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Mark Richardson, CR, is an author, columnist, and business growth strategist. He authored the best-selling book, How Fit Is Your Business? as well as his latest book, Fit to Grow. He can be reached at mrichardson@mgrichardson.com or 301.275.0208.

How to Maintain Margins When Projects Cost More

Use these guidelines to protect your profits 

August 13, 2018

One dynamic that’s created real challenges for remodelers today is the increase in project costs. I can’t count the number of times that I’ve heard, “We just cannot do a bathroom for less than 40k or a kitchen for less than 60k.” If you have a prospect with a budget that’s 20–30% lower than that, then there is a lot of wasted time and stress trying to make the project work. 

Most of you probably know why things cost more today, but rather than arm-wrestle your clients, you might try moving to a “trusted advisor” or wealth manager role on the subject versus a remodeling expert or project peddler.

Why does a 50K project from 2015 now cost 70K?

1] Material costs have gone up substantially. Over the past three years materials increased 5–9% per year. If this was a one-time increase, 5% does not seem like much. However, looking at it across a three-year time frame, 15–27% is meaningful. 

2] Trade contractors have increased prices. Most subs are small businesses. When times are tight they lower prices to stay busy. In a strong market, their prices will skyrocket. A friend of mine is paying 50% more for plumbing and electrical than he was three years ago.

3] Labor rates have gone up. With low unemployment and a significant shortage in skilled labor, it’s obvious that labor costs will increase. Look at what you were paying a lead carpenter five years ago versus today. Many remodelers are paying 30% or even 40% more across that time period. When you do the math, it’s easy to understand why the 40k kitchen is now 60k, or the 30k bathroom is now 45k. 

The question is, however, are you increasing profits as a result of this dynamic? Most remodelers are not. Most remodelers are getting squeezed. 

Even though demand is high, most remodelers are worker harder for each sale. 

What Can You Do?

Even though demand is high, most remodelers are 

working harder for each sale, resulting in a longer process and more internal costs. Many are tweaking markups and margins to get the jobs. While top lines are increasing, bottom lines may not be following suit.

With costs going up, you might estimate a project at 50k but by the time you finish it has grown to 60k. This is tough to explain.

Here are a few tips to address these unique challenges.

1] Assume that costs will go up. When estimating projects think six months forward, not now or in the past.

2] Educate the client. Share what is happening with costs in the first meeting. Try to tie it back to the trade wars and unemployment rates. These are things they read about and will more likely understand.

3] Lock in price parameters with subs and suppliers on a quarterly/semiannual basis. Explain to them that this is a partnership: If you don’t get the project, they won’t either. 

This is a critical subject in today’s market. It’s important to find ways to maintain your profit margin in times when you should be making more money, not less.

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