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September 18, 2005
Contracting is a Variable Cost Business
Construction is a variable cost business. Many other businesses have a fixed cost structure. The determining factor to classify a business is to look at the % of fixed cost of the business. The remaining cost is variable. Add these two percentage together, subtract from 100% and what remains is profit.
Over 50% fixed costs - we consider this a fixed cost business such as airlines, computer software manufacturers, restaurants just to name a few. They have to drive volume to make the economics work. To pay their fixed cost every month, they must have a certain volume.
Under 50% fixed costs - we consider this a variable cost business typically a service business. This means that the most of the cost of the product or service is caused by the sale.
Construction is under 20% and in reality, a majority of contractors are under 10%. That places a huge premium on taking the right work not cheap work. Furthermore, we must insist on a margin that is reasonable for the job.
In our business of contracting, we cannot use volume as a way to earn profits. We are not an airline. Our resources (good people, your expertise) are too scarce. We have to demand a value for these factors. Thus, we should have a profitable job.
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Posted by Matthew S. Stevens at September 18, 2005 05:55 AM
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