Pricing for profit

It’s nothing new that different industries and sectors can learn from each other.

In my previous life as a management accountant with a major UK food retailer we learned from ‘Just in time’ supply chains in the car manufacturing sector. Modern computing and more famously non-stick pans were by-products of the space race. So how about accountants learning from builders?

Something which builders tend to do better than accountants is pricing their jobs. They put a significant amount of effort into it. They really think hard about what is involved. What time will be spent by people with different skills and knowledge, what materials and resources will need to be deployed, what stage payments are appropriate, what the possible risks are, what the timeline will be and so on. And the price. Yes they think very hard about the price.

The detailed scope of work and price are presented in a professional proposal and guidelines are included for ‘Variations’. These being the steps to be followed if something unexpected crops up, outside of the anticipated scope.

All very sensible stuff and managed well, it works.

The customer gets what they want at the price they were willing to pay. The builder gets a fixed price with stage payments at agreed milestones to assist with cashflow.

In my experience, accountants aren’t terribly good at this. 

The worst of us still charge based on time. Imagine a builder turning up to quote for your extension and saying, ‘We’ll log our time and materials, see how we get on and we’ll give you a bill when we’re done.’ I suspect this builder would not get much work.

Almost as bad is agreeing the scope of work and price and carrying on regardless, despite the nature of the work changing significantly when the project is underway. The inevitable result of this is an unhappy accountant and ultimately an unhappy customer. Instead of a win/win it quickly becomes lose/lose.

Variations or ‘Change orders’ as pricing guru Ron Baker calls them are the answer. If a builder starts work on your extension and finds special engineering expertise is required to hold up a supporting wall, he doesn’t just grit his teeth and ‘crack on’. He discusses what the additional work involves with the customer and they agree a price before he continues. All very sensible, fair and mutually beneficial. 

Sometimes these conversations about variations can be difficult. The customer expects a fixed price and in their mind, a fixed price is a fixed price. In these cases the customer should be referred back to the scope of work and the assumptions made about the work involved. Polite, informed discussion about the scope and the nature of the variation can help to get things back on track.

In the best business relationships, both parties win. The customer gets a great product or service and the supplier makes a fair return. 

That takes careful management, not just of the project delivery but dealing with variations too.

We can learn a lot from the builders.

www,base52.co.uk