Why Square-Foot Pricing Fails (and What to Use Instead)

Michael Murray:Hey everybody, welcome back to the Price Sell Paint podcast. My name is Michael Murray. I'm joined by Jon Bryant. Hey Jon, how are you today?

Jon Bryant:I'm good Michael, how are you doing?

Michael Murray:Good, just as a way of introduction, I own a painting company in Cleveland, Ohio called Textbook Painting. I've been doing that for about 20 years. Started right after college where I ran a college painting company. So I've been doing this stuff for more than half my life. Jon, a lot of people probably don't know the infamous Jon Bryant. Tell us a little bit about what's keeping you busy these days.

Jon Bryant:Yeah, so this is a different style of intro for us because we don't often explain who we are and why we're talking about this stuff. I'm co-founder and CEO of PaintScout. I've been in the painting industry, I've owned a painting business, grown a painting business for the last 20 years. It sounds crazy to actually say that out loud. This is kind of a fun time with the Price Sell Paint podcast for us to talk about the things we've learned, share some stuff we know, and yeah, for our moms to tune in and be proud of us. So hello mom, good to see you.

Michael Murray:I don't think my mom listens. Hi mom, I don't think you listen, but that's all right. Every once in a while we run into somebody at a conference and they tell us, hey, I listened to the podcast. We actually both just experienced that. I had a really good experience. We actually got to hang out with each other, which we very rarely get to do, even though we talk to each other all the time. So we were just up in Seattle at the Nolan Grand Summit for Nolan Consulting. I had an awesome time. I felt like the keynote speakers were just incredible. Left with some really good takeaways. And you and I did a little presentation that a handful of people showed up for. And I think it went well. Good to see you.

Jon Bryant:That was a fun time, a great time. It's so interesting after kind of years of doing this and coming back to the grand summit. Nolan Consulting has been really foundational in my life. I know it's been foundational for you too. Coming back to that and you know, it used to be that I felt like the outsider a little bit. And now people recognize you and me and I don't know if it's for the podcast or not, but I had my first hater this year and I feel like I want to take a picture with the person and just be like, hey, what's up man? This is a big moment for me because I feel like finally...

Michael Murray:You should get like a PaintScout hater hat or something for that guy. I need to hear more about this.

Jon Bryant:Yeah, that would be great. The problem is you gotta buy at least like 25 to 50 to get a decent deal on them. So one would be too much investment for me. So I got, that might hate me. That's great. Who's trolling me on this thing? Yeah, what's the breaking point?

Michael Murray:I have a feeling there's at least 25 to 50 people. How many of these hats can I get? So tell me more about this hater. This guy just like hates you or like our podcast, or just PaintScout?

Jon Bryant:I don't want to get into it. I'm someone that leans more into the positive obviously, but yeah, it was someone I didn't recognize and they recognized me and all of a sudden in a moment of getting feedback, it was turning personal really quickly. It's kind of interesting. When you start these podcasts, we did this to start just spreading education and whether we know anything or not, it just felt good to talk about the things we've done. It felt like someone who knew me too well and I didn't know them and had some real opinions. So yeah, very interesting experience.

Michael Murray:I think that is actually a good policy going forward. If anybody likes the podcast, certainly reach out to me. And you don't like it, reach out to Jon. I think that's actually perfect. I have a really fragile ego. I bruise easily.

Jon Bryant:I have 50 hats to give away now, so that's great. I need one of those things.

Michael Murray:That's right. Come up to Jon, ask him where one of those hater hats are. Oh my gosh. Well, I think that's actually pretty funny. When we started this whole thing, it literally was you and I would talk all the time about our problems in our business, coming up with ideas and how are you solving this and what are you doing about that? And what do you think about this? And we're in these Facebook groups and chat rooms and we'd see conversations going on and we would talk about how there's a lot of maybe misinformation or just even tribal knowledge that gets spread throughout the painting industry that's maybe not necessarily tested. It's just like, well, this is how we've always done it. And so this is what we're gonna pass along to the next generation or the next group or whatever that might be. I speak for myself and I know you agree. I don't pretend to have all the answers. I know that I will never be worse than I am today. I will never know less than I do today. I try to take that to my business, try to take that to the podcast. I would say we don't take the podcast all that seriously, although hopefully just seriously enough to provide some value. But we don't pretend to be good at this. Is that fair?

