Volume 38, Issue 2, February 2003

theFarnadyFiles

The Fifteen-Percent Solution?
    What It Takes For Us to Make or Break a Profit

by Dez Farnady

Fifteen percent may not sound like a lot, but it depends on what you are counting. The latest 15 percent I have seen rear its ugly head is the concept that the customer, the general contractor or the government can limit your profit by contract to 15 percent. They require that you bid the job with your books open and your costs and profit showing. What is that all about? I have never seen a contract that restricts your right to lose more than 15 percent. 

Making a Profit
Fifteen percent profit may be a reasonable margin in some business enterprises or maybe in the form of dividends where even 15 cents per share (a lot less than 15 percent) may be nice, but that is different math. By the time a large corporate entity is done with juggling its books to show the stock holders that 15 cent per share dividend, a lot of ďexpensesĒ have been incurred, including the CEOís multi-million dollar hideaway in the Bahamas. For the glass shop or the glazing contractor there are not a whole lot of places to hide the money, whether itís a profit or loss. The math is much simpler and the extended neck is hanging much further out. You canít stick it out too far because too much is riding on the head that is attached to it. 

In its simplest form the glazing contract estimate includes only three things. The first job item is the cost of labor and materials specifically allocated to the job at hand. The second item is the allocable portion of the overhead required to run the business. The final item is what we do the job for in the first placeóthe profit. Now the math can get as fancy and as sophisticated as you want it to get, but I am not smart enough for that. You have tools, trucks, rent and taxes, insurance and deductible expenses, depreciation expenses and the bar tab and whatever else may come up. Ultimately, it comes down to what is left at the end of the year. 

So Much for 15 Percent
The way we get to what is left at the end of the year is by working on all three components. You can keep the job costs down by watching material cost and labor. You can keep overhead down by careful management, watching lunches and by hiring a good accountant. And you can always keep your profit down by committing to the 15-percent solution. At that rate jobs where part one and two were not managed perfectly, the lack of number three will put you in the unemployment line. So much for the 15 percent. 

Ultimately, it is no oneís business how much money you make. If they donít like your price they can use the other guy, unless of course they like your product and service better. This is why there is an opportunity to get multiple bids. If I choose to try to live with a 15-percent profit, it is my problem. On the other hand, if my profit is 100 percent, but you like my price and service better than the other guy, why worry about how much I make? 

It is pretty clear that there are companies and business entities that try to maximize their profitability by minimizing the profit of their subcontractors, or put in low bids and get jobs at the expense of their subs. There are also subcontractors dumb enough to fall into the trap, and like my grandpappy used to say, there is no law against stupid.

The bidding process is established to allow competitive pricing on an apples-for-apples basis. The bids may be accepted based on price or quality or reputation or personal and even family relations and we all live with our decisions and let the chips fall where they may. But nobody should have the right to restrict our ability to make or lose money. We are entitled to get rich or go broke based on our own abilities. 

 

DEZ Dez Farnady serves as general manager of Royalite Manufacturing Inc., a skylight manufacturer in San Carlos, Calif. His column appears monthly.


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