Back Costing for Fun and Profit

Okay, I lied about the fun part, but if we want to ensure our profit is not shrinking between quote and completed sale, we absolutely should back cost our jobs. Unfortunately, depending on our systems, back costing can be a painful and inexact process. Given that back costing takes some work, why would we do it? In my experience, the difference in margin between quoted sales and delivered sales can average between 2% and 4%. Every 1% is worth $30,000.00 on the bottom line of a $3m business, so back costing is worth the effort.

Of course, It starts with knowing how much profit is in a job at the time you quote it and win it. It should go without saying that every element of a particular job should be costed, and then based on those costs, the salesperson should know how much profit they have in the job. Understanding our margin is fundamental to understanding how much we can move if pressed for a discount, and to understanding and influencing our conversion rates. While we want to maximise GP, our market affects how high we can go before we lose so many sales that we aren’t writing enough business.

“…the difference in margin between quoted sales and delivered sales can average between 2% and 4%. Every 1% is worth $30,000.00 on the bottom line of a $3m business, so back costing is worth the effort.”

When we have made the sale, our interest in margin doesn’t end; we shouldn’t assume that because we sold the job at 30% GP, we will achieve 30% by the time the job is completed. In fact, the best-case scenario is 30%; more likely we will experience GP shrinkage.

“…we shouldn’t assume that because we sold the job at 30% GP that we will achieve 30% by the time the job is completed.”

The most common causes of shrinkage are costs overlooked at the time of quoting, mistakes, and installer extras. Let’s have a look at all three.

Costs Overlooked. From job to job, salespeople have to keep in mind all the variables for all the different types of products they quote. Then they have to consider the variables that apply to each job; things like floor prep, adhesives, trims, labour, are just a few of the things salespeople can overlook in the rush to get a quote out. In the flooring business, something will inevitably be missed, particularly on large, complicated jobs, but the problem can be minimised if salespeople use quote templates. Whether the template is in the quoting module of your business management system or it’s a laminated sheet of paper, templates are a prompt for salespeople to think about everything that might go into a project.

Mistakes. It might be a quantifying error, or product cut incorrectly by the installer. Whatever it is, they need to be visible to us so we can manage and record the additional cost against the job. Visibility is important so we can identify sources of frequent errors and eliminate or minimise errors on future jobs

“Visibility is important so we can identify sources of frequent errors and eliminate or minimise errors on future jobs.”

Installer Extras. We are talking here about those costs that could not have been anticipated, or where the customer might not have shifted the furniture or lifted the carpet as agreed. If we let the installer go ahead and incur these costs, we are reducing our profitability. What do you expect your installers and salespeople to do in these circumstances? Best practice is to require installers to get approval before they undertake any work not specified on their worksheet. It allows the salesperson an opportunity to contact the client to approve the additional cost. In most cases, we will get approval on the day of installation, whereas it will be unlikely once the job is done.

As an aside, many flooring businesses build some overhead into quotes to cover unexpected costs. It might be a flat fee per job or a percentage of the cost of the project. This is good practice to help maintain margin.

Your ability to back cost completed projects and to automatically build in an overhead factor will be limited or enhanced depending upon your business management system. If you would like to see how RFMS makes back costing an inherent part of the sales management process, let me know, and I will be happy to show you.