Managing Director, Jeremy Wynn-Harris, discusses Builderscrack fees and how to account for them in a way that doesn’t eat into your profits…
How to account for the Builderscrack fee is one area of our service where there is a lot of different interpretations amongst our members. The other day I was in the pub downstairs talking to one of our trade users who raised this with me.
It was his impression that we expect tradies to pay our fees out of their profit. This couldn’t be further from the truth, but it struck me that we could do a better job of explaining how to account for our fees in your pricing. This is something I really want to improve on now and into the future.
As it stands our terms state: (the following clause is taken from our terms 7.1.2g)
“All fees charged by Builderscrack are to be considered a cost of business and are not to be passed on directly to the Homeowner through the quote. Builderscrack is a means of marketing a business and should be treated as such in regards to fees. Directly charging the fee through an invoice will result in the tradesperson’s account being terminated.”
While we’ve made it clear what we don’t want you to do, I want to kick off the conversation around how we do want our fees accounted for, so that our fee doesn’t eat into your profit, while you continue to secure work and grow your business, and your profile on Builderscrack. We’re currently looking at improving our terms to better reflect this.
“We absolutely don’t expect that our fees are paid out of a job’s profit”
For most jobs, we charge 4-5% on the total cost of a job, with our fee capped at $600-$750. We re-invest virtually all of our fees into improving our platform and finding work for all our members. Think of our service as user funded advertising. We focus on what we’re good at, which is finding work for you, our trade users – and in turn you focus on what you’re good at, which is undertaking the work. It’s a win – win, with minimal risk.
We’re the only service in New Zealand that offers a “no work, no fee” promise on most of our jobs. The reason we don’t want our fee itemised into quotes and invoices, is it detracts from the homeowner’s experience of using Builderscrack, and isn’t a fair representation of the value we provide to both our trade businesses and homeowners.
Think about if you itemised your online, print or radio advertising on a quote or invoice to a customer. They just wouldn’t buy it.
It’s the same with our fee, and as such, our fee should be treated as an operating expense.
It’s standard practice to build in the cost of the services businesses use to procure, undertake and receive payment for work – into the quote or invoice, and we require that Builderscrack fees are treated in the same way.
Some examples of other typical operating expenses are:
- Accountancy fees
- Legal fees
- Phone & Internet
- Office expenses
- Other advertising channels (print, web, radio etc)
- Financial fees (bank fees, payment processing fees, credit line fees)
Three Typical Methods for Building Our Fees Into Your Pricing
As Operating Expenses Per-Job
You build in the Builderscrack fee per-job, passing the fee to the client as a markup on the various job costs (typically labour and materials). The client is quoted or invoiced with the fees built into the various line-items, but not as an item itself.
- Materials cost = Materials cost + profit (margin) + operating expenses – advertising costs + builderscrack fee
- Labor cost = Labor cost + profit (margin) + operating expenses – advertising costs + builderscrack fee
- A more complicated pricing model
- You will need to subtract the advertising component of your operating expenses per-job (as you know a Builderscrack job did not come as a result from your other advertising
- You should add the builderscrack fee proportionally to materials and labor, and any other line items (if your materials make up 75% and labor 25% of total invoice, then add 75% of the builderscrack fee to materials and 25% of the fee to labor)
As Operating Expenses Across The Year
Your total builderscrack fees for the year are accounted as part of your advertising, under operating expenses, and spread across all jobs from all sources (word of mouth, other advertising channels etc).
You can work with your accountant to calculate the advertising component for each job (usually as a percentage) and build it into both your materials and labor costs for every job you undertake.
- Materials cost = Materials cost + profit (margin) + operating expenses
- Labor cost = Labor cost + profit (margin) + operating expenses
- A simpler, more standard pricing calculation
- Your advertising costs remain the same for all jobs, no matter their source and are shared among all your customers.
Typically, building Builderscrack fees in as operating expenses across the year will result in more consistent and competitive pricing across all channels.
