by Ryan Spencer for SprayFoam.com
On the mind of most every contractor is one everpresent issue–the next job. It’s a familiar dance: the perpetual search, the due diligence, and the bid. Every aspect of landing a job requires substantial effort on the part of the business owner and sales team in following leads and properly assessing prospective jobs. Bidding, however, is a tricky matter, as it establishes project budgets to meet or beat. Complicating matters further is the one simple truth everyone knows about a budget: it will be wrong. So, the real issue is ensuring that the product and crews perform as predicted in the bid (or as closely as possible). You want to do everything you can to get the job, but you also want to keep as much money in your pocket as possible, as discussed in the previous Editorial Spotlight on Spray Foam Business. It’s a delicate balance, but with some of the considerations outlined below, you can become more profitable on every bid. MATERIAL COSTS After the bid and award, the easy part is over; scheduling, planning, and ordering materials and supplies usually follow very quickly. So let’s be clear: material costs can make or break your job. It’s just the nature of the product. In keeping your material costs under control, a bid must be based on accurate measurements and incorporate a manageable yield projection. Concerning initial measurements, applications in new construction benefit from readily available electronic or print blueprints with detailed dimensions. However, keep in mind that it’s not uncommon for plans to change, so it’s crucial to put in place a contingency protocol for alterations to the scope of work (generally, this should involve written authorization). As for retrofit applications, contractors will most likely take measurements themselves. Tape measures can do the job, of course, but opting for a laser measuring device can be a valuable tool for ensuring accurate measurements.
When it comes to projecting yield, contractors are faced with balancing a conservatively low estimate that risks leftover material, with an aggressively high estimate that risks insufficient material. Numerous factors affect material yields, from ambient temperature and substrate properties, to spray technique and application thickness. Weather projections and historic regional climate trends can help with environmental factors, while comprehensive training and past performance assessments can mitigate human factors. Also, let’s not forget that different manufacturers claim different yields, so it’s important to first understand what your target yield is. A competent supplier can help you with achieving the highest performance from their product, although you should consider if the requirements for maximum performance are worth the potential cost in time and resources.
Also, check to see if your equipment is able to run at the parameters advised by the manufacturer. Mechanical factors like sufficient hose insulation and the ability to attain consistent pressure at the proportioner will determine whether or not a manufacturer’s claimed yield is attainable. All of these factors are important, and it’s crucial to remember that material costs are 40-60% of the bid, so a 10% improvement in product performance can result in a 4-6% change to your bottom line. In many cases, this small change can change a failing business into a successful one. ADDITIONAL COSTS Beyond the significant cost of material, smaller costs can cut into profitability if not managed properly. Bids should include all the parts and accessories that could conceivably be used during the job: safety gear, plastic, tape, spare gun parts, air and fuel filters, etc. Additionally, overhead like insurance, licensing, and office/ shop costs should be included. Everything that isn’t accounted for ahead of time will eat into profits.
Although travel costs, namely fuel expenses, can be significant, they are generally predictable, given contractors know the locations of prospective projects. A caveat to that premise would be an unforeseen event like a severe traffic jam that contributed to fuel costs exceeding an initial estimate. Job site delays also can lead to excessive fuel costs, especially if they require extra days on, and extra trips to, the site. Opting to incorporate a “delay expense” to fuel costs can offer a degree of protection, but another strategy to mitigate potential delays is the ability to increase production with multiple proportioners. Yes, it’s a substantial investment, but every day not spent on the job site is a day without travel expenses or labor costs. LABOR COSTS Labor costs are perhaps the trickiest to manage, simply because of the avenues, human factors, and regulations involved. Basically, there are two options: hourly rates and piece rates. Hourly rates are more common and are generally easy to track and record, but they can be riskreward, to a degree. If your crew is consistently productive, you stand to gain from efficiencies when paying an hourly rate.
On the other hand, any drop in productivity, for whatever reason, will dig into profits. This program is effective if the crew is self-motivated, and also offered incentives for quality, timely work. Piece rates can offer some protection against reduced productivity, as you’re only paying for the work completed–nothing less and nothing more. Essentially, piece rates protect profitability via predictability. However, there’s a catch: in the same way piece rates offer little downside with regard to profitability, they also offer little upside. In other words, any operational efficiencies gained or productivity enhanced by a piece rate program will be passed on to employees, not your bottom line. So, although piece rates can protect profits and motivate employees, they shouldn’t be considered a profit-enhancing option. Furthermore, piece rates can also lead to poor work quality if projects aren’t managed properly.
A combination of compensation for installers can be an effective solution to manage costs and maximize profits, as a crew should be rewarded for eliminating waste and maximizing the yield of the product. The process may involve more preparation of the substrates to be insulated, as well as more attention to materials and equipment, to provide for the best mix at the gun and the highest quality cell structure possible. Slower may be better, and less may be more. In any case, wages are subject to federal labor regulations, specifically the Fair Labor Standards Act. Generally speaking, the FLSA establishes minimum wages for regular workweeks and overtime, which are fairly easy to determine under hourly rate programs. For piece rates, it’s slightly more complicated, as hours must still be tracked. Even for piece rate work, overtime still comes into play.
For piece rate overtime, there are two options: paying additional compensation at half the effective rate of a given workweek for every overtime hour worked, or reach an agreement with employees to pay 1.5 times the normal rate for each piece completed in overtime (of course, business owners should seek professional advice with regard to their company’s particular circumstances). MARGIN So, when it comes to finalizing your bid, you simply add up your costs and tack on a margin, right? Not exactly. Simply adding, say, 20% to your costs is really your mark-up, not your margin. Because margin is mark-up’s proportion to your bid price, rather than your costs, your margin will always be less than your mark-up percentage. In other words, to truly hit that 20%, you’ll have to increase your mark-up to 25%. So, a simple clarification of terminology can instantly improve your profitability, although that’s not the only strategy. Suppose your operation becomes more efficient over time, and you’re able to reduce costs on a given job, all else being equal. You still earn a 20% margin, but because your costs are lower, you’re putting less money in your pocket; you’re simply giving the market a price-break. To prevent this, always take a second look at your bid and consider a few things: your customer’s perspective, the market rate, and the value of your efforts. Maybe you nudge that bid price up a little, or maybe you increase it significantly. Either way, your business is only as profitable as you allow it to be.