How to Start Your Own Contracting Business
Are you ready to open your own business so that you can sit on top of your own totem pole?
You’ve spent years mastering your profession, making it to the point where you know all the ins and outs of your trade. During that time, you may have worked under the commands of a boss who dictated your schedule and undoubtedly made all kinds of decisions with which you didn’t agree. After spending years working under your boss, knowing that he’s raking in the spoils of your hard work, you suddenly have an epiphany. You think to yourself, “What if I started my own company? I could finally take control of my own destiny and do things the way I think they should be done.” But then doubt whispers into the dark recesses of your mind. “What do you know about running a business?”
After much thought, you decide that you do have what it takes to start your own electrical or plumbing business. You’ve done your research and found that there are software programs available that will help you with your estimating and accounting needs. You feel confident that you have the skills to do the work in the field. You understand that there will be long days in the beginning but you’re okay with that. You have the audacity to believe in yourself. After all, this is America, where you have the ability to pursue your wildest dreams and achieve whatever it is that you want.
You put in your two weeks’ notice and go down to your local courthouse to register your new contracting business. Now you’re official with your new business license in hand.
Congratulations, You’re a Business Owner! Now What?
Taking that first step and starting your own electrical or plumbing business takes a lot of courage, but your journey to a successful electrical or plumbing contracting business has only just begun. The next step is ensuring you have all your fiscal ducks in a row.
Financial planning plays an enormous role in the failure or success of businesses. This is especially true for new startups. Getting a firm handle on operational costs and overhead will help keep you on the path towards profitability. For example, you should account for current and future business expenses while keeping constant tabs on cash flow.
Electrical and plumbing contracting financial analysis
When you’re just starting off, you may be your only employee. If you want to grow, you should always be on the lookout for reliable people you can add to your team. You don’t want to turn business away because you’re stretched too thin.
Besides employee wages, payroll taxes, insurance, and other assorted burden expenses that will be incurred once you win a job, electrical and plumbing businesses have overhead expenses that are incurred simply because you’re in business, regardless of the jobs that you’re awarded. You’ll need to account for your company’s overhead expenses such as vehicles, software, office supplies, business insurance, marketing, etc. These costs can fluctuate throughout the year. Many companies either lose jobs or lose money because they are not including the correct overhead numbers into their estimates.
You and any team members you employ will need the essential tools and equipment for their work as well as a vehicle that can carry it all and get them to job sites. Tools, equipment, and vehicles aren’t one and done expenses either, so make sure you account for operating and maintenance expenses such as insurance, gas, and vehicle wear and tear when factoring in costs of business operations. These expenses can vary depending on whether you buy new or refurbished and how well you maintain your equipment.
Use current burden and overhead costs in your estimates
Your business model won’t be a fixed-cost operation since you’ll hire and fire employees as needed. One thing to keep in mind is that if your overhead expenses stay level, whenever you hire a new field employee, the overhead cost per hour that you use in your estimates actually decreases. Inversely, whenever you fire a field employee, the overhead cost per hour that you use in your estimates will increases.
For example, if you have overhead expenses of $30,000 per year, and you have a single employee that will work 2,000 hours per year, the overhead rate per hour that you use in your estimates would be $30,000 divided by 2,000, which equals $15.00 per hour.
Now let’s say that you hire a new employee. This employee did not cause your office overhead to increase. Remember, the costs for field employees in your estimate is a direct job expense and is not included in your company overhead. Now you have 2 field employees working a combined total of 4,000 hours per year. $30,000 divided by 4,000 hours equals $7.50 overhead cost per hour.
If you continue to use the old $15 overhead cost per hour in your estimates, your break-even cost will not be accurate. Your bid price will be higher than it should be and you won’t win the job. Take the same example but in reverse. Let’s say that you fire an employee but continue to use the old overhead cost per hour in your estimates. While you might win more jobs, you’ll lose money on all of them.
Contract Bidding - Hitting the Bullseye
If you’re going to be a successful contractor, you must become a business person. You must know your numbers. You must update your employee burden costs and your company overhead expenses in real time. If you are not using accurate data in your estimates, you will flounder around for a couple of years, wondering why you’re not making the money that you should, and eventually go out of business.
A significant portion of your time will likely involve bidding against competitors for the jobs that are available. You want to price your bids competitively to entice clients to hire you, but it’s imperative you never price yourself out of business by working at low rates that will keep you in the red. Calculating bid prices requires you to have a firm grasp on your overhead costs as well as your employee burden.
Regardless of the number of employees you have, it’s imperative that you accurately analyze employee burden (how much a worker costs per hour of work factoring in all expenses such as pay rate, insurance, taxes, healthcare, and vacation time) so you can make job bids that are low enough to be competitive while also charging enough to ensure you don’t lose money.
TurboBid includes step-by-step wizards for calculating your employee’s burden cost, as well as your company’s overhead expenses. If you ‘re going to correctly determine your break-even cost to do a project, it is imperative that you have these numbers right. If not, your bid price will be higher than it should be and you won’t be awarded the project. Even worse, your bid price could be lower than it should be and you’ll end up losing money on the job!
Please feel free to Contact TurboBid to discuss any issues that you might have regarding starting your own electrical or plumbing business.
TurboBid Founder & CEO
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