As Part of an Advertising Budget
In my opinion, the best way of approaching both our fees and your other advertising costs is through calculating an advertising budget for your business up front for the financial year (or remainder of the financial year). Ideally, this will be based on what you’ve spent in the past, plus a bit more for growth if that makes sense.
By building future advertising costs into every job you undertake, you build a pot that you use to grow your business through further advertising.
You also buffer against cash flow challenges when, for example, Builderscrack sends an invoice on a job you’ve secured but have not yet completed, and you can maintain a pot for procuring jobs through proactively advertising during quiet periods.
A typical way of doing this is charging a small percentage on every line item on your quote/invoice.
You can refer to your business balance sheet to have a clear picture of the position of your advertising budget, and confidently look for new opportunities including chasing jobs on Builderscrack.
What is a typical advertising budget for a trade business in NZ?
This varies among trades and is typically closely held by business owners. The higher your budget, the greater advertising exposure you can afford your business, but the higher your typical quote/pricing will be too. It’s a balancing act.
In 2008 Branz did a in-depth survey on the cost breakdown of building a typical new home, and published the following chart and associated report:
If we use the cost per sq/m of $2100 in Feb 2018 and an average house size of 200sq/m, based on a total build cost of $400,000 – the advertising and marketing component for a new home at 2.1% is $8,400.
It’s worth noting that with Builderscrack’s fees capped at $750, our fee is just 0.18% for that house build.
With sub-contracting work and smaller jobs, the typical marketing & advertising budget in our research is between 5-10%, and as much as 15%+ in certain businesses.
Some owners of established businesses may allocate less than 5%, and this is typical when a business has many established contacts supplying work, more work in the pipe than they can undertake or there is little competition in their space.
There are lots of variables and I strongly advise that you consult with your accountant to establish a marketing budget that suits your business. They will work with you to take your own industry knowledge and turn it into something you can use to grow your business, or simply just to smooth out your work pipeline. Some typical variables are:
- Economic factors
- Years in business
- Existing relationships
- Material vs Labor components
- Profit margins
- Available resource (or availability of skilled labour for hire)
A Note on Pricing
Last month we published a well-received article on Avoiding The Race to The Bottom. If you haven’t read it yet, I suggest you do. While it’s important to be competitively priced, there is a fine line between being competitive, and being profitable.
We’ve heard of reports (Why do tradie quotes vary so much?) of some jobs being quoted with up to a 100% difference in price. It’s important to note these reports are not concerning Builderscrack quotes, but we were asked to comment on the article and had a look. When we’re made aware of large quote variances on our platform we do investigate. As reported, this really turns homeowners off as they perceive a high amount of risk with accepting either quote.
According to our research, our 5% fee is simply not enough for homeowners to choose one quote over another. On a 10k job, we’re talking $500. On a 15k job or more, it’s capped at $750.
More important to the potential customer are things like:
- Doing what you say you’ll do on time
- Prompt communication
- Presentation and professionalism
- Trust (a warm smile and a caring attitude)
- Being helpful and adding value with suggestions
I encourage you to talk to your accountant about how to structure your pricing to properly account for Builderscrack’s fees under an advertising budget or as an operating expense, to ensure you’re building in enough margin to keep your business healthy and profitable.
Ultimately, with the right accounting method, our fees won’t be eating into your profits, but rather, will be a source of valuable business growth. We encourage you to build our fees into your business expenses, which are ultimately passed onto your customers. We just don’t want our trade members adding our fees on quotes or invoices as line items.
Avoid entering into the race to the bottom by standing out on other fronts aside from price. Build an advertising budget into your pricing and use it to find work when you’re in a quiet patch and/or grow your business if you have capacity.
We’re looking forward to answering any questions or concerns on this and will follow up in future newsletters.
Jeremy Wynn-Harris, Managing Director of Builderscrack.co.nz