Contracts versus cost-plus
by Anthony Noel
Choosing the best method of charging for your work will help ensure that you reach your ultimate goal - making a profit.
It's a pleasant dream. I'm doing jobs at a comfortable pace, never breaking my neck to beat a deadline, nor stretching work in thin times until the next job is ready to start.
I always work an eight-hour day, a 40-hour week.
Every job covers all my company expenses, pays me a decent hourly rate, and turns a tidy profit that I can use to further the company's growth. Every job.
Hey, I warned you at the top - it's a dream.
But if you're thinking, 'It sure is. I'm lucky to break even, let alone turn a profit, on most of the jobs I do,' then you should consider two things, without further delay. One is a re-examination of your pricing structure.
Since most custom work is done on a contract basis - agreeing to charge a certain price for doing certain specified work before the work is begun - constant assessment of completed jobs is crucial. You should carefully evaluate each job after it is finished, with the ultimate goal of determining whether you are charging enough for your work.
The other thing you should look at is the type of work your shop is doing and whether some can be done on a 'cost-plus' basis.
You don't have to be in business long before you realize that many customers consider 'custom woodworking' a catch-all term, one that describes anything from carpentry to cabinetmaking. This is not necessarily a bad thing. If you or any of your employees possess a broad range of experience in 'the trades,' it can create opportunities for your shop which another, more narrowly focused shop can't (or won't) consider.
Still, tackling diverse jobs can be a two-edged sword, if you're not careful about the numbers. My 'dream sequence' describes a too-good-to-be-true scenario for most tradespeople: doing every job on a cost-plus basis. Cost-plus is basically 'time and materials,' except that the 'plus' connotes taking a profit. And you should always, whether working up a contract price or doing a job on a time-and-materials basis, figure on taking a profit.
Cost-plus is a way of assuring profitability on a job that, done on a contract basis, leaves sincere doubts in your mind about money-making potential. You are in business to make money, after all.
A cost-plus arrangement allows for taking the time and securing the materials necessary to do the job right, knowing that, in the end, the customer is paying for everything.
(Of course, this is the goal of the contract, too, and if you're being careful and doing that all-important assessment of completed jobs to determine how to be more consistently profitable, it's a goal you can realize more often than not.)
But for jobs which are just too tough to price out in advance, where there's no clear definition of the scope of the work, or where working with one or more other trades blurs the line between your work and theirs, cost-plus is often a viable alternative.
Those are just a couple of indicators that a job may be better done cost-plus than by contract. Another is the customer. Though definitely on the endangered species list, there are still customers out there with a genuine concern for your stake in their project. Realizing that good work costs money, they'll 'pay as they go,' even if it means doing things as needed, as opposed to when wanted.
There is also a hybrid option you might consider for those jobs which could go either way: I call it 'capped cost-plus.' I most often suggest it when I'm doing work I've never done before, yet which I know (a) I'm capable of, and (b) shouldn't take more than a certain amount of time to perform.
A couple of years ago, one of my regular woodworking customers needed a slate roof. Outside the realm of woodworking, to be sure, but since I had done roofing in the past it was not, I believed, outside the realm of my experience. The catch? I had never done a slate roof.
The customer had already agreed to pay directly for the roofing slate and other materials as needed, and to secure a dumpster for the old cedar roof.
(See how some people stretch the job description 'custom woodworking?' Cedar, after all, is wood!)
After looking at the job, considering the work involved in tear-off and setup and vertical slate hauling (in other words, carrying a ton of slate up a ladder), I told my customer, 'I think I can do this job at a maximum cost of X. I'm confident enough in my estimate that I'll make X the cap. You can pay me Y per hour, and once I hit the total of X, you're off the hook.'
This worked well for both me and my customer. Since our time was covered up to a certain point, my helper and I could take the time to develop and work within a system. Though we were getting what we wanted hourly, we had an incentive to finish early: other work - woodworking - waiting in the shop.
For the customer, he knew the job wouldn't cost more than a certain amount, no matter how long it took. And because he had a comfort factor with my attention to detail, he knew the job would be done right.
The most important and, sadly, most often neglected aspect of determining payment terms is coming up with a plan both you and your customer can live with.
By and large for custom woodworkers, that means a contract. But remember to speak up when you are unsure that a contract is the best way to go.
Whether it's a job with miles of crown moulding to run for a customer who accepts nothing less than absolute perfection, or it's doing a job for a customer who wants to work along with you (often slowing an otherwise run-of-the-mill job to a snail's pace), remember that the doubt such situations prompt is usually there with good reason.
So, when it comes to setting terms for such work, remember this too: there are always alternatives.
Anthony Noel writes, consults, and teaches woodworking and journalism, along with doing an occasional custom job in his shop in Macungie, PA.
Have a business related question? Visit WOODWEB's Business Forum. The Business Forum is co-sponsored by ISWonline and is moderated by Anthony Noel. All business topics are welcome, from sales and marketing to dealing with difficult customers.
This article is reprinted by permission of Custom Woodworking Business Magazine.
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