Jon Bryant:I think the better way of phrasing it is like, we've been working through these problems for years. And I think on the outside, the painting businesses that you run, that we've grown, they're substantial. They're not nothing. So if anyone can learn anything from that journey, I think that's what's really important to me. And I think it supports you too.

Michael Murray:Yeah. To be clear when I say we're not good at this, I mean podcasting. Just to be on the same page. When it doesn't sound quite right or the nasally voice or whatever it might be, we'll take that criticism because we feel the same way. We only try to share from our experience and what we're learning and we don't pretend to have perfect businesses, but we have grown fairly substantial businesses that are profitable and employ a lot of people. Happy to share some information and if it's helpful for one or two people, that's pretty awesome and that's kind of the goal. But yeah, anyways, that's what we're doing here.

Jon Bryant:Perfect, man. So let's probably a good place to get into it. Yeah, that's what we're doing here. And yeah, so let's talk about what we came here to talk about today, which was this idea of pricing painting projects, in fact, pricing any construction project, and then having to explain why that price is what it is, whether it's to your staff or to subcontractors. I think it's a pretty interesting discussion. This concept actually came to us from someone who does listen to the podcast, Dietmar in New Zealand. And thank you, Dietmar, for the suggestion. It's a great suggestion. I think something that we overlook. But I think all of us face almost every day that are in this industry, whether you sell, whether you're a business owner, it's like that age old debate of was sales right or is production right? Sales always says production isn't fast enough. Production always says we didn't give enough time. So I think it's a great discussion and I want to explore this a little bit. So Michael, he's from New Zealand.

Michael Murray:Did you say he's from New Zealand? Wow, look at that. Okay, that's pretty sweet.

Jon Bryant:Yeah. So let's first kind of get into the way we price. And for those of you who haven't listened to the Price Sell Paint podcast before, if this is your first time or haven't met Michael or myself at a conference, we believe the only way to price a painting project is through production rates. So a lot of people talk about dollars per square foot. They talk about man days. They guess.

Michael Murray:For anybody that's in the listen only, that's licking your finger and putting that up in the air. In case you don't want to have the full 3D experience of this nonsense on video.

Jon Bryant:Yeah, so it's kind of what we call wild-ass guessing versus actually having a system that is going to get you pretty close to the right price. So Michael, tell me a bit about your experience with both of these and why we think it's the gold standard for production rates.

Michael Murray:Yeah. So I was lucky enough when I started as a college student running a franchise painting company type of thing, which I know many other people have done in our industry, we learned how to sell and price projects based on production rates. We literally did it all on paper, learned how to do a lot of mental math. We didn't have any fancy software like PaintScout to help us out. But yeah, production rates, pretty straightforward. It's basically breaking everything down into its smallest unit. And then from there, determining how many hours it takes to do things. And from there, how much you charge per hour. That can include materials, or you can then add materials afterwards. That nuance doesn't really make much of a difference. It's going to come out to the same math. So how long does it take you to paint a door? How many square feet of drywall can you paint in an hour? How many linear feet of baseboards can you paint in an hour? How long does it take you to paint a window? You just take that over every single substrate or area that you could paint, breaking it down to time. And then from time, you build that up into a price based on how much you need to charge per hour to run a profitable and successful business. That's production rate estimating. I don't understand how people do square foot pricing. It doesn't make any sense. I remember when we first started doing interior painting probably, what was that? Maybe seven years ago. We got to learn how to price stuff because as a college kid, all we did was exterior and for the first 10 years, all we did was paint exteriors and needed to learn how to do interiors. And the first person I talked to talked about per square foot pricing is how you do interiors. And I had no idea what they were talking about. And I tried to figure it out. And I consider myself to be fairly intelligent and I can figure it out. And they had no idea how to explain it in a way that made any sense. And it seemed like basically somebody said you charge $2.50 a square foot. And so that's what you charge. And I'm just like, yeah, that doesn't make any sense. I don't understand what happens when they only want certain things painted or they want to change the type of paint or anything changes. And it's just like, yeah, you just use your best guess. And I'm like, okay, that doesn't work for me. But I don't know. Did I explain it well?

