Construction and Trades: How to Handle the Negotiation Process with Clients
January 12, 2017
Is negotiating price with potential clients your favorite part of running a business? We didn’t think so. What if we told you there’s a way to avoid negotiation altogether, no Jedi mind tricks required?
Renovantage Business Coach Mike Draper specializes in helping contractors build their businesses. He says there are simple techniques you can employ to dramatically reduce the time you spend haggling over price with homeowners.
1. Always Ask “Why?”
“The biggest reason contractors lose a job is due to price,” says Draper. “Typically, the contractor hasn’t done anything to differentiate themselves from every other contractor, so the only basis the homeowner can assess them is on their price.”
You can avoid being squeezed out of a job by setting yourself apart from your competitors during your first meeting with a potential client. According to Draper, all it takes is one word: Why.
“In order to bring a homeowners’ dreams into a reality, you need to understand why they want to do the renovation in the first place. Why do they want to build out their basement? Is it because the kids growing up and want their own space? Or is a mother-in-law moving in because she can’t manage a house on her own? Or are they looking to earn extra income by renting out a self-contained apartment?
“The question is far and away a contractor’s best tool.”
When you understand the motivation behind the renovation you can tailor your proposal to the needs of the homeowner. For the teenager’s oasis, you might mention ceiling tiles that muffle sound. You’ll highlight safety features that could be built into the mother-in-law’s suite and privacy and security considerations for the basement rental unit.
Draper says that when you demonstrate that you understand the homeowners’ needs and can customize an approach to address them, price is no longer the biggest factor in their decision-making process.
And if they still want to negotiate price, you can shift the focus to the additional value you bring to the job, i.e. “Yes, I may be more expensive than the other three quotes, but you did say you need special attention to safety/noise/security features. Here are two of my recent clients who had similar needs. You can talk to them about how I met their needs.”
2. Adjust the Scope, Not Your Rate
If a job is hanging in the balance over price, it might seem like a no-brainer to drop the price slightly and just get on with it. But Draper says that’s the absolute worst thing you can do.
“If you’re working on a 20 per cent gross margin and you discount a project by 10 per cent, you just gave up 50 per cent of your gross profit. That’s a huge, huge drop.”
If, like me, you didn’t catch the math on that one, Draper offers an example.
“Let’s say the project is $1,000 and your cost to do the job is $800. The gross margin, then, is 20 per cent. The customer says, ‘If you do it for $900, it’s yours.’ Now, instead of making $200 on the job, you’re making $100 and the gross profit is 50 per cent of what it would have been. Now you have to do double the work to make the same amount of money.”
You can avoid this dilemma by changing the scope of the job, not your price. If a customer balks at your quote, offer to swap out some less expensive materials to bring the price down. For example, if a quote is $10,000 for renovations in a kitchen but the customer’s budget is only $9,000, you can suggest switching the granite countertop to linoleum to bring the price down. The ball is then in the homeowner’s court to decide the value of the material, not the work.
3. Break Big Projects into Two Phases
Bidding on a project worth $100,000 or more? You can build trust, demonstrate your expertise and cement the value of your work simply by breaking up the project into a design phase and a construction phase.
It’s tough to quote on a big renovation job without blueprints. Consider offering your services to consult on the plans with the designer or architect they hire. Not only will you get input into things like outlet placement and wiring that will affect the efficiency of your work, but you’ll be paid while you’re building rapport and getting the inside track on the tendering process.
“It might seem more complicated as a proposal, but it drastically increases closing rates,” said Draper. “Building trust with a homeowner and getting paid while you’re doing it is a beautiful thing.”
4. Pick a Specialty and Adjust Your Marketing and Prospecting
Draper says there are three types of business models for contractors: ones that are built on price, service or uniqueness.
He advises choosing one of them as a primary focus, another as a secondary focus and going after clients that value what you do best.
“If you find yourself constantly negotiating price with homeowners, but you provide higher-end workmanship, go after the clientele that appreciates quality and will pay for it.”
It might be as simple as scoping out neighborhoods where people are using higher-quality materials like marble over ceramic tile and marketing to that demographic. Invest in advertising and a website with high-quality photographs that demonstrate the commitment to quality craftsmanship you offer.
“Someone will look at your work and recognize the value. They’ll know it will be expensive before they even pick up the phone so you won’t have to go through lengthy price negotiations. Spending time and money on high-quality marketing is worth it to weed out the jobs you don’t want.”
Draper says that when you position yourself to side-step tense negotiations over price you’ll enjoy higher profit margins, avoid stress associated with unpleasant interactions and set yourself up for a successful experience.