The previous installment of this two-part series emphasized that while electrical distributors may think their primary goal is to serve as a source of supply for electrical materials and tools, electrical contractors are really more interested in working with distributors that can help them make more money and avoid hassle.
If you can address these contractors' concerns you are likely to get more business from them.
Many electrical distributors believe nothing but price matters to contractors. Price makes a major difference to the contractor, but it is not the only issue. As a former electrical contractor, when purchasing materials for other contractors, I frequently bought materials from suppliers whose prices were not the absolute lowest. Other times, I would say something like, “If you can take 20 cents a hundred off the half-inch thin-wall conduit, I can give you the order.”
Why did I pay more than I had to? Because all things considered, I wasn't really paying more. Yes, the numbers on the page said that I was paying more, but the reality of my life and my job said it was better for me to pay those few extra dollars. This is became especially important on jobs where I knew that I would need fast answers from the supplier, quick turnaround on orders or special delivery times. In those situations, I put price second, and went with the suppliers I trusted. In such circumstances the cheaper materials were not the better value.
There are some other key contractor concerns that you should be aware. Let's take a look at them.
This is very important, especially for contract bid projects. Incorrect or late submittals can cause expensive delays and a lot of hard feelings. If submittals do not go smoothly, the job gets off on the wrong foot. If electrical contractors mishandles submittals — whether it's their fault or not — project managers will tend to mistrust them from then on.
This can be especially critical for long-lead items such as light fixtures and distribution equipment. If these items do not show up on time, dozens of electricians may have to be moved or reassigned. Every time this happens, productivity can dip dramatically. That's why contractors will push distributor's salespeople on delivery schedules. They want electrical distributors to call the factory to verify the delivery dates, and, if possible, to get written confirmation of the schedule.
Back-orders hurt an electrical contractor worse than either they or distributors may realize. When a product isn't available, foremen must shift their workers from one task to another, cutting productivity drastically. The solution to minimizing this problem will be different for each situation, but it generally involves communication between the electrical distributor and the contractor.
Distributors' invoices and statements give electrical contractors lots of headaches. One day when I was in charge of purchasing for a large electrical contractor, I was deluged with invoices that were very difficult to decipher. A huge hassle surfaced when I realized the purchase orders did not match the statements. On one hand, I thought it might be simple ineptitude; on the other, I wondered if it was on purpose to slip a few things through. After all, if the invoices were not understandable, then I couldn't really compare them to the original purchase order, and see if I got the right price. To this day I'm not sure what happened, but those suppliers eventually lost my business.
All electrical contractors want to cut costs. The reason is simple. With fewer costs, the contractor makes more money. Electrical contractors can cut costs in three basic ways:
Buy material more inexpensively than estimated
Increase labor productivity, and thereby pay less for labor than estimated
Cut overhead expenses
One of the most significant problems facing contractors is knowing when to stop cutting costs. At some point, trying to cut costs is a waste of time. For example, no matter how hard a contractor may try to convince them, suppliers will not sell materials below a reasonable cost. After reaching a certain pricing level, no further discounts will be available.
It's the same with overhead. A fine line exists between a company operating at peak efficiency, and a company working as hard as it can but still not getting everything done. If too many overhead expenses are eliminated, the company simply cannot operate efficiently. So, as nice as it sounds to cut costs, if the contractor cuts too deeply, they will be worse off.
For electrical contractors, overhead generally runs at between 13 percent and 20 percent of total sales. The smallest contractors generally have the highest percentages of overhead, and the largest contractors have the lowest percentages. A particular company may have slightly higher or lower percentages, depending upon what types of work they do and their method of doing business. However, these percentages seldom vary.
The chart on this page provides estimates of how electrical contracting expenses break down. The percentages are my interpretations of studies by the National Electrical Contractors Association (NECA), Bethesda, Md., and other sources. On the left are expense items, and the three columns to the right show the percentage of sales taken in each category by small, mid-sized, and large electrical contractors:
Even though few electrical contractors charge 20 percent for overhead, they survive. They stay in business because their electrical estimators play games in their estimates. When figuring a new job, they hide extra money in the estimate by using inflated material prices.
They tend to use book prices (or something closer to book price than to buying price) when estimating material, especially standard items such as boxes, fittings and branch circuit wiring. Then the contractors buy that material aggressively when it comes time to do the job. This is where the extra overhead money comes from.
Getting prices for switchgear and light fixtures in advance of a bid is important for electrical contractors. They need the best possible prices at the earliest possible moment. But electrical contractors will often shoot themselves in the foot regarding bid pricing. Once they have the best price, they may give that price to another supplier, who will then beat your price by just a little bit and get the order. You can solve this problem, but it may not always be practical. Here are some recommendations:
If you think a contractor may be shopping your bid prices, don't give him or her your best prices. Protect yourself.
If you are unsure about a certain contractor, proceed with caution. Stay safe, and test them a few times before trusting them with your best prices before the bid opening.
Do not penalize customers who are trustworthy. Give them your best possible price at the earliest possible time. Not only should you reward honesty, but you will be making it more likely that the honest contractors will win more bids.
It is likely that you'll get complaints like, “Smitty's Electric got a low bid in before we even got a price from you!” What he really means is, “You are preferring him over me.” I suggest that you say, “We have a long history with Smitty's. We trust all of the folks there, and they have earned favored status. Perhaps in time we'll be able to do the same for you. We'll let you know.”
Don't be afraid to say things like this. I'd much rather deal with someone who told me the truth than someone who's continually saying half of what they are thinking.
Warehousing and surplus material
At the end of most large projects, the electrical contractor is stuck with piles of unused materials. This is all material that they paid for, and most of it will be in good, usable condition. What can they do with it?
One choice is to carry it all back to the company warehouse, restock it and us it on a future project. However, if you perform some financial analysis on this, you'll see that it makes no economic sense to move small, inexpensive items in this manner. For example, the labor cost of picking up scattered 4-inch square boxes, boxing them, carrying them back to the office, and re-shelving them would almost certainly require more labor than the boxes are worth.
For full cases of such metal or nonmetallic boxes, however, it might be worth it. For scattered pieces of half-inch, thin-wall conduit, it would not be worth it, but for multiple intact bundles of conduit, it would be worthwhile. It wouldn't be worth it for wire connectors, but it would be worth it for motor starters or other more expensive equipment.
A second strategy is for the contractors to divest themselves of surplus material at the end of each project. In this case, contractors don't want to spend their money on the acquisition and maintenance of warehouses. The only pay-off is to save money on material. In this case, the “free” material is not worth the warehousing expense. Expenses exist for moving the material and purchasing and maintaining a warehouse. If someone can solve this efficiently, they can make lots money.
In addition to his book, “Successful Electrical Contracting,” published by the National Fire Protection Association (NFPA), Quincy, Mass., the author has written 30 other textbooks and manuals for the electrical industry.