Jon Bryant:I think you did. There's gonna be lots of people listening, I think, that do square footage pricing. I would obviously challenge them on that to say I think you're missing some things there and you're making it more difficult on yourself than you have to, and quite honestly, what we're talking about today, it requires production rates in order to have good conversations with your team, with the people doing the work or if you're going to subcontract it with your subcontractors. And without that, it just feels like everything is unpredictable. So I do think there's always that guy still, which is funny. When I started, I think $3 a square foot was the number thrown around. I had the same problem. It was like, what is that number? How does that make sense? I'd go into a house, like how many square feet is your house? And they'd be like, it's 1200 square feet, like sweet 1200 times three. And I'd have this look down at my numbers and be like, oh Jesus, this is the number. It only takes a couple of times of being like, that's $3600 when really it was a $9,000 job to kind of realize this doesn't make any sense. But there was always that guy, like you go to the paint store and this is where I started. I talked to the person at the paint store. I felt like they were the person who had the knowledge. The person at the till, yeah. And you'd be like, hey, I don't know how to price this. Is there like a sales rep that could help me or someone? And there'd be this old guy covered in paint. It reminded me of like a gold digger back in like the Klondike who would come out from behind a shelf. It was like $3 a square foot. Where did you come? Then you go back and you could never find him again. This is where this guy come from.

Michael Murray:And then just go back. Got it. Thank you. Yeah.

Jon Bryant:Thank you. Yeah. Duly noted. So for me, production rate was really the thing that opened up my ability to run a successful business. If you're not familiar with this concept, check out some of our other videos on it. We have a bunch of videos as well as some estimating videos that actually help show how to use it. I think that's the starting point you have to have. And we're going to explain more why, because this is so important to running a healthy company, having healthy relationships. And it's really the start of pricing profitably, accurately, and getting jobs done on time. So Michael, why don't you take it from there? You went from someone telling you a dollar per square foot or whatever it was to production rates. Talk a little bit about more like why you think this is helpful to get that conversation going with staff.

Michael Murray:Yeah, I would say one of the first places that makes this helpful is you can train somebody how to quote. We talked a little bit about why we started this podcast and we strongly believe that if you price a job accurately at the right rate and the right amount of time and the right dollars, then you can, and hopefully you learn how to sell well so that you can win a high percentage of your jobs. You can now run a business where you have enough money in it to pay people fairly, afford maybe nicer, newer vehicles and stuff that your team can drive around that they can be proud of and be safe in and have health insurance, all the things that you might want to have to run a good business. Or you can go with subcontractors and pay them a really fair wage and attract the best of the best in terms of your subcontractors and take care of them really well. It's really all about pricing it well, having enough money so that you can take care of people. And I would say when you do it with a production rate method, you have a language that everybody can understand. How many hours should this take is something that everybody can understand. And you can get really good results out of your production team, employees, whatever, doesn't matter, they're people at the end of the day. And when you tell somebody, hey, it should take you five hours, six hours, whatever it is to paint this bedroom. Eight hours, 12 hours, it doesn't matter. Whatever your production rates tell you, that is based on past experience, it's based on doing it, it's based on the normal average speed of a crew member on your team. That is a standard that everybody can get behind. Like, at this company, it takes us an hour to paint a door, or whatever. If it takes you an hour and half, we need to work with you to help you get a little bit better so that you can get to the standard. That's where I think production rates matter almost even more than when it comes to actually selling the job is in managing the job and producing the job and giving your team something that they can go after and kind of sprint towards.

