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Most Contractors are Underbidding - Here is How to Fix
81 Plays1 month ago
Episode 79 breaks down one of the biggest mistakes contractors make. Underbidding. This results from not accounting for overhead, which leads to underpriced jobs and small margins. Brent Oberlink and Alex Eckhardt dive into when it makes sense to rent vs buy, and how the wrong decision can cost you in the long term. They also cover smart financing strategies, including building banker relationships and setting up a line of credit before you actually need it. On the operations side, they stress the importance of solid contracts, clear scope, and proper payment. If you're trying to stay profitable in a competitive market, this episode lays out what you need to do differently.
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Transcript
Understanding Contractor Expenses
00:00:00
Speaker
A lot of contractors don't do this. They don't know their numbers, unfortunately. So a lot of people, especially getting started, I've seen they'll go sign a lease or a loan for a cat and they think, oh well, this cost me $2,300 a month.
00:00:13
Speaker
So they think that's their cost. They factor in some fuel, they throw in whatever they want to make, and that's their price. The issue is you have overheads that you're not accounting for in that. You're not accounting for breakdowns. You're not accounting for failures.
00:00:27
Speaker
whether there's so much overhead in this business that if you're not factoring that stuff in, then you're charging way too cheap.
Podcast Introduction & Nicknames
00:00:49
Speaker
Welcome back to another edition of The Better Contractor. Today, i am joined by my co-host, Alex. What's up? Glad to be here. I just remembered when I said that. I think i said this in the last podcast with you, but I still don't have a nickname.
00:01:02
Speaker
When you find one. so Just remember, I forgot. going to make a note right now. Nickname for Alex. It makes me nervous, though. I don't know if I want a nickname. There we go. There we go. Sneaker guys. Alex used to do sneakers before this.
00:01:14
Speaker
But Alex needs a nickname. So if you guys got any ideas, they don't even have to be PC. They can be mean, whatever. Those are the best ones. Whatever you guys want to call me. I won't get offended. Don't worry.
00:01:27
Speaker
I love nicknames. When I was your age, dude, everybody had a nickname. I was around. What was your nickname? I can't give you mine. so I can't give you mine. I was a nickname giver. Oh. Yeah. Yeah. so They got have a nickname too.
00:01:40
Speaker
Yeah. Everyone has a nickname. I had one. I had a few of them though, but they weren't really that good. Yeah. Mine were always very descriptive of people. What's the best nickname you gave? gosh. Oh, gosh. I can't actually say on the podcast because it wouldn't be PC.
00:01:55
Speaker
That's a different era. That was 20 years ago. That's fair. We can bleep it. The best ones were definitely not PC until the 26th. Yeah, that's fair. So, thank the podcast
Investment Advice for Land Clearing Business
00:02:05
Speaker
today. We've got a few questions that Alex has put together or got. So, we're going to go through those. be a little bit of a shorter podcast, but hopefully some value. These will be geared more towards the individual who's just getting started or thinking about getting started. So, Alex, what have we got? Yeah, we'll kick off. I have a question from somebody that I pulled out of our Facebook group. I won't say names, but basically they said, i am wanting to start my own land clearing company.
00:02:30
Speaker
I have $200,000 set aside to invest into equipment. Props to you. That's pretty good to invest in your business. I'm impressed. um What do you think I should invest this into? I understand this is not enough for everything I will need, but would you recommend finding a bank and taking loans out for the rest or renting equipment for a few years?
00:02:50
Speaker
So to answer that last question, so we'll deal with rental first. If your projects are intermittent or random, meaning once you finish this one, you may not have one for two to three weeks, I would say rent until your book is full.
00:03:08
Speaker
um The last thing you want to do is tie yourself down to an equipment payment for two to three years or a lease payment for two to three years and not have a project every month to make that lease payment.
00:03:19
Speaker
As you probably know, rental is obviously more expensive per month than a lease or a loan. But if you don't have projects every month, the rental may be easier. I know we, especially when i got started, we rented a lot of equipment ah basically for that very reason, or we had a special project come up and we needed something for like two weeks. And we knew we wouldn't need it again for probably two or three months.
00:03:42
Speaker
Makes sense to rent in that regard. As far as financing, Leasing is not bad, in my opinion, especially for items that have a decent residual value. And most leases you can buy at the end.
