"If a customer wants a kitchen remodel done with a $30,000 budget, it's your responsibility to help them understand what they can expect for $30,000."
I get a lot of calls from people looking for help or advice because their remodel didn't go as planned. Either it wasn't the quality they expected, or their home is halfway through a remodel and their contractor is asking for more money because the project was underbid.
I've told this story before, but it deserves repeating: A woman called me complaining about the disappearance of her contractor halfway through a large remodel project. The contractor underbid the project, and was asking for another $100,000-or-so to finish the work. Upon further questioning, I discovered she borrowed money based upon the bid she received and couldn't borrow more to finish the project. When she told the contractor she didn't have the money, he abandoned the project and left her with a home that was still open to the weather in some places!
I've also received calls from homeowners wanting to know how they can fix substandard remodel or repair work. In some of these projects, the original work was done with such an extreme lack of care and quality that it would take more money to fix than if the project was done right in the first place!
This begs a few questions:
Was the project underbid? Did the contractor lack experience? Did the contractor simply not care? Or is it the MO of the contractor to bid and perform projects on the cheap?
I have taken my career and business seriously, and it really gets me fired up when I see scenarios like that, that not only give an undeservedly bad reputation to good contractors, but also leave a wake of emotional and financial distress in people's lives!
I'm sure many of you out there have experience hearing the same stories. If you're a new contractor,
it's critical that you understand how to run a business, and part of that is bidding your projects properly.
Managing expectations
So, what went wrong in the stories I mentioned? I think it's pretty simple to identify, and I can boil bidding projects down to one word: expectations. I believe as contractors it's our responsibility to understand the client's expectations—and at the same time, help the client understand what's reasonable to expect.
I'll give you an example: If a customer wants a kitchen remodel done with a $30,000 budget, it's your responsibility to help them understand what they can expect for $30,000. Your bid should ultimately reflect the scope of the project; don't waste your time bidding on a job where the customer has a $100,000 expectation, but only a $30,000 budget!
That sounds simple, right?
But it's not. Bidding on projects is a complex process because it is connected to so many other business components, including your specialty or brand, marketing, salesmanship, communication, subcontractor relationships, your experience and the experience of your employees, project logistics, customer expectations, your business infrastructure, tooling—and the list goes on. The longer you're in business, the more you have to pay attention to your business components and costs, because these need to be reflected in your prices to avoid scenarios above (or, just going out of business).
I highly recommend a great book called
Markup & Profit: A Contractor's Guide, by Michael C. Stone. In the worst of the economic downturn when I found myself needing to find ways to refine my business bidding process, this book really helped—but I've read it over and over again because as I continue to learn, something that may not have made sense before now does. It's like I read it with new eyes every time.
Two kinds of bids
With all that said, there are basically two types of bids: time and material (or cost-plus), and solid price or fixed bid. Even with a fixed bid, there are often parts of the project that just can't be priced
exactly at the time of bidding. These go into a budgetary list called "allowance items." In this method the owner can see the entire budget, knowing that some costs are variable without having to make choices that affect cost at this time.
Bidding on a remodel project takes time. It can take as little as a couple of hours, or in excess of 60 hours depending on the size of the project. You've got to call your subs to come out and view the site; there are take-offs to perform and send out to your suppliers for pricing; you've got design questions, type of material questions, and maybe you need to inspect certain areas of the home to determine the feasibility of executing the design.
All this is orchestrated in a way to flesh out project logistics, customer expectations, and ultimately a cost that accurately reflects the scope of work as a whole. Then, all this information should be written in a detailed proposal format that the customer can easily understand.
Formatting bids
I like to format my proposals to reflect the details of each phase of the project with a corresponding price for that phase only. Not only is this easy for the customer to read, but it also shows them how the project is conducted in chronological order. Formatting my proposals this way also helps me to easily reduce scope if the customer wants to eliminate some items to save money.
The main thing to remember with bidding on projects is to make sure all the costs that are needed to execute the project are accounted for. And also be sure your business operating costs are covered for that project. I don't care if it's a three-hour project! Everything has a relative cost to your business, and if you're not paying attention to that in your bids then chances are you're giving away work at no cost to others. But it does cost someone: you!
I'd be happy to answer any questions you have on this subject. As usual, your comments and feedback are welcome!