How Do You Handle Volume Discounts?

Mike Finley

This is kind of a tricky situation, as we grow in business volume our purchases from vendors naturally grow in volume too. There are established levels in specific material vendor categories where discounts are tiered. Since we do bathrooms we do a lot of tile so we've reached the top tier in that wholesale discount pretty quickly.

A few months ago I was ready to take the next step in my business plan which was to start subbing out the tile setting. The initial goal was just to find reliable setters that could set tile and meet our needs based on time frames and quality. As you can imagine with anything new measuring the success of this changed on a daily basis.

Fast forwarding to now, we have a couple of reliable tile setters who we have established good working relationships with and have done enough work so that now we both know what to expect from each other.

So here is the issue, just like volume discounts with material vendors, as we increase business and purchase more and more from labor vendors like tile setters at what point do volume discounts enter into the picture?

On the one hand we have the issue of these guys have spent time and energy working with us and have been awesome in every way. We've never beat them up on price, nor have they taken advantage of us, and of course I have a feeling of loyalty to those who have taken care of us.

On the other hand, it is business and if you get to the point of purchasing large amounts of anything, discounts usually enter into the equation sooner or later. I see it that both sides of a relationship can benefit. My side can benefit from a reduced expense in purchasing the tile setting we need and the other side can benefit from a constant and steadily increasing volume of work.

I have no doubt I could approach the open market with $5000, $10,000 or $15,000 worth of tile setting a month and ask new setters to bid for our work based on this volume and reduce our costs pretty easily and quickly. But I don't want to cut out of the picture the guys we use now. So how do you go about approaching this with your established sub-contractors, with out making them feel like you are trying to squeeze them? That's the last thing I want to do, but I also don't want to over pay for work if we are justified not to.

mdshunk

Never. Perhaps you have the mistaken impression that their costs got cheaper because they are doing more work for you? They're still working a 40 hour week, whether for you or someone else. Their costs are still their costs. Do they owe you a discount because you give them a lot of work? I hope not.

john elliott

Basically they are selling you their time, and they only have so much of it to sell. A tile wholesaler can call and order another truckload of tiles, but where can a tile setter get more time from?
By supplying them with a lot of work, ongoing, all they are getting from you is the reduced risk of a day or more without work, and I guess that is worth something, but not actual money, more like increased effort on their part to keep you and your clients happy, maybe get out of bed when they don't feel too good, hire a truck when their own breaks down so as not to mess up your schedules, that sort of thing, but not actual money

John

go dart

the best relationship w/ any sub is win-win. its enough for me to exspect professional workmanship and in turn have jobs ready and pay quickly

realpurty2

I have to disagree with MD this time.

Logically thinking... Most if not all companies that do bid/contract projects have a contingency or markup of some sort on labor. Everyone typically estimates high to be on the safe side, so yes, that does leave them some wiggle room in most cases.

When we are on the subcontracting side, all repeat clients get a 10% discount on future jobs. We might make 10% less on any job after the first one for that client but repeat business is well worth it. Every opportunity to do repeat business is an opportunity to improve our reputation and earn even more word of mouth from that client. The 10% discount total is then taken from my ADVERTISING budget and put back into the current working job. It's no different than selling the company in any other way.

When we are on the GC side of this issue, after we've given repeat work to a sub firm that either meets the criteria of "we're paying their overhead in the amount of work we've given them" or "welcome back guys, at this rate you might as well move in" then I actually HOPE for a discount. * Note the HOPE not EXPECT*

The way I usually approach this is during the contract signing, I'll jokingly mention to the sub that as much as he's been around lately, isn't it about time for my repeat customer discount to kick in? Then leave the ball in their court. Sometimes all it takes is to put the idea in their mind. If they balk... it's never mentioned again. If you've worked with a sub long enough, you already know if he's giving you his bottom dollar or if he has room to come down a bit without harming his profit margin.

It never hurts to ask Mike. No sub will ever give up the gravy train over a simple question.

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john elliott

I'm surprised to heart that a subcontractor would have such a large advertising budget, more that 10% of their turnover.
People that sub for me don't usually advertise at all

John

realpurty2

Ours is sort of a unique situation John, we are two divisions operating under one name.

The electrical division does mostly subcontract work and service calls. The construction division does everything else. Thus I have two budgets to distribute as needed.

Also, our budgeted amounts were developed before the company even opened the doors and I revise as necessary. I see no harm in leaving funds in an interest earning account for advertising and marketing until it's needed. Call it my rainy day stash..

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bcf

Seems to me that asking them that question is very similar to a homeowner asking you to sharpen your pencils. If they are doing great work for you, not rapng you, and building your business image, maybe they deserve a bonus, not a paycut.

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maj

I agree.

