Identifying the benefits and challenges of pricing out your projects, tailored to a full cost per project pricing method.
Deciding between full cost estimating and per fixture estimating in your outdoor lighting business can be extremely challenging. The key is knowing the pros and cons of each method and the stage of business you find yourself in to determine which is right for you. Full cost estimating takes into account costs of a project by factoring direct costs and indirect costs into your proposals in order to achieve your desired margins. Ultimately you want to ensure you don't lose money. From a holistic approach, this method appears to be more accurate and reliable than other methods, but it comes with its own challenges in implementation. In this article, we will look at the main advantages and disadvantages of using full cost estimating for your outdoor lighting business.
Want to learn more about different pricing models? Check out the first article in this 3-part series "Is "Price Per Fixture" Best for Your Landscape Lighting Installation Company?"
Advantages of using a Full Cost Estimating Model
Accurate Project Cost
How do you get an accurate project cost? Identifying your true costs by taking into account direct and indirect costs is key. For example, did you just add a new member to your office team? You should account for that increased expense in your proposals. Has the price of wire or transformers gone up? You should account for that increased expense when pricing out projects.
Determining the method and reason why you are charging the amount you are charging allows you to set the exact profit margin you are aiming for, ultimately rendering better profits. This will also keep commission-based designers honest on discounts. It's effortless to review a proposal on its profitability and this gives you the tools to coach your employees on only quoting profitable jobs. Using the full cost pricing method with the support of your team will help avoid paying out the same level or even any commissions on jobs that lose money. It will help better align your goal as the business owner with your commission-based designers who are creating the quotes.
Achieve Lower Costs
By tracking costs in detail, owners can better act as their company comptroller and achieve the goal to minimize wasteful expenses. Using this pricing model, you can track these in real time, and make adjustments as necessary to ultimately improve profitability.
More Flexibility in Estimating
To contrast with the price per fixture method in which you have two inputs, the number of fixtures and price per fixture, it can be quite rigid for you and your staff. Full cost estimating, however, is extremely flexible, allowing you are your team to build into your estimates the biggest variable on jobs: abor. Lighting contractors and designers know that labor can make or break your profitability. Having the flexibility to properly account for labor is a huge advantage. The speed at which your crew works and the total billable hours spent on a project will make or break your margins. With full cost estimating you can predetermine if a job will be profitable; rocky terrain, longer runs of cable, and extremely tall trees now become an integral part of estimating. Once you master this you will be able to bid out both large and small jobs with the same confidence.
Scale and Prevail
Often businesses who are rapidly growing will plateau and ultimately have trouble scaling, when they cannot identify exactly where their profits are coming from or determine when it's appropriate to expand overhead. Using the full cost estimation method allows you to estimate large jobs that otherwise would be at best a "guess-timate" on how much time and labor it will actually take to complete the project.
Detailed Cost Tracking
Detailed record keeping allows you as a business owner to know if you are making or losing money in real time, being able to identify where it happened, providing you with the tools to make real time changes to rectify the pricing and ultimately improve the profitability of your business on each project. No detailed costs = no strong profits. Know detailed costs = know strong profits.
Better Customer Service
It is far easier to articulate why your project costs more when you provide excellent, above average customer service. A prospect will understand that a reputable company that provides a great service and amazing customer service will cost more. Many find it a benefit to hire a company with top ratings and referrals, a company with honesty and integrity that follows through on contracted work and leaves customers satisfied. When you deliver a higher level of customer service, attention to detail, and responsiveness than your competitors, it's more difficult for a customer to disagree with the price, because you have accurately accounted for your total cost to run a top level company.
Value of the Intangibles
By using full cost estimating, your skill as a designer, the time you have invested in developing and training your employees, your actual designs, all your overhead costs, mileage and distance from your office, and most importantly time spent on the job can all be included in determining your price structure. All of these and additional costs incurred by the business can now be included in your pricing.
Disadvantages of Full Cost Estimating
Complexity of Systems
Full cost estimating will require a more complex system for tracking and managing costs. This will require attention to detail and consistency in updating so it might be more appropriate for an owner with that skill set or a dedicated employee managing the books.
Detailed Record Keeping
A full cost estimate model requires detailed record keeping and estimation of metrics like hours spent on the job and total costs associated with a project. Simply put, identifying and tracking these can be time-consuming, so you need to be intentional when setting up the processes to track these key metrics.
The process you chose to implement when tracking detailed expenses and creating a full cost pricing model can impact your bottom line., Setting up smooth and straightforward processes to track these can help save time and employee hours. If you have created a system to reduce labor costs in the field, but are creating hours upon hours of new work for record keeping, it can become too labor intensive and end up costing you more money than you want.
Effort of Ensuring Use
As owners, it is essential that detailed costs be accurately tracked, even in the midst of putting out fires to handle the immediately pressing and simultaneously growing your business. Ensuring everyone is trained and consistently using the system and processes you've selected can be a challenge but is well worth the effort. Accountability in keeping up and utilizing the systems you have set up is key.
For full cost estimation, all employees need to be trained on how to use the system, which can be an additional cost and a time-consuming process.
Risk of Inaccuracy
This is probably the biggest risk of implementing full cost estimating: bad data. Your estimates can be only as accurate as the data that goes into it. If the data is incorrect or incomplete, the estimate can be severely off from what it should be. If you are making business decisions based on incomplete data, you will continue to run into obstacles accurately bidding out projects.
Is Full Cost Estimation Pricing Best For Your Landscape Lighting Installation Company?
Full cost estimating can provide an owner with accurate project costs, better profitability, more incentives to lower costs, flexibility, scalability, detailed cost tracking, better customer service, and it allows you to include the value of intangibles. But it can be challenging to implement due to the complexity of systems, detailed record keeping, and employee time commitments. It is important to consider the current stage of your business, your specific needs, and the skill set of your team before deciding if full cost estimating is the right method to implement your outdoor lighting business. Ultimately, the goal is to have a profitable business and you should choose the method that works best for you.
In my next post closing out this three part series, I will describe which stage of business will see the most benefit from each estimation method.
Missed Part 1 of this series? Read: Is "Price Per Fixture" Best for Your Landscape Lighting Installation Company?
Read Part 3 of this series - Choosing the Right Estimating Method Based on the Stage of Your Outdoor Lighting Business?