Growing Your Business

The Cost of Doing Business

Are You Keeping Up?

Kelly Barker with her partner and brother Russ

How often have you shaved your bid to the very lowest level in order to be awarded a contract, perhaps in order to get the job away from your competitor? When this happens, it is a common mistake to not factor in the many expenses that are necessary to take care of the account properly.

In today's rapid economy, service businesses with fixed contracts need to be aware of the operating costs that can erode away at profitability. For sweeping contractors, some of the more common of these are the rising costs of fuel, labor, and consumables such as trash can liners, backpack blowers, curb brooms, etc. Many times, to keep a client from 'shopping,' contracts are just allowed to renew year after year with no price increases.

With many contractors, the only cancellation clause in the contract is when the customer gives 30 day's notice. Although they may be happy to have the business, contractors oftentimes don't realize the profitable contract of a year or so ago is the loser today. Or, because they are in a 'contract,' they believe that no price increases can legally be passed on.

If you want to remain profitable, you can't operate on that premise, and it's very much in the best interests of both you and your customers that you remain profitable. If you're doing a good job, and providing customer service at the level you should be, your customer doesn't want to change contractors any more than you want to lose them as a client.

Here's how to ensure you can introduce necessary price increases from time to time as needed. If you need to, the first step is to change your contract language. While the following is not legal advice, I am happy to share with you the portion of our contract entitled, 'Contract Terms.'

"The term of this contract is as stated on the face of the contract. If an open contract period exists, Contractor reserves the right to adjust the price as required from time to time based upon economic conditions outside of their control. Such conditions will include price increases in fuel, trash removal or environmental charges imposed by third parties. All such charges shall be communicated in writing."

In the case of MetroSweep, Inc., we imposed fuel increases on our customers in May of 2000. We did so on a two-tier service basis. If our contracted services to a client included air sweeping, we increased our charges by $5 per servicing; if they were receiving mechanical broom sweeping, the cost increase was $10 per servicing. We made no allowance for distance from our headquarters, which means the location next door received the same fuel increase price add-on as did the locations across town.

The response? We received fewer than five telephone calls to question the increase. Given the fact we service over 1600 stops per month, I believe the increase was well received.

While having language in your contract to permit such an increase is certainly a first step, equally important is how you notify your customers. I recommend a carefully worded letter from the president or owner of your company. It should include easily understandable language that spells out with statistical documentation if at all possible the reason behind the need for the increase in your service price. Remember, your customers are in business too, and they know about the rising cost of fuel, if not for their company then for themselves.

They are also aware of the rising costs of health insurance and, depending upon the part of the country you hail from, the scarcity of labor. Just because they haven't called you up to remind you to be sure you're covering your costs and making a normal profit doesn't mean they won't recognize that you have to do so!

Fortunately, as sweeping contractors we deal primarily with 'business savvy' customers. They, too, are having to pay their employees better, include benefit plans and, in most cases, pay an increasing premium in order to cover the costs of fuel and other consumables in their own businesses. Imposed correctly, price increases in such logical areas will show you are a solid businessperson, one who recognizes that the surest way to eventually be working for someone else again is to do whatever it takes to get the low bid. On the other hand, that doesn't mean you don't have to run a tight operation, no matter whether you're running one sweeper or 30. If you don't, you will be pricing yourself out of your marketplace. If you don't keep a firm grip on costs, you'll either get no contracts or, at the other end of the spectrum, end up working too cheaply and be out of business because you can't afford new equipment and good personnel.

The sweeper fleet at MetroSweep, Inc., which is located in Waterford, Michigan.

Here's a real world example: Today, nearly every shopping center has outside trash containers that we are required to change in the course of performing our sweeping service. Because a can liner may only cost 14 cents per liner, it can be an easily overlooked cost. Several years ago, before the advent of rising fuel costs, I got interested in how many trash can liners we changed in the course of our sweeping routes. You may now be doing what we did at the time; we'd just 'throw in' trash can liner changeout as a part of our service. However, when we looked closely at the true cost of changing trash can liners, we found it was worth a second thought. I think you will, too, as are all of the other small, somewhat hidden costs in your business.

For this example, let's assume you sweep standard retail shopping centers, each with the need to change out 8 can liners per site per sweep. So, the total cost per site is only $1.12 (8 ¥ 0.14), right? Wrong! Your employee, the one who is changing the liners out, costs you $15.00+ per hour including benefits. Let's assume it takes only 2 minutes per liner changeout; that's $4 in wage cost per stop. But, remember that while the liners are being changed out your $50,000 sweeper is also not at work, and is probably idling away fuel. You'll find that over the course of a week, a month, a year, that seemingly insignificant 14 cents is actually a pretty large number.

Rather than give away boxes and boxes of these liners, along with the labor to do the change-outs, we commenced charging $1 per can liner for each liner we changed. Again, nary a comment from our customers, and the reason why is because it's a sensible, explainable cost of doing business, and our customers recognize it as such. However, this $1 per liner 'add-on' an amount that used to be a hidden cost against our bottom line now generates approximately $13,000 in income per year. This amount helps to offset the labor and material portion of our actual costs. While many of the competitors in the market might choose to use it as a selling point that they don't charge for liner changeout, what they are choosing to do is to work for less money. And, to a good business person, most of their customers, they don't appear to be making an intelligent business decision.

All of this presumes, of course, that you understand and adhere to the principles of good business. No matter your size, large or small, you must provide great customer service if you expect your customers to stay with you year after year. You also have to make a normal profit, after all expenses, or you won't be able to keep your equipment up to date and your employees with you for the long term. Your successful customers already know that's true!

Customers that deprive you of making a successful go of your business are not the type of clients you need. That's because they also happen to be the same customers who tend to be more nit-picky, demanding and used to getting something for nothing. No matter where in the country you operate, I can assure you of one fact: Good customers value good service and will pay whatever small additional amounts are needed to ensure they continue to receive that level of quality service on an uninterrupted basis. To do that, you need to be sure you keep your pricing in line with 100% of your costs.

Sometimes, we just forget to ask.

This article was written by Kelly Barker, the president of MetroSweep, Inc., located in Waterford, Michigan. Kelly, along with her partner and brother, Russ, own one of the most successful power sweeping companies in Michigan. Their operation is run from a 20,000 square foot facility located on 5 acres. The facility has received many beautification awards, and MetroSweep received the Business of the Year Award from their local Chamber of Commerce. Kelly is a frequent guest speaker on topics relating to marketing and business management.

She and MetroSweep were the feature story of Michigan Contractor and Builder (MC&B) in March of this year. Additionally, MetroSweep has been nominated by the Detroit Chamber of Commerce as one of the 101 Best Companies to Work for in Michigan. You can reach Kelly, Russ and the rest of the MetroSweep team at their website, www.metrosweep.com.

This article is reprinted from American Sweeper magazine, Volume 8 Number 1, 2000.

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