Jon Bryant:Yeah, absolutely. I recently ran a session on how to get production rates. So this was at the Nolan Consulting conference. We were talking about how to get production rates, how to understand them. There's kind of a couple of ways just to go back to the start for people. You can take some industry standard rates. PCA has some industry standard rates. PaintScout, we have some rates that we've vetted over the years that we think are good. A lot of coaching groups are going to have production rates, so you can start there. But you need to test them. And one of the ways to do that is to start conversations with your team. So if you've never gone through this process of implementing production rates, say if you have an employee team, it's asking people up front, like, guys, how long does it take to paint a door? Independently, let's go around and let's just take a survey. Steve, Tina, Sam, what do you guys think? And everybody writes it down, and then you kind of get a consensus, and you compare that against maybe an industry rate. And you say, okay, well, here's where we got to get to. Can we have some consensus on that? Does that seem reasonable? And I think at the end of the day, what we're looking for is fair and reasonable in a way to assess what is a time that we can afford to pay and get something done and have that be a profitable and good experience, like profitable for the company and good experience for the customer. So I think if you see a standard rate, doors an hour and your team's like, that thing is seven hours to paint, well, you might not have the right team. You can kind of gauge that. You can also, if they're like at seven hours and you're like, well, it says it's an hour, let's try one and see, let's time that thing. You can start to see, oh, they're like, oh, actually, no, we were way off. It's actually an hour and a half. Okay, well, maybe we can charge for an hour and a half. We should probably try to get that close to an hour. So I think the start of this is really a conversation with your team on an employee basis. And that leads to pay for your team, like how fast you can get something done is ultimately, if you can do it faster with better quality, that should be paid higher, in my opinion. And if you're just doing it at the baseline, well, that's the standard amount that we pay. That's the start, I think, on the employee side. And then subcontractors, we'll get into this in a second, but I think it's very similar. And ultimately it's changing the tone of conversation because I think too often when we're having conversations with our partner teams or subcontractors, it's almost identical. I would venture to guess that everybody out there probably who has done this, the first time you do it and every time you do it, it was, you didn't pay me enough money to do this. And now you're getting into a fight about what was the right amount of money, which I think is actually part of the discussion, but it's not the root of the discussion, which I think is time.

Michael Murray:Yeah, and when that comes up, it's like, how do you have a leg to stand on? Like what you're basically saying, let's say your subcontractor says, hey, I'm not getting enough money to do this job. And if you aren't using production rates, it's just going to be an argument. It's going to be a, well, I just kind of guessed, or like, I think you could paint it for $10,000, but it's not based on any foundation. Well, like industry standard says that you should paint siding at a hundred square feet an hour. And so I calculated 5,000 square feet and I gave you 50 hours. That is facts. That's data. You're bringing something to the table that is not just based on my own best guess or like one time 10 years ago we painted something that kind of looked like this and I felt like it maybe took us three and a half days, so I gave you three and a half days to paint it. It's just like, what? Okay, well it's gonna take us five, so I need to get paid for the five. And that's where production rates, I think, really matter, because you can break it down and you can say, okay, well let's talk about it. How long, subcontractor crew or employee crew, you don't have enough time or you don't have enough money. Same conversation. And it's just like, okay, great. Well, which part? Like I said, that window right there, you should be able to paint in an hour. Can you paint that in an hour? Yeah, I do that in half hour. Perfect. Okay. Let's go on to the next one. And it's like I said, for all the siding on this side of the house, you should have eight hours. Is that appropriate? It's like, no, I need nine. Okay. Well, we're pretty close. Let's keep going. You can imagine having that conversation at a broken down level allows for a lot greater nuance. And I think trust at the end of the day, if I'm the person on the production team doing it, I feel like there's at least some close to science that's behind how this was calculated. Otherwise it just becomes a like, they're going to fight on every job. Like, why wouldn't you just say every single job, I need more money. I need more time. And as the sales rep or the owner, you're just going to, what choice do you have other than, okay, yeah, you're maybe you're right. I guess I'll give you more money. I don't really, you know, just kind of make it up as I go.

Jon Bryant:Yeah. One thing that's interesting, and I think, have you heard the term the curse of knowledge before, Michael? It's like this idea that once you know something you think everybody else knows it, and it's hard to understand what you actually know at the end of the day. So in this particular case with the production rates, the one thing I think we forget is that subcontractors often don't know how to price the job. We're introducing this new concept of production rates. They just know more money equals better for me. And I think in a lot of cases, we need to remind ourselves that we need to educate a little bit. It's not in a condescending way, but like, here's how we do it here. Here's how this works. Here's the discussion I'm willing to have because this is how we price. And that for a lot of people, if you go back to our original experience of like $3 a square foot for a lot of people, that's all they've heard. They're not familiar with this process. And so they go in, multiply it by three. They're like, okay, it seems fine. That's industry standard. They do the job. They realize they're making $4 an hour. And now they're like, wait a second, that wasn't fair, but they're not understanding what the right discussion is to have and I think that's where we can bring in our expertise and the way we do this to show them what type of conversations we can have and what makes sense and why it's fair and why that builds trust. So I think that's a really important thing for everyone to remember is that just because you might know it doesn't mean somebody else does.