MF.... If things are working out for the best, why risk that relationship? Personally, I would be insulted if I did alot of subcontracting for one guy, and then he suggests discounts in what I get paid. That would lead me to believe he thinks I am not worth what he is paying me. IOW, I am not doing a good job for him. If that were the case, I would prolly say,"screw you, there's other work out there!"

Most likely as a sub, they have already lowered their standard rate somewhat. That's what I do when I do sub work.

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john elliott

So it's not really an actual advertising budget then? More a savings account

John

realpurty2

Maj, in interest of our usual debates for pleasure.. I have to ask something here. I've noticed this way of thinking on many ppl's post and it raised a curiousity. Without hijacking Mike's thread.. since this does tie in.. in your opinion... who is the "giver" or "upper hand" in Mike's situation? The project belongs to the GC to use whatever sub he chooses. In my most humble opinion only... the sub would not be working on that particular project if the GC (opps..or IC) did not hire him. Therefore the sub has no right to be offended if a question is asked. I don't see the logic that it would be an insult. Sure there is other work out there as you say, but at what cost? My point is, if you have a regular client, whether it be a GC/IC or H.O, you save expenses by doing repeat work. There are also nonmonetary benefits from repeat clients such as guaranteed work, a good working relationship in which you don't have the hassles and lost time chasing down answers, prompt pay schedules etc.

I guess I still haven't mastered the "screw you, I'll work my way or no way" attitude. Give me some gender bias too here, my skin is not yet toughened up. But, I actually appreciate every customer we work for. I see them as the "giver" because they too had the choice of "screw you" but instead they chose to use our services. I choose to voluntarily make it part of our sales to offer repeat customer discounts, but even if I didn't.. I'd still never be offended if someone who repeatedly used us asked if it was an option. If it wasn't, I'd simply explain that I had already given them the best possible pricing since we were pleased they had chosen our services. I guess maybe I still believe in "Don't bite the hand that feeds you."

And John... I don't see it as a savings account simply because of how it is recorded on the books and the method it is funded from. Typically most ppl don't budget a routine savings account deposit into overhead, while a marketing and advertising budgeted amount is. We determine at the end of each fiscal year how much that budget should be and that's all that it gets. It's spent in whatever manor best benefits the company, usually company shirts, sponsoring some event for charity, newspaper ads, portofolios etc. Anything left over is considered profit at the end of the year and can be disbursed into other accounts, left for the next year to use as discounts or any other way needed. Maybe I just do things wierd but it works well for us.

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Pearce Services

If all the suncontractor needed to keep busy full time is the business you give him, his costs would be lower, and his life simplified, that is worth something, and should be considered in this discussion.

He would not waste time talking with potential customers, trips to look at work and find pricing for products, time spent doing estimates for work he may not get. No time would be wasted on customer expectation discussions, and the whole effort of explaining the process, the materials, the pay structure, the warrantee.

He would eliminated advertising costs, referral fees, and commissions.

He would eliminate the need to allocate 2% of his revenues for bad debt.

He would reduce his clerical costs by only dealing with one customer.

If I eliminated all these things from the course of my day, I could create 20 extra hours a week of constructive, billable time. I think I would take that for a small percentage of the projects.

How much do you think the installers give to Home Depot or Lowes for the same arrangement?

john elliott

Great..... and the day when Mike calls the sub and says, sorry, I've got no more work for you?

If I was a subcontractor the last thing I would want is to work for just one GC. I would keep looking for other work and if that other work payed better then that would be the work I would take.

John

Pearce Services

I doubt that schedules and the inconsistency of work from a single contractor could allow for working only for one GC, fill in work is always going to be required. Just as the GC could not only have one sub.

The point is that the more you do for one customer the less you have to do for others. and if it is guaranteed, you have some economies that should be considered.

maj

Maj, in interest of our usual debates for pleasure.. And why is it everyone here feels they have to "debate" me and a few select others????.......... Oh yeah......the "herd" I have to ask something here. I've noticed this way of thinking on many ppl's post and it raised a curiousity. Without hijacking Mike's thread.. since this does tie in.. in your opinion... who is the "giver" or "upper hand" in Mike's situation?The sub. The project belongs to the GC to use whatever sub he chooses. Correct, but he wants this particular sub because of the relationship they have developed. In my most humble opinion only... the sub would not be working on that particular project if the GC (opps..or IC) did not hire him. DUH....Therefore the sub has no right to be offended if a question is asked. I don't see the logic that it would be an insult.So why do the "contractors" on this board get so pissed off when a client asks for the "contractors" bottom dollar? Or when they are complaining about lowballers or someone underpricing their work?I hear it over and over on this board about how we, as "contractors" are always getting screwed, but now suddenly when I say it, it needs to be DEBATED???? WTF??? Sure there is other work out there as you say, but at what cost?No cost. Actually it would be more money. My point is, if you have a regular client, whether it be a GC/IC or H.O, you save expenses by doing repeat work. YEP.... been trying to say that for months too! There are also nonmonetary benefits from repeat clients such as guaranteed work, a good working relationship in which you don't have the hassles and lost time chasing down answers, prompt pay schedules etc. Again.... That's what I've always said the whole time here on this board but.............It's always wrong when I say it.

