The often misunderstood world of overhead and profit, the preamble

I’ve been giving lots of thought to what often happens when I talk with clients about overheads, profits, and productivity. Often these values are really just taken from the “street” .. the same logic that will tell you to “charge $200 a foot for uppers and lowers” (Please don’t BTW!). So there’s often a vagueness around how these all interplay with each other to create your outcome (hopefully a good profit).

I’m outlining, over the course of the next weeks, my thoughts on this aspect of the business and how we can achieve better and more consistent results, as well as better forecasting. If I achieve what I’m looking to do it will result in a series of postings that cohesively lead from a simple fundamental beginning, through to a nice strategy that you might choose to use in your companies, should you desire.

None of this means that I am the “end all be all” expert on the matter, or that there is one single strategy that works for everyone. I do have, though, 20 plus years of working on these exact types of issues with clients throughout the US and Canada, from high end residential work to architectural millwork, to commercial and institutional casework .. and the many flavors in between. So I do have that as a cornerstone.

If you have some ideas or questions you would like to talk about in the meantime, please feel free to post here. Posts only require a name and an email, and rest assured that your information is never shared with any third party and your email account is not visible to other users .. so post away!

I’m reactivating our blog

It’s been a few years since our last postings here but I think that all woodworkers would agree that they are just as relevant today as when they were published, perhaps even more-so.

So why were we gone so long? Well, frankly it seemed that we didn’t get much participation and that put a damper on my interest. I guess I should have been more dedicated than that. This time around I’m really not looking for participation so that won’t happen again.

We were also the victim of lots of hack attacks on both of our websites, as well as It turns out that when you have a web address for a long time (we’ve had ours since I think 1993!) you build up a reputation with Google and other search engines as a legitimate business and a trusted IP and URL address. Hackers seem to love that, and so we’ve had to spend an inordinate amount of time setting up security and monitoring our sites. We turned the corner on this in December of 2014 and now I feel it’s past time to start contributing again.

So we hope you stop by and soon we’ll have some new meaningful content coming your way. Hang in there with me and I’ll do my best to make this worthwhile for you. There is much to cover about making money in the business of woodwork.

There comes a time to raise prices ..

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?

When it comes to bidding, it’s the exceptions that kill

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.

Do you charge different labor rates by department?

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.

So there’s that .. different departments have different operating costs aside from the labor cost.

But of course it goes deeper .. let’s set aside the example where you pay everyone the same .. it’s not ever gonna happen that your master bench man works for a rate that is not commensurate with his or her skills.

So you tie down an excellent job with lots of high end work. Did you sell it at the “averaged” labor rate of all departments? If so you might be kidding yourself that it will make you money. It may in fact be the setup for the big loser month(s) of the year even though it all looks good heading out the door and your top guys are doing their absolute best with it.

Why? It’s a question of balance. High end craftsmen don’t grow on trees and this is not your only job demanding their services. Meanwhile many of your other departments are left short of work while the shop is pushing thru all this custom work. The invisible hand work load imbalance has cost you much more than you charged for. Because you couldn’t effectively work the entire plant your labor efficiency has dropped and it’s you that is gonna pay the price.

So there’s that work load balance.

Now let’s look at the same scenario .. you know the other side of the plant that wasn’t busy? You know why they weren’t busy? Because when you had an opportunity to win that simple casework job across town your averaged labor rate made you artificially high on the job. Why artificially? I say that because you undercharged your high end craftsmen and orvercharged for your other workers at the same time.

So there’s that .. averaged labor rates can distort your selling prices, but it will not distort your costs, which in the end is what you the business owner will pay .. the cost doesn’t change just because you adapt an averaged sell price scenario.

It goes on, but hopefully you’re starting to see some of the invisible ways you might not be making the money to think you’re gonna make. Ouuuuch!

How do you recoop your tooling costs?

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?

Do you charge for engineering? Should you?

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 ..