Michael Murray:Yeah, no, I think that's well said for sure. I've been doing these quotes for almost 25 years this way when I include college and it's like, there's obviously people that don't use production rates. You can go out and run a profitable painting business. That's not the argument we're making. The argument we're making is that it's more difficult to scale or difficult to manage. And that makes it maybe less profitable. You can get to the same number. It's just the math behind it is teachable, I guess, versus maybe not. That would be some of the argument.

Jon Bryant:Yeah, I think it's a little bit less, a little bit more unpredictable, right? You might get there one time or you get there nine out of 10 times. That's a different thing, right?

Michael Murray:Yeah. Or 98 out of a hundred or whatever. That should be the goal. And that's how you build confidence with your team. Right. When you're, just like, do we have jobs that we miss estimate using production rates? Yes, we do. There are jobs where our estimator makes a mistake. We don't pretend that production rate estimating is perfect. We certainly don't pretend that it's all science. There is some art, right? Like how long is it going to take to patch drywall? It's like I gotta see the drywall. Like what are we talking about? How long is it gonna take to scrape this paint off of this old lead house that was built 200 years ago? It's like, let me see the house, right? There's a lot of art that has to go into that. And there's times that our estimator goes out, does their best guess and they're wrong. And we have to have a system for fixing that. But at least we can now have a conversation around like, okay, well this part is where we need to be, I need 10 more hours to do the prep. And it's like, got it, that makes sense to me, not just like, I need more time. We can get more nuanced than that.

Jon Bryant:Yeah. Or I need more money. Like, why? Where does that come from? Because I think we're all trying to learn together, right? We're trying to refine the system over and over and over again. And we've had the benefit of doing this for a long time, so our systems get more refined with every mistake we make. But if you're someone at the start of this, you need to probably learn and understand, get an understanding with your crews, or just how it's working, how they're feeling. And try to understand whether you can actually sell the job at the price that your crew needs. Or if you need a new crew, that's kind of the two. Or if you got to work with them, there's kind of that in between stage too.

Michael Murray:Yeah, I mean, you said at the beginning, there's always this debate of like, charge more, paint it faster. Charge more, paint it faster. And it's like, the answer is probably always both. How do we produce work more efficiently should always be the question. And how do we charge more and make sure that we're providing equal to or even greater value to our clients? Those should always be the questions. If we keep pushing improvements in both sides of the business, you're off to a good start.

Jon Bryant:Absolutely. Well, let's talk a little bit about some of the breakdown in terms of compensation for using this system well on the subcontractor or employee side. And what I mean by that is we're talking about how to communicate this so it's fair. And what happens when someone exceeds the standards you've set? Is there, or on a sub side, I think we should dive into like how we break that down for subs in terms of payment because that ties into the discussion. So in your world, let's start with employees, Michael. So on your team, you break things down to time, say the job's 50 hours, you give it to a team. Do you incentivize them doing it less than 50 hours? Do you not? How does that work?

Michael Murray:Yeah, we do. Anytime you're coming up with a system, you have to be careful, right? Because if you incentivize speed, you might get poor quality. But if you disincentivize speed, you might just get people that are going to hang out at the job site. And these are the arguments that you hear. Some contractors versus employees, there's no, like some contractors versus employees, not one's faster, one's better, one's more profitable or less. If you're doing it right and everybody's paying their taxes and doing all the things, the math should come out pretty similar. Generally speaking, your subs are probably a little bit faster and your employees are probably a little more loyal. It's short term, long term, there's arguments for both and that's not necessarily the conversation we're having. But if we're incentivizing our team, the way that we do that is just what you said. So we have a system called Painter Bonus Points we created ourselves and it's basically a tiered system based on the percentage of hours that we use on the budget. It's like 95 to 100%, 90 to 95 and less than 90. All of those are different bonus tiers. There's like the three tiers. If we use more hours than we were supposed to, we obviously can't pay out a bonus. Everybody gets paid for all the hours they worked of course, but we just don't have extra hours to pay. And yeah, and then that just kind of ties back to a flat dollar amount for the people that worked on that project. We do it kind of for the month. So you can't just have one good project and three bad projects. You would kind of look at how did all the projects go for the month? For the month, we were supposed to get all these projects done in a cumulative total of 500 hours. We got them done in 475 or whatever, do that simple math. And it's like, that's your percentage and what tier does that fit in? Crew members that worked on that project or that crew for that month, they get a bonus based on that. That's more like without having a piece of paper to explain it, but that's basically the system.