00:03:55
Speaker
So you can buy it out at the end. If you do that, it's not really much different than the finance as far as cost. um But preferably, you lease or finance over a rental. But I would definitely get an established with a bank, preferably more of a traditional, maybe a regional bank. So one that's not so huge that they care a lot that you just started up and not one so small where you're too
Financial Strategies for New Contractors
00:04:17
Speaker
high of a risk for them. So regional banks are good. That's what we use currently. They give you usually a little bit better interest rate than maybe going out and grabbing, i don't know, more higher risk type loans, which you may have to do because you're brand new, depending on how young you are, if you have any credit. um
00:04:34
Speaker
But the one thing I would say as far as you asked about the dollar amount and equipment, 200, 250 probably minimum, because you're going to want, for land clearing specific, you're going to want some kind of skid steer. You're talking 70 to 90.
00:04:47
Speaker
You're going to mulching head, which you're talking 30 to 45 for that. I wouldn't do used. Our industry is super rough on equipment. So used usually means you have a lot of maintenance bills. So for example, a house,
00:05:01
Speaker
For that specific equipment, we try to do either a two-year note or a two-year lease, maximum three, and we return it because after that, the maintenance costs will start to eat you up. So at that point, it's not cheaper.
00:05:14
Speaker
So I would consider doing that, probably $250. but and And then the other thing I would do... $250? Yeah, $250. $250,000, quarter mil. And then you're going need a truck and trailer, obviously, to pull it, and you're going to need CDL. So I would do that. The other thing I would do, too, is try to go ahead and establish early on, before you need it, a line of credit.
00:05:35
Speaker
So hopefully you don't need it that early on, but there will be a time where... A payroll is due or something is due and you just don't have the project, so you need that cash flow line of credit to dip into to make that payment until you get it. So that it's easier to do up front before you need it than after it's too late and you need it, then the bank will probably tell you no.
00:05:55
Speaker
So I would do that. The other thing I would recommend to somebody just starting just to add in, have contracts. Don't just do word of mouth handshake agreements. I wish those worked. Unfortunately, that's not enough contracts.
00:06:08
Speaker
You need to basically have a scope of work in that that says, here's what I am providing you. Be very specific so it can't be really argued much. ah Have some disclaimers. Have some protections for you built in.
00:06:20
Speaker
Pay an attorney the $500 to write that simple agreement for you and have every contract signed before you start doing work. And take payment up front or while you are still on the job site. Do not wait for payment.
00:06:34
Speaker
That's interesting going back to your buy brand new point. Everyone
New vs. Used Equipment
00:06:38
Speaker
hears their whole lives. If you're getting into something, buy used. If it's a car, buy used because everything depreciates. um is Have you had experiences with that where you bought something used and you just it just hit you with maintenance bills and you're like, I should have bought this brand new?
00:06:53
Speaker
So we have some equipment. we've been in this long enough now that where we kind of know. yeah So like a skid steer with a mulcher head. In our line of work, you're using it and you're abusing it a lot. If I'm running, so for us, I would say 1,500 hours and under is about all I would run of those two, maybe 2,000.
00:07:15
Speaker
If I was using a bigger skid steer and I was just moving a little bit of dirt here and there, you're fine to go above that because it's not really a high-stress environment for that machine. um Trucks and trailers. um Trailers, we run those forever.
00:07:29
Speaker
Like, we have some that are a decade old. You just rebuild the axle, you know, repaint put a new floor. yeahp You can keep going. So it's kind of piece by piece, equipment by equipment, and industry by industry. That's fair. Yeah.
00:07:40
Speaker
Just learn as you go. Yeah. So many contractors rush to go into debt buying their own equipment when they're starting their company. Do you think going into into debt early will actually set contractors back in the future?
00:07:54
Speaker
Is all business debt good debt? I've heard both. So I'm going to go against the grain a little bit on this. And there's a very well-known person that speaks against debt.
00:08:05
Speaker
um I think that's great personally. I think in business, especially an asset heavy business, I don't really see how it's possible unless you are starting out with an investor or you just have a ton of
Debt & Financial Management
00:08:18
Speaker
cash.
