Should Contractors Give Discounts?
Should we as contractors give discounts on jobs?
I dare say we’ve all been there and done it at some point.
And if you did it for long enough, you probably no longer do them. ??
The story usually goes something like this.
You slide the proposal across the table. Or send it to them.
The client looks at it, loves the scope of work, but says, “Can you do it for 5% less?”
You fidget and a mental battle ensues.
It’s a nice big job.
You need the work.
Payroll is due at the end of the week, you need the cash.
…and…
“Yeah sure, we can do that.”
Life goes on, and you work like crazy throughout the whole season.
You do great work, your clients are usually happy.
You get to the end of the year, check your bank account, and you stress.
How on earth could it be possible that you’ve done more work than ever before, but have less profit?
Well…
What you’re really giving away
When giving discounts, the only thing you’re doing is giving away your profit.
And look! I don’t mind if you give discounts. It’s cool. As long as you aren’t going below your minimum profit target.
The minimum profit target should not be less than 10% net profit. (Not gross profit)
So…
That triggers the question of “How much NET profit is in my estimate?”
Many contractors genuinely don’t know.
If you’re discount giving takes you from 20% net profit to 10%, hey that’s your decision to make. Are you willing to do that?
But if your discount takes you from 10% to 0%, or worse, from 5% to -5%, that’s not going to work.
Can’t be doing that. It’s business suicide.
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If you don’t actually know what kind of net profit you have in your estimates, I’d look at your labor rate first. That’s usually where we get it wrong. Correctly marking materials up enough is usually not a place we screw it up.
Labor is where we get caught.
You can sanity check your labor rate at this man-hour rate calculator kind of like you can calculate a car payment online.
It’ll get you close. You can always dive down the rabbit hole and get more detailed and accurate on the free budgeting calculator, which is like the man-hour calculator on steroids. It also tells you exactly what your labor rate should be.
But here’s the point, that man-hour calculator or budget tool will tell you your “floor”. You can never charge less than your floor.
The market is the only thing that dictates your “ceiling”. You can always charge more than the floor until you run into the ceiling. e.g. the market telling you “no” on your estimate and its prices.
But a word of caution, before you say the market is telling you “no”, ask yourself if you’re selling to the right market or the right customer.
You’re not going to sell a Lambo to an Accord buyer. Just not going to happen.
What to negotiate on instead
Another super effective tactic I want to leave you with:
Always negotiate on the scope of work, (instead of a discount) never the price. NEVER the price. Never.
What do I mean?
Next time Mrs Jones asks? for a 5% discount, say:
“Sure, I can help you shave 5% off. What would you like to cut back on? We could remove the lighting for now. We could simplify the design to save labor. We could use a cheaper product…”
Get it?
Many times people will ask you for discounts. They don’t know better. Our society is used to it. They don’t mean to ask you to work for free.
But there are only two possibilities when they ask.
So, the next time a client asks you for a discount, do this:
Imagine your family all sitting around a table with no food, looking at you.
That’s what’ll eventually happen if you keep on working for free.
Working for slightly less profit and working for free are two different things.
But in this industry, the profit margins are thin enough that it usually means working for free.
Don’t fall for it.
Serve your family and your team first.
Weston Zimmerman
SynkedUP co-founder and CEO