Second, as a contractor, you have an obligation to provide a customer with a project that meets his desires and budget. How can you do that without giving him a guaranteed price for the work? You can't.
I have been estimating construction projects for 14 years. Maybe I am not too smart, but I have yet to be able to consistently provide customers with accurate ballpark estimates. I use cost tracking to help accurately estimate projects and I only enter into a contract after I have thoroughly estimated their projects.
Lump Sum Pricing Helps You Track Your Costs More Accurately
Time and material projects do not have accurate budgets. There’s no need or incentive to be accurate because with time and material all you do is keep charging the customer ― for everything. That sounds very appealing, but this lack of accuracy can hurt other parts of your business.
Cost tracking, however, not only allows you to create accurate estimates, it lets you track costs against budgets so you can have more accurate budgets.
Time and Material Opens the Door to Second Guessing — and Dissatisfaction
Third, time and material projects allow the customer to second guess the entire project. They will review invoices, review the time your company spends on the projects ― they will review everything.
They will wonder why they are billed for overhead when nobody is at the project. They will ask why they received a bill for delivery of material. They will want to know why they are being billed for sheetrock repairs when they already paid for it to be installed.
Do you really want to open that door?
In addition, with so many contractors doing time and material contracts, customers are being asked to make decisions on options and changes without knowing how that decision will affect the final price. Instead, projects just keep getting more and more expensive as they proceed.
No wonder customer dissatisfaction is so common in our industry. Whenever a person spends more money than he anticipated, he gets upset.
Lump Sum Pricing Increases Efficiency — and Profitability
The final reason for using lump sum contracts over time and material contracts is so you can make more money.
Your project will not cost more, but because you are more efficient, you can make more money.
Ask the best contracting companies in America how they do their projects and lump sum will win hands down.
It will take some time to convert to the lump sum process, but in the end, you will have a much better company and be even more profitable. You will also help improve the image of our industry.
Erik Anderson, CGB, GMB, CAPS, is vice president of Anderson-Moore Builders, Inc. in Winston-Salem, N.C. He also currently serves as vice president of the Home Builders Association of Winston-Salem. For more information, contact Anderson via e-mail.
The NAHB University of Housing Offers Designation Programs and Other Courses
The NAHB University of Housing offers CAPS, CGR, CGB and a variety of other professional designation programs and business management courses that set builders and remodelers apart from the competition. To learn more about NAHB’s designation programs, visit www.nahb.org/designations. For a complete list of all current education offerings, click here.
Watch for a New Look for Nation's Building News
Coming next month, Nation's Building News Online will have a new look and even more of the information you need and want — like the latest lumber prices, interest rates, floor plans, builder tips and industry news and information. Building news that will make your business click.
The new NBN will arrive in an even easier-to-read and more “user-friendly” format — with color-coded category tabs to help you locate information of interest to you quickly and weekly charts to give you an instant read on important economic information like starts, sales and prices on framing lumber, OSB and plywood.
Subscribe Your Employees to Nation’s Building News — Chance to Win Digital Camera
Subscribe your employees to Nation’s Building News Online. It’s free, easy and NAHB members who sign up three or more employees will be entered into the "Make Your Business Click" contest to win a digital camera. To learn more or sign up your employees, click here.
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