Jon Bryant:Gotcha. So there's incentive there to get that done. Now, I think every good company has some pretty good tension between sales and production. How is the sales team also incentivized for quality or to overperform?

Michael Murray:Yeah. And so we're actually in the middle of changing some of the stuff right now for next year. But our sales team is compensated for a bonus basically for the realized hourly rate. So they're, you know, things that are going to affect their hourly rate are if they're providing any discounts. And as well as if they have what's called pushback. So pushback is when the production team says, hey, I think we need more hours. Let's go back to that scraping example. We've got 20 hours to prep this old house. We've already done two sides and we're 16 hours in. We're going to need some pushback hours is what we'd call that, meaning the estimator and sales rep did not give enough time. And so they're kind of pushing back against the budget. And they would put in for whatever they think they need. So let's call it maybe 10 hours. The sales rep then needs to look at it and either agree or disagree. They can, based on that fact, it's like, okay, it's prep. So it's kind of a guess. And we're halfway done with prepping it. And we're almost done with all the hours. Like, yeah, I'm probably going to approve that if I'm the sales rep. But they might push back and say, you know, I don't have any prep work to do on this window or something. And it's just like, actually I just put in PaintScout, I just put all the prep work under a section I called prep for the right side. And so there's actually 10 hours to do all the prep work on that side, even though you don't see a half hour for that window. And then they might disapprove it. And if the crew still disagrees, then the sales manager and the production manager are gonna take a look at it and make a conclusion and we can just move on. One side's gonna be right. And so what that does is when pushback is approved, it kind of counts against the sales rep's ability to earn a bonus, because we're basically having hours that are getting paid out that we're not getting any money for. Or if it's not approved, then the production team, obviously, it's going to be harder for them to beat the budget and earn some bonus. And that's what we have found. Came from the Nolan Group. Feels like it works pretty well. What are your thoughts? I don't know if you have different experience or you've heard of other things that might work.

Jon Bryant:Gotcha. I mean, I think there's a lot of ways to do this, but you got to find that healthy tension. The production team can't always be right. The salesman can't always be right. The salesperson, they miss stuff. But you got to have the incentive on both sides. So I've seen it done like gross profit is a big one, a gross profit payout to the sales rep on a job, means that they benefit if it's a more profitable job. I've seen systems where amount of hours saved by the crew, a portion of that gets paid out to them. And so we're trying to incentivize on both sides to get that good, profitable job at the end of the day.

Michael Murray:Yeah, I was just gonna say at the end of the day, what we need from this group, right? Selling jobs and producing jobs is gross profit. We both strongly agree. It's like if you're targeting a 50% gross profit, you have a pretty good shot of running a healthy business. 45 to 50%, to kind of give a range. Higher the better. That means you're selling jobs high and well, you're producing jobs efficiently and well. And when we're doing that better than maybe the standard, we should share that. We should share that with the sales team. We should share that with the production team. And when we're not, we've got to dig in and kind of solve for it.

Jon Bryant:Yeah, I think without incentive, it's just like any result will do. And so we want to be monitoring this pretty accurately on every job. But like you said, it's not based on every job. It's actually based on a volume of work. I think that also is really important in this discussion about quality and how all of this works to be fair, is that you know, we win on some jobs and we lose on some jobs. And we don't want that to be job dependent. It's actually about a group of jobs and about is the company healthy? Is your production team healthy? Is the sales rep healthy on what they're doing over time?

Michael Murray:Yep. Yeah. Similar to how you might think of baseball, right? I'm a big baseball fan. It's just like, you go four for four in a game, but it's like, what's your batting average for the month, for the season? I need to know, I need more data points, basically. One or two jobs is not enough to be able to say that there's a problem. And I think that's where some of the, when we talk about production rates with people, it'll be like, well yeah, but there's one nuanced oddball scenario and it's just like, yeah, but this stuff works really well, especially when you look at it in aggregate.

Jon Bryant:Totally. Okay. Let's move to subcontractors because I think we have experience with the employee model and there's a variety of reasons for that that we can get into at the time, but when you're working with partners and subcontractors, that discussion about the amount of money, how were you seeing that on your end? I know you've recently had experiences working with subcontractors and how do you explain the compensation?

