What? Make a profit just because a client needs to change the contract? That's just taking a liberty!
Part 2 of 3
Link To Part 1: How Builders Can Learn From Jetstar
Link To Part 3: Markup Versus Margin: How Builders Are Being Ripped Off!
Now, you would expect a client to think like that right?
But, this is the response we get from BUILDERS when we talk about variations!
It's almost like they expect to succeed in business without making money from clients. But, hold on! Before all those comments regarding integrity and 'over delivering' start flying in, let's start by dispelling a few myths.
"If I do it for free they will be a happy client and refer their friends."
No they won't. Every time you give something away for free it raises the question "what else should I be getting?" Or, "How much fat did they put into the price to cover this?" You simply cannot 'buy' a happy client. It never works.
"I can't justify the cost, they'll get upset and it will destroy the relationship."
What's happening here is the builder is taking ownership of the problem. It is very important that you never allow yourself to become part of the problem, only the solution. The choice sits with the client. It's your job to give them the options, along with some professional advice (something that is not cheap and you are an expert).
"It's wrong to make money out of variations."
Builders Making A Healthy Profit Is Good For Both Sides
If you are a client reading this then you probably think that no builder thinks like that. Well, unfortunately they do. Those builders work hard, get taken for granted and never end up creating a business that will look after them later in life. Builders are in business to make money. They make money from building homes. The good ones make money and grow their business helping more and more clients to create the home of their dreams. The bad ones lose money, survive on cash flow and let their clients down. Eventually they give up and become angry and bitter about the whole experience.
DO NOT CONFUSE THE TWO. Making money is good for builders and good for clients. The trouble is, there are not enough builders making money which is why we have so many unhappy clients in the industry.
What Is A Fair Margin?
If you are a builder, then there is a 97% chance you are already dealing with at least one variation on every build. So what should you charge your clients in order to:
- Be fair?
- Deliver value?
- Avoid losing money?
The first option is to insert an administration fee. Perfectly reasonable as it is the admin that chews up a lot of time for builders and time is money, so it makes sense to cover that expense. The larger builders charge $500 upwards, but any sort of admin fee is a big step in the right direction. It also gives you a 'Goodwill Option' where you can write off the admin fee at your discretion, but still earn a margin on the variation itself.
But what about the actual percentage? Well, we have never met a builder who is charging too much! Builders dislike variations because there is no money in them. But yet they fail to increase the margin in their future contracts to make it worthwhile.
By default, some contracts suggest 20% margin if no figure is stated.
That's Not Enough!
Twenty percent does not cover the work involved preparing the paperwork, let alone making a profit out of the extra work you are agreeing to do. We suggest a 25% margin as an absolute minimum.
"If I put 25% margin in the contract, my clients would never sign."
Quite frankly, that is bulls**t.
Have you ever tested it?
Well we have, and we can tell you that even the most price-conscious, highly detailed, nightmare of a client rarely objects to 25% being put into a contract. They tend to focus on the price and not items like a builders margin on variations, or interest due on overdue amounts (which should be increased to 24%).
The Truth Is, It's About Quality And Service
If you do have a client that objects to the 25% then you calmly explain the process, what's involved, why you charge for admin and what your competition typically charges as an admin fee. This is not about ripping anyone off, it's about setting expectations early and ensuring that you make money out of the contract in order to deliver exceptional service. Once you can demonstrate value, your prospect (soon to be client) will be happy. Why? Because they are no longer interested in price, just quality and service.
That's right. After spending the last 6-9 months haggling with you over the price in the contract, the only thing they now care about is service and quality! (And that is why we train builders to not to compete on price. It's only ever about price if that is what you choose to compete on.)
But here is the kicker, and something to think about over the next week.
If a supplied item is costing you an extra $1,000 and you have a 25% margin in the contract, what is the total price you charge the client?
There's no time now to fully explain the margin calculation here as we need to go into a bit more detail regarding why it is misunderstood and how builders are being ripped off due to the 'accepted norm' in the industry.
Successful Builders Understand This
What we can tell you is that the big players understand the difference and that knowledge alone will change the way you do business for ever!
Click here to download the #1 checklist for understanding construction financials.