00:08:18
Speaker
But for a lot of people, myself included, when I got started, that is not the case. So in that situation, you either don't go into business or you get a loan and you finance it Debt is not bad as long as the debt works for you.
00:08:29
Speaker
So if your debt costs you $2,000 month and you know the actual item cost you you're paying interest, But that brings you in double that.
00:08:40
Speaker
And I would argue it's actually a pretty good investment. It all comes down to the numbers. So the debt all comes down to servicing the debt and then making an income off of it. If it's doing that for you, I'm not afraid of it at all.
00:08:52
Speaker
Back to our first point, you got sure you have the contracts though. you know So you're not going to get in over your head if you keep the stuff flowing in and you're making good profit and making that money. Yeah. I would say on that one, debt is your friend, as long as you are making money on that debt.
00:09:09
Speaker
I think it's important, a lot of contractors don't do this. They don't know their numbers, unfortunately. So a lot of people, especially getting started, I've seen, they'll go sign lease or a loan for a cat.
00:09:21
Speaker
I say caterpillar, but that's what we have. So i have generic skid steer, mulcher, and they think, well, this costs me $2,300 month. So they think that's their cost. They factor in some fuel, they throw in whatever they want to make, and that's their price.
00:09:36
Speaker
The issue is you have overhead that you're not accounting for in that. You're not accounting for breakdowns. You're not accounting for failures. Whether there's so much overhead in this business that if you're not factoring that stuff in, then you're charging way too cheap. And when you have that major bill, like we've had stuff where Literally, we've spent we've had repair bills 10K, $10,000.
00:10:01
Speaker
Well, that's a whole lot of hourly costs over the past two or three months before the previous one of those, or another, hopefully not that big, smaller amount that I have to have factored in. So knowing your numbers is key.
00:10:12
Speaker
If you're brand new, you don't know your numbers. And that I would caution you to guess as best as you can. I can't give you that number, but know that you're Paying $2,200 for a lease or for a loan, you need more than double that probably to cover some of other costs, to be honest. And then factor in fuel, factor in profit, your time, weather delays, days where, hey, I thought we were going to work five days this week, we only work three. And that becomes more complicated when you hire employees because then you also now have to feed and pay those people.
00:10:46
Speaker
You got to have those costs factored in as well. so I would definitely make sure you do that one.
Market Understanding & Competition
00:10:52
Speaker
Another point I would make there is knowing your market. I think the contracting space, the land clearing space is a little bit this way right now. I'm in some of the Facebook groups and see all the comments and there's so many brand new people in there and That's awesome. Competition is a good thing. But what I will say is it seems like it's very saturated right now.
00:11:13
Speaker
There's so many people with one or two employees that are doing this and doing it way too cheap. So I would say know your market, whether it's land clearing or something completely different. Study your market enough to know, is this saturated?
00:11:25
Speaker
Is it becoming saturated? And if it is, are those people charging a really cheap price? And if so, I would question things a little bit and try to think, what is my differentiator?
00:11:36
Speaker
Your differentiator cannot be just price. And if it is, I wouldn't jump in right now. So, yeah. Other than that, I would just be a little bit cautious of seeing a dude on Instagram or something that's got a brand new pickup truck that you want, a brand new Caterpillar or something like that, and thinking that he's making this killing.
00:11:52
Speaker
He may be, but he also may just be really good friends with his bank and they're loving him. He may be barely making it buy. So just be aware of that. That's not something I dealt with when we got started because Instagram did not exist. um But I know nowadays a lot of people look at that and think, man, this guy is killing it in life.
00:12:11
Speaker
He may be, but just realize that's his highlight reel as well. You got to look at business is all about numbers. Business is black and white. So you got to look at it that way. It can't be a feeling based.
00:12:22
Speaker
A lot of times those guys are making their money from social media. Yeah, yeah some of them are. you' doing Yeah. Oh, yeah, there's a couple I know that are that way. Yep. Probably in a whole bunch of debt.
00:12:32
Speaker
Yeah. just to Just to keep that image up. Uh-huh. That's in really any industry, any yeah part of life. oh hundred percent Yeah, 100%. Yeah. What are the benefits of renting equipment? Whether you're first starting your company or you're 10 years in and you know you need something short term, what are the benefits over for renting over owning?
