By Tom Stephani. In Life's Little Instruction Book, author H. Jackson Browne notes: "In business and family relationships, remember that the most important thing is trust." When you think about the enormous financial and emotional investment that consumers place in our hands as builders, it is no wonder that when we fail to build trust, we fail to satisfy the customer, and we fail to make a fair profit on our work.
One of the easiest ways to build trust with clients is to be completely open about the financial aspects of the construction of their home. "What!" I hear you shout. "There's no way that I will let my clients see how much I am making." Many builders feel that if they reveal costs and their margins, the owner will use that information to squeeze all of the profit out of the job.
In my experience, the opposite happens. When clients are educated about the real costs of construction and how you must be compensated for your efforts, their comfort level increases dramatically.
It takes a lot of suspicion out of the project's pricing and gives the clients an opportunity see where their money is being spent. Plus, with many owners now providing construction financing on custom home projects, it is nearly impossible to keep this information from them anyway.
The right footing
Many builders find themselves in the unenviable and embarrassing position of explaining their way out of inflated line items in a cost breakdown or sworn statement at the start of a job. This situation can lead to a communication breakdown, an erosion of profits, and a start down the slippery slope of a bad relationship.
Instead, design your sales presentation around the "open book" concept. You will surprise customers when you tell them you will reveal all construction costs and your margin during the bidding process.
Note I said show them; don't give it to them. In fact, you shouldn't let them have a copy of your bid until they commit to building with you. Create an easy-to-understand format for your cost breakdown by laying it out in sections titled Start-Up, Land & Financing, Excavation & Foundation, Rough Carpentry, Exterior Finishes, Mechanical, Interior Finishes, Allowances, and Builder Margin.
When you lay out the costs so that they are easy to understand, the client will appreciate your expertise and organization. It will also help to dispel a widely held belief that builders make 30 percent profit or more on a custom home building project.
The water gets a little muddy here if you or your company provide some of the job's labor, such as carpentry. Treat any work other than management and supervision of the job as you would the work of an outside subcontractor. Include your labor, material, and margin in that line item.
The question then becomes, can you (or should you) charge margin for managing your own people--a double charge of sorts. Probably not. Whether you reduce your overall margin or only charge margin, items on the remaining line will be dictated by the market and the customer.
The "P" word
When discussing payments to your company, use the word margin rather than profit. Don't use the common term "profit and overhead" either. To most people, profit means the money that you put in your personal pocket--as in net profit.
None of us really knows whether there is going to be any net profit in a job. Factors such as volume, velocity, overhead, a huge liability insurance increase, or a big estimating blunder, can quickly turn a planned profit into break-even, or even a loss, at year-end. Of course, we should price our homes so that each one has a planned profit--but there are no guarantees.
Rather than explaining the treacherous nature of the business or even the difference between gross profit and net profit to customers, call the fees that you receive margin.
For example, don't be embarrassed to tell the client, "If we do a good job for you, Mr. and Mrs. Jones, along with our 11 other custom clients this year, we plan to make a reasonable net for our efforts." After all, this is America. (Standing on your desk and waving the flag is optional.)
To soften the large dollar figure in margin, which even a modest and fair percentage can create, consider splitting it into its component parts. Smaller dollar figures in line items, such as supervision, office overhead, insurance, field overhead, and warranty, as well as a small profit, will go a long way to justifying and explaining your margin. Some builders will move supervision and field overhead into the body of the cost breakdown to further separate them from costs that cannot be specifically tagged to a particular job, like office salaries, for example.
When dealing with custom clients, set and maintain the realistic expectation that you must make a fair return for your time and expertise. The attention that you can give to the project before, during, and after construction is directly related to the margin that you receive.
There is no free lunch. Our clients know this. When you are honest, and open their project's books, you will begin to build a trusting and profitable relationship.
Tom Stephani is president of custom builder William Thomas Homes in Crystal Lake, Ill. He is also a nationally recognized speaker, trainer, and consultant on residential construction issues. Reach him at firstname.lastname@example.org.