Managing Cost Increases in Your Trades Business
Staying profitable requires upping your prices.
If you work in the trades, you’ll know all about supply chain issues and costs—especially in the current climate.
With inflation doing what it does best and the scarcity of so many resources post-COVID, cost increases are a fact of life for most trade businesses. The trick comes in knowing how to apply them in a way that minimises awkwardness and impact on your client base.
To help our clients to manage their cost increases effectively, we teamed up again with our favourite terms of trade expert! Sian at Tradie Terms again shared a few thoughts from her considerable knowledge base.
These are just a few of the issues you might come up against when it comes to pricing your services in a way that’s fair to all parties, and Sian’s advice on how to navigate them.
The cost of resources is changing faster than ever
Keeping your invoices accurate is difficult when the cost of basic products like GIB is constantly being adjusted and inflated. To stay on top of these fluctuations, Sian recommends reducing the validity period of your quoted prices. This is a relatively simple fix: update the terms at the bottom of your quote template, for example from 30 days to 14 days.
If you are using a job management software with a quoting function, you may need to manually enter the update validity period, or change the setting to reflect the change. Tradie Terms can help you find the right wording for your quote terms. If a customer comes back outside of the quote validity period, you can point them there.
Your supplier price lists are out of date
It’s crucial that you always know how much your suppliers are charging, so you can quote your own services accurately! Make it a priority to ask for updated price lists regularly, or subscribe to update alerts if those are available.
Check in with all of your suppliers to find out the best way to stay 100% current with their pricing. Entering accurate pricing into your job management platform should be a priority admin task—your VA can help with this!
Cash is not flowing so well
As we mentioned in our previous blog post, cash flow can be tricky in the trades, where invoicing is standard practice and late payments are common. To smooth it out, Sian suggests taking payment for materials (like wood, hardware, etc) at the time of ordering it rather than after delivery or completion of the job.
This is fast becoming the norm and it can be advantageous to both parties. For your customers, it spreads payments over a longer period and breaks them down into more manageable chunks. On your end, it allows you to pay in cash for the supplies you need rather than carry debt.
Talking about price hikes is awkward
Look, we’ve all been there. No matter how inevitable your price increases are, it’s not fun to have to communicate them to your clients. Truthfully, you just have to rip the bandaid off and do it in a matter-of-fact way. Don’t be overly apologetic about it; inflation is a fact of life.
If you don’t have a cover email that is sent automatically with your pricing and quotes, create one. Update it to notify of any price increases, and include everything they need to know, such as dates when various payments will be requested.
You have clients requesting firm quotes in advance
If your client is applying for lending to fund their project, they may need a firm quote that’s valid for more than a few weeks. If you’re willing to provide one, you need to PRICE UP to cover the cost increases which are very likely to happen.
Sian recommends taking a look at the rate of price increases over the past 3 months, averaging them out, and applying that rate to the time covered by the quote—then adding 5% to cover your bases.
You have an agreed rate with a preferred customer
If you’re locked into a service rate for a regular customer and prices are getting out of hand, check your contract. Many of these will specify that labour rates are fixed for the contract period, but there may be provision for an increase in materials cost.
If the prices for materials are also set in stone, then check for upcoming review dates which will allow you to make adjustments. You may also bring your case to the other party in the hopes of their understanding. The huge cost increases for all kinds of materials are pretty common knowledge at the moment.
If you are locked into a contract with margins that have been fully eroded by inflation, take it as a learning experience! You may need some more leeway in the next one, particularly around the cost of materials which is out of your control.
Navigating cost increases is no easy task for a business owner; it’s often one of the first major hurdles for an SME. But in 2022, it’s more or less inevitable that you’ll have to increase your prices in response to inflation and materials shortages. The suggestions above may help you to tackle some of the most common issues in this area.
Thanks again to Sian at Tradie Terms for her expert input!
Tradie Terms is a service that supplies tradies with Terms of Trade. Offering tailored, instantly downloadable kits that your trusted VA can implement into your quoting or job management software is what helps our army of tradies get professional and protects their profits.
Contact Sian at:
www.tradieterms.com | sian@tradieterms.com | Book a free 15 min call here.
