The Technology Benchmark-Price Fixing vs. Cost Fixing
March 1, 2007
I travel heavily in my duties as a consultant and trainer and have discovered a theme that runs through almost every surveying firm I visit. For the knowledge, experience, liability, physical nature and sometimes even personal danger of the work the employees at these firms do, the fees quoted and collected for surveying are too low.
During one particularly interesting discussion I had recently at a firm in Virginia Beach, I mentioned that surveyors are a group of people with extraordinary camaraderie. On the flip side, they are also among the most competitive, especially to each other. For every surveyor who bids a job at a hypothetical price of $100, there is another down the block who will price it at $95. Indeed some will even go lower, while others yet will take it at a loss.
My clients routinely tell me of their fellow professionals grossly underbidding projects. Every time I mention setting a fair price for a fair work effort, I hear the same old refrain that price fixing is illegal. I searched the Internet for “price-fixing surveyors” and located 17,000 articles on various surveyors being indicted, along with opinions regarding the topic of setting prices for this professional activity.
I know professional societies are very sensitive about discussing anything along price-fixing lines, so I think the issue needs to be discussed from a business point of view. If we could take the discussion into the area of business costs of surveying instead of prices, maybe we could begin breaking some barriers that prevent surveyors from increasing their pay and corresponding economic reputation in society.
If we analyze the costs to perform a given project, it could assist all of us in setting fair and equitable prices by way of establishing a foundation from which to build quotes upon. Several elementary parameters come into play in order to discuss these costs.
Elementary Business TenetsFirst, we should all agree that we are in business to make money--otherwise what we do would be a hobby! Second, we should agree, just out of sheer business sense and not from a price-fixing sense, that we shouldn’t take a job at a loss. If the job is worth doing, it is worth doing correctly. To do it correctly, you must be able to stay in business by getting paid with at least some level of profit. After all, we are not performing charity work for clients. (Exceptions, of course, include actual charitable purposes, such as working for a church. I also do not object to performing pilot projects at a potential loss in order to gain knowledge in areas of new technology.)
I have heard that companies will perform tasks such as stakeout at a loss just so that they can be a full-service shop to their clients. Are they gouging the clients in other areas to make up for this loss? Do the clients not understand that they are overpaying in one area so they can receive a reduced price in another? Perhaps the clients should just use a firm that provides fair pricing for all of its work.
Sometimes I hear that firms must bid a job at a loss in order to get it and keep their staff busy. As the market tightens around the country, this solution seems to be the first course of action for many companies. So, basically the message to the client is that “We are not good enough to be able to attract enough work to keep a stable workforce. We have to work at a loss to keep our staff.”
Instead of losing money on contracts, which is just a slow method of bleeding to death, why not look at more effective, business-like solutions? Companies must take proactive measures such as:
- investing in new technologies,
- becoming a leading-edge user of those technologies,
- developing new revenue sources (e.g., producing certified data prep models for contractors),
- increasing staff productivity by investing in better equipment and
- using slowdowns as opportunities to train staff.
Cost FixingHaving established these prerequisites, let us discuss “cost fixing.” Surveyors have high costs, which include the following non-comprehensive items:
3. Errors and omissions insurance
4. General rent or mortgage, administrative and overhead
5. Financing for equipment
6. Miscellaneous costs, such as loss, theft, etc.
Cost #1. Salary costs vary from region to region, so let’s set up a hypothetical situation with a licensed surveyor who makes a raw salary of $40/hour.
Cost #2. Equipment costs are very high in this profession. A GPS base station is about $30,000, a current well-equipped total station is about $28,000. A CADD system with related costs (such as hardware, software, networking, support and forced upgrades) is about $5,000 per year or so. A decent survey truck is $30,000 and the list goes on and on, with a variety of consumables such as stakes, gas, etc., adding yet another $50,000/year. Let us say that two surveyors can use this equipment simultaneously, thereby bringing these costs to about $75,000/surveyor over three years, which is $25,000/year/surveyor.
Cost #3. Errors and omissions insurance also carries a hefty cost and varies depending on company history, sales volume and responsibility levels (such as design only or design/build). Training costs for continuing education, conferences or simply keeping up with technology are about $3,000/year. Let us estimate this at $15,000/year.
Cost #4. General administrative and overhead costs include rent or mortgage, health insurance, utilities, etc. Let us estimate this at $40,000/year/surveyor.
Cost #5. Financing costs. Depending on what is purchased and the credit rating of the company, these can also add up dramatically and virtually double the cost of buying the equipment, hence another $20,000 per year in financing costs.
These are fixed costs and we haven’t added any profit at this point. So, just to break even, this surveyor must charge around $85/hour for every hour of the year--and that is without taking any vacation or other time off.
We can also argue that I left out many costs such as advertising, theft, loss, warranties, equipment service calls, etc., that could easily run hourly costs for a surveyor to $100-105/hour. With varying levels of profit, it can be seen that in this scenario, charging less than $120/hour for a surveyor’s time is simply a losing proposition. Consider the above bid spreadsheet where project bids are established by fixing the costs and varying the profit. Notice how these forecasted rates end up in the area of a 3.0 multiplier of the raw salary.
CommunicationSo then the question becomes: how does a surveying firm use this knowledge and cost projection to become profitable? Here are my suggestions for communicating the costs of surveying to customers in your region.
- Make customers aware of your system upgrades and purchases. When you are upgrading and your competitor isn’t, you have an advantage.
- Tout training you have provided for your staff.
- Let customers know that your staff can produce more work per hour than the competition.
- Inform your clients that your firm and its work are subject to less litigation than other less qualified competitors.
- Charge a fair wage for clean, accurate, honest work.
- Don’t gouge clients in one area just to trick them into using you for something else at a loss leader fee. According to one Internet definition, the loss leader is a pricing strategy that involves selling products/services at a price that will generate little or no profit and in some cases not even cover all associated costs (marketing, overheads, direct costs, etc).
- Build relationships for the long term and not just job by job.
- Don’t let people think you are underbidding a project because you have no work!
Smart BusinessI am not proposing price fixing; instead I am simply trying to determine how an honorable profession can earn a reasonable wage. This is a profession currently under stress with few new employees entering the profession. I believe one way to increase recruitment is to increase wages.
Surveyors owe it to themselves to bid their projects with their heads held high knowing they will achieve a satisfactory profit for their very difficult work. A surveyor who is great at surveying but cannot price a job, collect the money due and handle business affairs is a disservice to everyone involved. So let us all agree that: (1) we are in business to make money, (2) we are in business to stay in business and (3) we are in business to serve the customer. Please E-mail me and let me know what you propose to lift wages and profits for surveyors.