I guess I still haven't mastered the "screw you, I'll work my way or no way" attitude.When did I ever say that??? Give me some gender bias too here, my skin is not yet toughened up. But, I actually appreciate every customer we work for. And I don't? BULLCHIT!!!!I see them as the "giver" because they too had the choice of "screw you" but instead they chose to use our services. So the difference between a GC & a homeowner is???? I choose to voluntarily make it part of our sales to offer repeat customer discounts, but even if I didn't.. I'd still never be offended if someone who repeatedly used us asked if it was an option. If it wasn't, I'd simply explain that I had already given them the best possible pricing since we were pleased they had chosen our services. I guess maybe I still believe in "Don't bite the hand that feeds you."

And John... I don't see it as a savings account simply because of how it is recorded on the books and the method it is funded from. Typically most ppl don't budget a routine savings account deposit into overhead, while a marketing and advertising budgeted amount is. We determine at the end of each fiscal year how much that budget should be and that's all that it gets. It's spent in whatever manor best benefits the company, usually company shirts, sponsoring some event for charity, newspaper ads, portofolios etc. Anything left over is considered profit at the end of the year and can be disbursed into other accounts, left for the next year to use as discounts or any other way needed. Maybe I just do things wierd but it works well for us.

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maj

EXACTLY........

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Gordo

As both a contractor and subcontractor, I have seen this senario from both sides.

From the contractor side, I respect my subs enough to NOT ask for a discount. They do excellent work and they do it right the first time...saving me money due to delays. Another benefit from using the same subs is they are 'Johnny-on -the call' when I need them......saving me money by expediting the job.

From the sub-contractor side, if the GC asked for a discount....I would say forget about it because there is too much work out there from other sources (mostly HO).

What I have experienced, the cheaper subs that 'slash' their prices will always cut corners (these short cuts will come back to haunt you months or years down the road).

The good subs are usually more expensive, but they save you $ in other ways.

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maj

Although I don't "slash" my typical rate, I do subcontract to other contractors for a few bucks less per hour, however this is usually just a day here or a few days there. Otherwise typical subcontract work is an agreed upon price with signed contract, just as anyone would do with the homeowner. Thus my point of subbing is no different than contracting directly with the end user (homeowner). Only difference is GC's are making money off subcontractors, so for God's sake why should they get a "volume discount" by screwing the sub out of his hard earned dollar?

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mdshunk

Getting a lot of work from one GC would be enough to cause me worry such that I'd never want to offer a discount. The 'too many eggs in one basket' school of thought.

When I bid work for a repeat GC, I do tend to bid lower anyhow. I already know exactly how he wants things done, know how his jobsites are, have developed a rapport, and can expect few or no surprises. In essence, he's already getting a "deal" and doesn't really realize it. When bidding work for an unfamiar GC or a GC for whom you've only got a short track record, you tend to naturally bid a little higher for imaginary situations that may or may not crop up. If something does crop up, you're covered; if nothing unusual happens, you just made a few extra coins. Once you've got a sufficient historical data, you can give more 'normal' bids without the unnecessary padding. If such a customer asked for a volume 'discount', I'd have to explain that they're already getting it and they don't know it. (I would, however, never personally volunteer this information). This doesn't come out of some arbitrary 'advertising' budget. It's just not marked up extra, as previous bid might have been.

What we're seeing here in this thread is the 'Wal-Mart mentality' spilling over into trade craft.

Gordo

Yes Maj. The few bucks cheaper you charge the GC is because of the reduced PITA factor of dealing with an ORGANIZED GC. The easier a GC can make the job go smoothly.....the more $ the GC saves.

In return, as a sub you can fill in your schedule working for the GC whenever there is an opening. Planning and cooperation are the key in these GC/sub relationships. We've work with a few GCs in the past....most were unorganized and they were charged a higher rate (time is money). As a sub, the job is to get in and out as fast as possible while doing the highest quality work.

When I am the GC, I make sure to give heads up calls to the subs days in advance to keep the subs schedule rolling. Nothing worse than the GC calling the day they need you when you are already committed to a 2 week project.

Bottom line is I will not be as motivated to work for less as a sub if the headaches were the same as being the GC.

Another view....the more the sub charges means the more M/U you make as the GC. After all, the client is the one paying for the job.

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