The other day another AWI linkedin post floated over my desk bemoaning the lack of profit, despite good sales, even in this tough economy. The responses were almost all aimed at chasing out inefficiencies, increasing outputs, embracing more automation, etc. All good thoughts in and of themselves which could perhaps reduce costs and therefore, after great investment expense, reap some profit.

But what should have been an obvious solution was nowhere to be found .. if you’ve got plenty of volume and good production and no profit raise your prices! At least I thought it was obvious. The lack of agreement to raising prices led me to reflect on the state of the industry I’ve known all my life. Where are we going so wrong that even in good times, the average profit for a mid size millwork company is less than 3%?

Built into the fabric of this industry is an aversion to raising prices, even in good times. I can safely say that the price of our goods has stayed flat or declined for at least the last decade, probably longer. Where does this aversion come from? Has the nature of the open competitive bid market whipped us into submission to such a degree that the thought of raising prices is shunned, industry wide?

In this period where I have never seen so many companies shuttered .. there’s a story behind each closing .. some were fraught with terrible luck like being flooded or burned to the ground or their bank going under and loans called, but the vast majority were closed down because they couldn’t make a buck and had no real idea where their costs truly were. Taking on cheap work to feed the overhead is one thing .. taking on work below your actual cost is quite another. Learning what your cost is? Well, some never do and they’re the ones left twisting in the wind of rapidly depleting cash flow while contractors hold back on payments, certain that the shop is going to close shop before their job is done. You see, they know you’re not making any money before you do! They know what price you took that job for.

I think it’s time to admit, as an industry, that in today’s environment we’ve reached the point of diminishing returns in reducing costs. Automation has been widely adapted in the industry. Yes, certainly there’s always more to be gained in fine tuning your efficiencies and it should be a regular process to get the most out of your resources, but without increased profitability why invest more to still fight day in and out for a 3% profit?

So I plead with you all .. when you have a full backlog for a while, try it .. try raising prices .. you will be stunned to learn that nobody will notice an extra 5% .. you may even be stunned to find that you still get the work.

And I leave you with this last thought .. when was the last time you saw the oil industry, the defense industry, the banking industry, the health care industry, the insurance industry .. any of them .. EXPEND EFFORT TO REDUCE COSTS SO THEY COULD CHARGE CUSTOMERS LESS INSTEAD OF MAKE MORE MONEY?

The millwork business is a business of details .. maple or oak, clear or stain, standard laminate or Chemmetal, on and on, the details of a job make it unique. Of course, in the “low bid gets the job” market and also make it easy to lose money, before you ever cut your first board.

So is the angst of the estimator .. ensuring that each job is priced for the exceptions of that particular job. Historically estimators have handled a lot of this thru intuition .. “plywood cores? .. I’ll add 10%” .. “a filled finish? .. even the mouldings? .. I’ll tack on a couple of grand for that” .. “install during off hours? .. I bet my guys will do that if I just kick in some meal money” .. “we normally mark up materials 50% but this job has all those marble buy out tops on it so I’ll drop my markup to 30%” .. and on it goes.

Take The Fix Restaurant on the Vegas Strip .. it’s the pic I use here for the header and one of my favorite millwork projects. If you’ve never seen it in real life make a point of looking it up when in Vegas. It’s composed entirely of strips of curved laminated panels that form the walls, partitions, and ceiling. A real millworker’s dream .. or nightmare, depending on how you priced it! How many exceptions does a job like that have?

Is it no wonder why so many owners place so little faith in the estimates they rely on? I recently had a new customer tell me that over the years he had a staff a 3 estimators and in all his years he never believed a single estimate from any of them. Wow .. and why was that? It was about the exceptions in every job and how they are handled. Every job is just different enough to make profitable pricing a challenge.

So my advice .. carefully consider how you handle the exceptions .. they will bite you if you’re not careful.

My real tip about exceptions is to minimize them .. maybe even eliminate them .. but how? First move towards material and labor pricing. Suddenly changing out materials is no exception anymore. Second, put in research, especially as it relates to labor estimations. Need to quote something very unusual? Put in the rest of the team, especially for work you really want to get. Let the foreman take a shot at what he thinks. Break the processes down and find the risky parts. If it’s still scarey, you can walk away .. not even bid the job, or pad the job till you feel safe. Do these things and there won’t be any fudge factors in your bidding .. and you’ll be able to sleep at night once you’ve signed that contract.

With almost every new client we setup with our estimating system, we run into the question of labor costs and labor rates. Nine times out of ten it seems that most shop work is charged a just one or two labor rates.

While I made a vow not to be “too preachy” here in my new blog, I have to say that I think this is real mistake. Let me tell you why ..

First, let’s imagine that you pay all your shop staff the same .. the sander, edgebander, the saw guy, the master craftsman .. imagine you pay them all the same wage.

Now imagine that you charge the same rate for all of them as well.

Do you make as much money from selling edgebanding time as you do sanding time? I would have to say no. Your edgebander uses glue, electricity, machinery cost, cutting heads, etc. So even in this simple example using a single labor rate only serves to obscure your costs and perhaps simplify your pricing.

Anyone with experience in running a millwork company would almost swear that tooling is the blood of making it all work. Cutters, blades, bearings, sharpening, maintenance .. on and on. As machines have gotten more sophisticated so has the tooling.

So who’s paying for all this? Certainly when it’s a clearly defined need such as special profile knives or routers it’s clearly definable as part of the project cost. But when it’s more general, like drill bits or finger joint heads .. things that are more generally used in the day to day, who’s paying?

Do you bury it in the overhead? Do you even consider it as something more than “incidentals”? Do you charge your machinery time differently from other labor in an effort to cover tooling and maybe energy use?

Long ago, “engineering” used to be a guy at a drawing table and the guys on the plant floor developing their own material and cut lists. Every once in a while I still find it that way, but it’s the exception when I do, and often only for complex custom work.

Today for most companies engineering is it’s own essential process .. submittals, cut listing, panel optimization, and material ordering. Today’s engineering has saved countless hours in production. Engineering has spawned the departmentalizing of the shop floor and it’s made training new workers easier. CNC couldn’t pay for itself very well without today’s engineering. But today’s engineering, for all it’s greatness doesn’t come cheap.

Many firms are finding that engineering alone can add up to 10% of project costs. This of course, dwarfs the costs of the old model of shop drawings. The costs are especially high when it comes to “non box” or custom work. The upfront time and effort required in designing and part sizing a check desk or nurse’s station or library wall is nothing like box work.

So we’ve added costs to the upfront portion of a project in effort to save that time in building. Where is that cost going? Well, with the understanding that there is no “right or wrong” I still find a lot of clients that have buried that cost into overhead. By it’s nature, overhead averages the cost of engineering into all your projects with the implication being that it’ll all be covered in the end. A lot of this is mindset, since in the past engineering was a smaller part of the whole, and closely tied to all the other office processes like selling and managing.

What’s your thinking on this? Has engineering become a big enough part of the cost that it should be estimated and charged for, just like finishing or installation? Please weigh in ..

Does the world really need another blog?

Good question .. well if you’re involved in the millwork, casework, or fixture work industry I hope you think it does.