of detail or excellence.
Remodeling is largely a SERVICE industry.
Remodeling and Building sell a PROCESS and an ASSEMBLAGE of parts.

Attorneys are very much transparent. They charge an hourly rate at which they bill, typically in 5 minute increments. They track every action, and bill accordingly. Your bill typically will carry a detailed log of time spent, the activity it was spent on, and the individual who spent the time, and their specific bill rate.

Doctors and Surgeons are also very transparent. They are required to record and produce, when requested, an itemized accounting of every single element involved in the procedure. The cost of aspirin, a box of tissue, a syringe, bedding replacement, etc. It is all tracked in excruciating detail and billed.

For any of the contractors in the insurance restoration industry, they are already very familiar with big estimating software platforms that produce highly detailed estimates. For anyone working on publicly funded projects, especially large projects like stadiums, which are audited, they are also very familiar with the requirement to be transparent.

The process of estimating accurately, accounting for your overhead accurately, accounting for your real costs of construction accurately, and then recording, tracking, and refining is all about the fitness of your company. It has absolutely nothing to do with your sales process. If you can't accurately identify your profit independent of your actual overhead, independent of your project specific management, administration, and logistics, then this all sounds scary. The primary reason to do this is for internal health.
SALES - I make the argument that in today's world transparency is appreciated and desired. I'll argue that by in large Remodelers are treated with caution, concern, trepidation, worry, and fear of being ripped off. Remodelers and Used Car Salespeople are at the bottom of the 'trust' barrel. This is the reality we've created for ourselves in our poorly regulated and poorly governed industry. If your know the odds are against you, and you know you've got to fight madly to build and maintain trust, then I'll argue you want every available tool at your disposal. A sales coach who tells you, you've got to sell on emotion and build the trust, is absolutely right. You are starting at zero, and you've got to get them up to at least a 25 or a 50. Where your sales coach is dead wrong, is that the trust should be blind. The 'black box' of estimating is the number one fear for clients. Read any comments on FB or in a non-industry magazine, or just ask the question at a party where no one knows you. People get three estimates, because they have been taught not to trust you. And with good reason. Most remodelers do a sh**y job of estimating, and many do it intentionally. "Expect the job to cost 20% more than the estimate" is a commonly read sentence. That is the public's reaction to our industry not doing our job well.
This is where Transparency becomes your friend. Your estimate is thorough and detailed. You have nails, hinges, toilet ring, toilet seat, caulking, site protection, meetings with inspectors, meetings with clients, quality assurance, material ordering, material inspection, material delivery, subcontractor inspections, subcontractor management, invoicing, processing, etc. Do your competitors? If you are competing with other contractors for a project and they submit a single number, or a number with 5 or 6 categories, and you show up with a 20 page detailed estimate that shows quantity, price per sf, numbers... and you are more expensive than the others, you are in a much better position to get the project. "why is your number higher?" Tell them to ask the other contractors to explain how their project is so much lower. Do they have site cleaning? Did they account for everything? What happens if you change a material? Is it clear what is allowanced and is it accurate? Do they have mark-up buried in the product? Why is the faucet that Kohler says should be $325 costing $515? Here is another scenario. We are a Design+Build+Architecture firm. We design a kitchen, and 75% through the design process we begin to estimate it. When we meet to look at material selections we also update the client on where we are with price. Sometimes we are tracking just fine. Often the client has added features that pushed the project past their original stated budget goal. We present a single number in the update. "Susan and Derrick, we've done our preliminary estimating and we are at $79,443.91 at this point. We're a little over the 70-75K target, but we've got the grain matched quarter sawn pantry that you added in there as well. " Seven times out of ten, the client is fine with it. The other 30% of the time the client asks, "How did we get there? Is there anything we can do to bring it back down? You gesture to the 20 page print out sitting in the middle of the table next to the drawings and the materials you are going to discuss next. We can probably pull some things out. Flip it open so they can see, go page by page, stop at plumbing and share the number, stop at electrical and share the number, get to the cabinetry section, they see $13,331 in cabinets. Go to your project binder, pull out the cabinet quote, it matches, go to the pantry section, there is $3,440 for the extra cabinet, and a $1,727 grain matching/species charge. In 30 seconds you are dispelling the myth of the black box estimate. You are pulling back the curtain, opening the hood, showing them the part, and your part supplier's quote. At this point they could choose to remove the pantry and the only thing you'd need to do, most likely, is remove the one line item. You might also go into your labor numbers, which you share, and decide you need 4 fewer cabinet install hours as a result. Your management numbers don't change, your overhead numbers don't change, and recalculating your profit (if it is EXPRESSED as a percentage of project cost) takes 10 seconds. There is no need to go away to "rework the numbers" you did it with the client, in front of them, no smoke and mirrors. They feel like they have some control, they feel more trusting, and they appreciate the detail and accuracy of your process. This is nothing like their last experience or the stories they've heard. YOU ARE SELLING TRUST AND EMOTION through the vehicle of TRANSPARENCY.
I'll reiterate. The first reason for transparency is internal. 1.68 or whatever you use is sloppy and impossible to track and mange. The second reason for transparency is so that WHEN you have a project that needs the extra boost, you've got it. The third reason for transparency is in the even that your client doesn't pay you and you end up suing them, you've got the contract with everything accurately estimated and billed.
Hope this helps.
Michael

In my years in the industry, I have heard both side of the transparency coin. My question for those in favor, what do you say when a client questions the amounts you must include for all the overhead? We are a larger company with expert people in many roles. They provide a great service to our customers by training our staff. Would a kitchen client like to pay for the OH expense of our sales trainer? How much would they pay? How much are they willing to pay for our Marketing Director? She is an expert and her efforts got us to meet with the prospective client, but there is no benefit to the client in her salary and efforts once we meet the prospect...no job related benefit...I think people want a good company and cannot comprehend how much it costs to have the expertise and OH it takes to run a big company. If you can shed light on where such items go on a transparent quote, I would appreciate it.

Andy, I think this is an excellent question. You are correct. The overhead in a company like yours (or mine) is going to be more than what it is for a chuck in a truck or smaller company without the extra people it takes to keep a business running. It is a risk, that a client could balk at the OH number, but if you're that far along with the design and estimating process, I suspect that they are working towards an overall budget and have a sense of what the project will cost already. We find that our clients have an eye towards the big picture (the budget of the addition is $450-500K and if our estimate puts is within that range they feel good), and seldom go through the estimate line by line. When the design has pushed past the budget, then we do look to the estimate, but they typically are looking at specific cost areas connected to design features, and may take only a passing glance at the OH and Profit lines. We put our OH at the end of the estimate right above Profit. I've seen other versions that put it closer to the top, but I like to lead with direct costs so the first thought/impression isn't OH. Our profit % is lower than our OH% on most projects, which I suspect is comforting to the clients. So the short answer is, yes, you are open to potential questioning about your OH. I think as long as you don't try to justify it, and rather state it, you are in a good place.

Great article! In my more than 30 years in the building industry I have found that the clients who put price first over every other aspect of the project are the ones you will have the most trouble with. Yes, price is important and letting your clients know what some of the cost will be is part of the process but being "transparent" in all aspects of the proposal or estimate is just not possible or smart. Plus the fact that the previous administration made the word "transparency" a dirty word.

Add new comment

By submitting this form, you accept the Mollom privacy policy.
Overlay Init