There are dozens of clichés that deal with time: Better late than never; in the nick of time; Rome wasn’t built in a day; time flies when you’re having fun. Virtually all of them share a theme – humans, as a rule, wish we had more time. That is especially true for companies that rely on time-based billing, from doctors to mechanics, from lawyers to contractors.
If you’ve ever wondered “where did the time go,” you’ve hit on one of the biggest challenges to time-based billing. In business terms, it’s called a markdown, and it’s the money you “mark down” when a project comes in over budget. In other words, if you bill at $75 per hour, and you tell a customer that a job will take four hours (for a total of $300), then you spend six hours on that job (worth $450 of your time), you have a choice. You can tell your customer it took longer than expected and bill them the extra $150 (many times this is called a “change order”) or you can write off the extra $150 – this is known as a markdown.
In a perfect world, markdowns don’t exist, but in the real world, they are a part of everyday life. Sometimes the markdown isn’t the customer’s fault, so it would be unfair to charge them for it (a truck runs out of gas because one of your employees forgot to fill it up in the morning). Sometimes there was an agreement that doesn’t allow for change orders (often called a “not to exceed” clause in a contract). Sometimes it’s just not a good idea to argue with the customer (if, for instance, they happen to be your best customer). For those times, markdowns are just an ugly cost of doing business.
On the other hand, just because markdowns are ugly doesn’t mean they aren’t important. If you bill by the hour, tracking markdowns is a critical part of staying profitable. After all, if you are consistently doing jobs that lose money, you will soon be out of business. Need proof? Without making you track down a calculator or accounting for your cost of goods sold on parts (a very important factor that we will leave out for simplicity’s sake), here is a simple example of how much impact a labor markdown can have on profit. Let’s say you’ve done your homework, and you know that you are making 10 percent profit on your labor billing after your costs are accounted for (salaries, for example). Now let’s go back to that job where you worked six hours but only charged the customer for four. You essentially gave away $150 worth of billing (two hours at $75), which costs the company $135 (90% of $150 – remember, you are making 10% in profit). To make back that $135, you will need to realize the profit from 18 hours of billing (18 X $75 = $1,350 / $1,350 X 10% profit = $135). In other words, marking down two hours cost you all of your profits for 18 hours worth of work!
Every business needs to make a profit, or it can’t stay in business (unless you are a charity or the government). Profit helps you grow and keep employees. It helps you improve your equipment and go on vacation once in a while. The trick is to identify those jobs that are losing money and do something about them. You really have three basic options. You can (A) not take those jobs – easy, but not always practical; (B) do those jobs differently – a great idea that might be easier said than done; or (C) adjust what you charge for those jobs – a good plan that takes some research and math.
Successful businesses use all three of these strategies to some extent. They tend to focus on their core business, which addresses strategy A. They continually work on controlling costs and improving efficiencies, which is really strategy B. Finally, they track their markdowns and costs, and make adjustments to their hourly rate in order to stay profitable. That’s strategy C.
If you are billing by the hour and not tracking markdowns, you are leaving a lot to chance. If you are billing by the job and not tracking time at all, you may really be in the dark. Without tracking markdowns, it is impossible to understand and plan for profit. In addition, today’s shortage of tradespeople means that you may need to figure out how to make do with your staff at its current size. In other words, you will want to learn how to make more profit without necessarily adding more people.
Fortunately, there are a couple of resources that can help. DSG’s P4 Learning Labs are a great place to learn all about markdowns and profit, as well as dozens of other factors that impact your business. The instructors are experienced, and the atmosphere is hands-on. As a result, you leave with a deep understanding of what it takes for your business to make money. You can learn more by talking with your DSG representative or by going to dakotasupplygroup.com/p4.
If you’d like an easy way to start tracking your markdowns and other expenses online – along with a tool for finding your best, most profitable hourly rate – check out Budget Shaper. This web-based app is made especially for contractors and other businesses that use time-based billing. Budget Shaper is free for qualified DSG customers.