Originally posted by :
As an investor you have a pro forma. As a contractor I have a pro forma. In my particular business furnishing material represents 70% of my revenue. When I talk about risk, I am also talking about pro forma. If someone wants me to give up 70% of my revenue, I am moving on.
Again, it's hard to have this conversation when talking two different languages...
Unless you're marking up materials a LOT, that 70% of your revenue is presumably at a relatively low margin. For example, if you mark up materials 20%, and 70% of your COGS is materials, than those materials only contribute about 15% margins to your business (the math isn't that simple, but that's a reasonable estimate). Unless the total margins in your business are close to 15% (I hope not for your business' sake), then material markup isn't as important as you think it is to your business.
Just because 70% of a big percentage, but as a revenue (gross income) number, it's a meaningless without other metrics (COGS, net income, expenses, etc). You could make 99% of your revenue on material costs, but if you're not marking up the materials, that 99% would be meaningless to your bottom line. Likewise, 70% is a meaningless number without more metrics surrounding it.
First, in a free market, labor -- for the most part -- is a commodity. Nobody fixes your wage; nobody guarantees you a minimum wage or puts a ceiling on your maximum wage. You are free to sell your labor services on the open market and get what the market is willing to pay for those services at the of time.
Why do you believe labor is not a commodity? Why would you want it not to be???
Second, what does you labor cost not having to be as high have to do with reducing your risk? Are you talking about reducing your risk of not being able to pay your mortgage or reduce your risk on the job? I don't see how your risk changes by cutting out one portion of your earnings, assuming the portion that's left is at the same margins it would have been otherwise?
What exactly do you think is at higher risk in this case?
Okay, so you think that your markup of materials is reducing your risk of losing money in the case of other things you can't forecast. This is what I was saying in my last post -- you are passing on your perceived cost of the risk to your customers. While this is pretty standard, doing so by bundling another profit-center into your product (forcing customers to buy materials through you) isn't the way most businesses do this.
When you buy a lightbulb, the lightbulb manufacturer has already passed on some cost of risk into the price of the lightbulb. The manufacturer doesn't say, "To reduce my risk of selling this lightbulb, I'm going to make you buy this toaster as well, because the toaster is a lower risk product for us."
If you're concerned about your risks with your labor, then mark up your labor. Don't require other bundled services (well, do what you want, but I wouldn't). If you're bundling materials for other reasons (Aaron mentioned control of the schedule), then mitigate those risks separately.
Obviously, you can do what you want, but many investors are accustomed to buying materials themselves, and your disallowing that practice is going to mean that your customer pool is now smaller. You may not care, but I'm sure a lot of contractors don't want to shrink their customer pool.
Yes, all my contractors think that. In some cases, it's true (and I let them buy the materials). In many cases it's not.
Your example of carpet pricing is a good one here. I probably get carpet at about 1/3 the cost you do (and about 1/3 the cost of any flooring contractor I would use in my area). That's because I lived near the largest carpet manufacturing center in the world and built relationships there. I have suppliers who will ship carpet to me in places where they wouldn't ship for you or anyone else.
You (or whoever my contractor is) can insist all day that I would have to use their carpet suppliers, but if it means adding thousands of dollars to my costs because they can't get the pricing I can, I'm not going to do that.
Now, if you can get carpet cheaper than I can (even with your markup), I'm all for it!
Absolutely. And like I said to Aaron, there are ways for you to mitigate that. In fact, there are ways for you to profit from that! Get the investor to agree that if they don't have the materials on site when you're ready for them, you'll buy the materials yourself at an even higher markup, plus payment for the lost time. That way, if the investor screws up (of course he won't think he will), you'll make more money!