Michael Murray:Yeah, we use a little bit of sub, we do a little bit of subcontracted work now, only in the last little while here. Certainly don't pretend to be an expert on it. I don't know a lot more than I do know. That's for sure. But yeah, the way that that typically works is some percentage of the job, the total revenue, the total dollars that you're being collected from the client are paid to the subcontractor. You can get into nuance of who's paying for materials. The subcontractor has nothing to do with materials and the materials are just going to be there for them to complete the job, meaning like the paint and the primer, then obviously you're going to pay them less or you're going to pay them probably a higher percentage if they're responsible for buying the materials. Typically, I would say from an industry standard, it's probably give or take 50%. I've seen numbers on both sides of that. And again, that would be with the subcontractor having the responsibility of purchasing materials. Without materials, it's probably 40%, somewhere in that range. Feels about right. I'm not sure if I've ever really heard that model being done, but I don't know. Check that math. What are your thoughts?

Jon Bryant:Yeah, it needs to track with the rest of your business, like that model in painting of 50% gross profit in order to run your business. And it needs to track with this relationship. So whatever things you're giving over, whatever percentage that makes up, that's really what needs to be considered. I've seen, if labor is around 35%, materials around 15 with your paint and other sundries, that's kind of a decent breakdown, pass that all off. And that's a good starting point. But I've seen anywhere between overall give of 40 to 60%, depending on what you're considering in there.

Michael Murray:Yeah. Yeah, what's the type of job it is and scope of the work and all of the things, I agree. I think what's so important though is, from the subcontractor, right, let's just use 50%. It's like 50% of what? We compete locally with one of the big national franchises who use a lot of subcontractors. They're probably the company locally that does the most work through subcontractors, but when we go on bid, their price is significantly less than ours. And so it's just like, if we're both paying a subcontractor 50%, if my price is $10,000 and my competitor's price was seven, that's a lot of money different to the subcontractor if we pay them 50% and the other guy would have paid them 50%. And so sometimes talking in percentages can be misleading because you can't eat with percentages. Give me the real dollars here.

Jon Bryant:Yeah, for sure. Real dollars and going back to it, I think the real time, this is a hundred hour job. Here's kind of some rough breakdowns of how that worked. Do you agree? Now the second piece of that though is we deal with time, but you also have to look at what you're charging per hour in order to get your total price. And so in this discussion, it's hard to explain dollar per hour to to anybody else because that's really independent of your business. And I think that is, you can explain it, but it's a little bit harder. So for those that are kind of trying to get an hourly rate that makes sense or check their hourly rate, we've talked about this in other episodes, but really looking at things like Indeed, figuring out the average rate for somebody in the painting industry to get paid, then basing your hourly rate on something like that to accommodate your entire business into one number. We have videos on this as well at paintscout.com in our education section as well as just on YouTube in general that we've done. But that really plays a factor. So when you talk about that difference, was it time or was it the cost? And I think what's so interesting is that in the sales presentation we have this discussion to have with the customer about like, hey, we're 10. They're 7. Why? Like what really goes into this? They've got to pay painters roughly the same. Let's hope they're paying a fair rate. They have a similar overhead. So really, what does it come down to? Time. Like they've cut a ton of time off here, because I think they can do it way faster. Now, I'm not convinced in your example that really time is what it is. I think it could actually be just squeezing subcontractors. And so that's always the concern is like, if you're someone who subs a lot of work and you're listening to this, I think it's time to ask the question of like, how'd you come up with this number? Was it just a random square footage price or how much time is involved? Push your agenda because I would love to hear the answer on the other side for that. That's a significant difference. And if we were all using the same subs, they'd be like, well, Michael pays better. I'm going to work with him. But yeah, tell me your thoughts on that.