Equipment Rental Strategies
00:12:53
Speaker
So the benefit on renting would just simply be your liability.
00:12:58
Speaker
So obviously with renting, if I have a project and I'm done with it and I don't sell something else while I'm doing that project and I don't have anything for a couple months, I just return that piece of equipment and my payment's gone.
00:13:11
Speaker
The downside of that is you're paying a lot more for that equipment per week or per month than if you were paying a lease or a loan. Obviously, the rental company has to make money. So there's a premium that you're paying for that lack of liability or lack of debt. so But the the plus is...
00:13:29
Speaker
you're you're You're doing the work, you just got to price it that way. You got to price it. So you may be a little bit higher because you're pricing a piece of equipment that you're paying more for, but you don't have that risk and liability at that point. So if you're just getting started, price to save rental is probably not a bad idea, just until you get your feet wet, know the business a little bit better.
00:13:47
Speaker
Because who knows you may want to exit or or whatever, but at least at that point, you're not locked into a two or three year loan that you may or may not be able to pay back. So I would say that is a the the case for rentals.
00:14:00
Speaker
um One thing we did in the beginning, and we still do this once in a while, we don't rent much equipment anymore unless it's a specialty item. The one thing we've done lately, we actually just bought a piece of equipment last week, actually, a remote control piece of equipment. We rented it for a while.
00:14:17
Speaker
The customer wanted us to try it on a job site. We didn't know if we would use it long term because we didn't know if they would like it. So we rented it first, but when I rented it, I asked the question of if there was the option to apply our rent to the purchase price if we were to buy it. Some places do not allow that. Some places will allow a percent of.
00:14:36
Speaker
So like 70% of your rental over the last three months, whatever. applies to your purchase, which is nice. So if you're buying a $60,000 piece of equipment, you've got $10,000 in rent in it, and they apply 70%, well, now you've got that $7,000 that you can now apply to that purchase and knock that purchase price down. That's a really good way to do it. I try to negotiate that or get that when we rent so that if that contract is at being long-term or we do more with it, that we have that option to be able to do that. So that's something you can do.
00:15:05
Speaker
Another thing we've done actually at Lander Corp is we started up kind of a so subsidiary, and it's called Forestry Rentals. So we've been in the game 17 years, and with that, we now have some equipment that's very specialty that we don't use every single day, but it's sought after and it's needed in the industry. So what we do is we put it out there for others to rent.
00:15:26
Speaker
So that allows us to have it when we need it. So if we know, hey, I need that in June, July, and August, then we just block it off and we don't rent it for those three months. But if we don't have anything after that, we'll open it up. We have ads on, you know, for, it I forget, there's three different websites that have a lot of rental equipment on them. So we have ads there for all this equipment that runs.
00:15:45
Speaker
And then if it's available, we rent it out. So it allows us to be able to, honestly, it continues to make the payment all year. And then we have it when we need it at our normal cost. So that's something you could consider as you've been in business a little longer, especially if you have kind of unique equipment.
00:16:01
Speaker
So like we have like our trucks, trailers, cats and stuff like that. We use those every single day. yeah So we may rent one out, but it's very, very rare because we're using those are daily items. But some of our giraffes, aerial lifts, you know, a lot of those are only needed on a section of a project or once in a while.
00:16:18
Speaker
So we rent those out throughout the year because we don't need them all year. So, yeah. It's another branch of cash flow.
Podcast Growth & Community Sharing
00:16:24
Speaker
That's great. yeah But on the other side, if these guys are watching because they're starting, look up Forestry Rentals. Yeah, that's good point. Forestryrentals.com. Yeah, if you guys are in land clearing space, I mean, that is exactly what we rent. That's all we rent. So it's basically our equipment that we're not actively using at the moment.
00:16:39
Speaker
Yeah. Those are the three questions I had. Awesome, guys. Short podcast for your guys' drive. and Perfect. i think we achieved that. Yeah. Well, guys, if you enjoyed this podcast, ah please do share it. Like I said, that's how we grow. We don't do any ads. We don't run anything like that. So this is, especially this one, is very much for those guys just starting out. So I know that's a lot of our Facebook group, private Facebook group. So if that's you, please do share it and hope you enjoyed. See guys.