Michael Murray:Yeah. I mean, subcontracting is closer to a more pure capitalist market, right? Where labor's moving with a little bit less friction than an employee model, right? It's harder for an employee to leave with benefits and it certainly happens. Don't get me wrong, but subs can do a job with you or do a job with the next guy each week they could be working in different places which is obviously the point of having subcontractors and there's a lot of flexibility and stuff there and so yes I hundred percent agree, subcontractors, there's nothing wrong with that. It's a great way to, if it's done well, you should make really good money as a subcontractor and you don't have to take on the overhead of an office staff and HR and a lot of those types of things that maybe a larger company with employees has to have, you don't have to do marketing. You don't have to have a sales system and sales arm because you're subcontracting, right? That's what you're essentially paying the parent company or whatever, the general contractor, however you want to think of that to take care of all of that stuff for you. But yeah, I think too often it is, we charge a really small amount and subcontractors don't know what they're worth and so they don't charge enough and yeah, anyways, they get taken advantage of.

Jon Bryant:Yeah. So I think at the end of the day with all of us, it's about inspiring a conversation between everyone involved as to how the price came to be the price. Understanding that it's not just the price. I think we get hung up on that far too much that it's just like, what is the price? You didn't pay me enough. These discussions aren't helpful in my mind. It's like, what we need to get back to is how did this get priced? How can we improve for the future? How can we have better relationships? How can we build better trust? How can we deliver really, let's call it fair price to our customers that's actually based in some type of a metric, like a reality of some type. And this is where you've mentioned at the start that we are passionate about this idea that when you price a job properly, you can deliver a job that is hopefully greater value than what the customer's paying you. And you can pay people well, and you can make the world a better place in my mind. It's not a race to the bottom. It's like an actual ability for you to have some control over the reality of your world. So if anyone, as a takeaway, it's just start thinking about those conversations, have those conversations, be aware that this doesn't need to be some secret. There's actually real data behind what we're doing and hopefully what you're doing too.

Michael Murray:And I would just give a little bit more commentary on coming up with that hourly rate. I think that the profit margin of a painting company should be about 10 to 15%. Too often that number is way too low. And there's risk involved in what we do. I think business owners should be compensated for taking on that risk. If you're not earning 10 to 15%, you could probably shut down your business, liquidate all the assets, put it in the stock market and make more money. We have to realize that every year as business owners we are deciding to reinvest in the business. At the end of every year, you could take everything that there is, take all the cash out, take all the trucks, take all the things, sell it all, liquidate it, put it in the stock market. Your rate of return is going to be X. If you can't beat that, you're probably playing the wrong game. Or you're not playing it very well. So the goal should be 10 to 15 percent. From that, we already talked about 50 percent gross margin, and so you've got basically 35 to 40 percent to cover your overhead. Your overhead should be fixed costs by definition. So you should be able to figure those things out. I need to have a salesperson. I'm going to pay them. I need to pay for a marketing budget of whatever per month. I need to buy vehicles or pay for the financing cost of the vehicles and the fuel and maybe an office expense and some overhead staff and health insurance and all the things, you know what I'm talking about here, what it takes to run a successful business, right? The printer paper and all the things, put it all in the bucket. And it's just like, great. And now once you get that number, double it. We've got my 10 or 15%. The rest of it has to be so add up everything. Divide that by 0.35 or 0.4, depending on what your profit margin is, whether it's 10 or 15%, that's where your price should be. So all your fixed costs divided by 0.35 or 0.4 to give you a 15 or 10% profit. And that's how you come up with your rate. Most people are charging too little. We talked about this in our presentation. It's a huge passion of both of ours, sales reps, business owners, we need to make sure that we're charging an appropriate amount based on our actual costs to run a really successful business.

Jon Bryant:Yeah. Well, I think it's a great place to end it. So yeah, there are videos that we have on this. It's not a new concept. So check those out and we just encourage you guys, whoever's listening that there is a way to have conversations with people that make sense. There's a way to price this that makes sense. And yeah, let's make the world a better place with the business we run and the work that we do as salespeople. So I think, yeah, Michael, thanks for chatting. And for those of you who enjoyed the podcast, feel free to like and subscribe. We love the conversation. Dietmar, thanks again for the suggestion. We'd love more of that. Yeah, keep that coming.

Michael Murray:Yeah, I think we could get a little five star review from somebody that might be listening to this. And if you want to give it a three star review instead, just send an email to Jon and let him know how you feel.

Jon Bryant:Yeah, he'll give you a hat. Yeah.

Michael Murray:You'll get your hat. Whether you liked it or didn't like it, you should share it with your friends.

Jon Bryant:There you go. Some emotion is what matters. We want to be as polarizing as possible, right, Michael? That's why we do this. Michael, thanks, man. Have a great day. See you.

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