Secrets to Higher Gross Margins in the Painting Industry

Welcome to the Profitable Painter Podcast. The mission of this podcast is simple: to help you navigate the financial and tax aspects of starting, running, and scaling a professional painting business. From the brushes and ladders to the spreadsheets and balance sheets, we've got you covered. But before we dive in, a quick word of caution: while we strive to provide accurate and up-to-date financial and tax information, nothing you hear on this podcast should be considered as financial advice specifically for you or your business. We're here to share general knowledge and experiences, not to replace the tailored advice you get from a professional financial advisor or tax consultant. We strongly recommend you seeking individualized advice before making any significant financial decision.

This is Daniel, the founder of Bookkeeping for Painters, and this is Richard, tax director.

How's it going today?

It's going good, Daniel. It's Friday. The weather is starting to cool off. Football is back. I don't know if anyone, you know, I don't think you're too much of a football fan, Daniel.

I'm not. I heard that there's an— Paula said that there's a football game going on in Brazil, which I thought was weird because I didn't realize that they actually do football or NFL games in different countries like that. So that's interesting. But Yeah, no idea what's going on besides that.

Yeah, tonight is the Green Bay Packers at the Philadelphia Eagles in Brazil, and I heard there was some kind of controversy because both teams wear green and green has some kind of significance. I'm, I'm not sure. I'm— I will—

part of their colors, the Brazilian colors in their flag. I don't see how that would be an issue. That seems to be a good thing. I don't know, but I'm not an expert in the NFL or Brazil, so I don't, I don't know anything. Um, yeah, but what I am an expert in is gross profit for painting businesses, and that's what we're going to talk about today. So that's good.

Yeah, yeah, yeah, let's talk, let's talk about gross profit.

Right. I, so I just had a call with a client and, uh, he, he messaged me. He's like, I'm really struggling financially right now. And, uh, you know, this past month or so was, hasn't been good. Just need to do a quick call with you to kind of go through what am I doing wrong. And the, the main answer to the, the primary answer to that question was your gross profit sucks. We need to get it better. And so we kind of went through— I didn't—

is that how you put it to him?

Well, I didn't, I didn't put it like that, but you know, and it's okay. It happens. It happens to all of us. It's happened to me. No shame. You know, you just, I gotta identify the problem. Once we identify the problem, that's like most of the, the work is okay. Identifying the problem precisely.

Okay.

What is the problem with the situation? Once you identify it, then solving it is often not as hard to do, but problem identification can be hard sometimes. So, uh, no shame in having low gross profit. Uh, it's just identifying that that is an issue. Now here's some solutions that we'll go through today in this episode: ideas for improving your gross profit. So the first, first of all, what you want to do, uh, the— and this is going to be kind of in, in order of priority of how I look at it. If your gross profit is below 40% or maybe even 45%, this— these are the things I would start to take a look at. And the reason why I'm using 40 to 45%, uh, Warren Buffett, as, uh, as an example, he looks at when he goes to invest in businesses, he says 40% or higher are the companies have— that have a competitive advantage. Uh, we also do internal benchmarking, so we know that on average, the painting businesses that we work with, they're hitting around 44% or so. 44% on average. Now, obviously we don't want to be average, so we want to be shooting above that. So somewhere between, you want to be over 40 to 45%, you want to be, you know, 50% or better, that would be ideal, right? Uh, so if you're below 40 to 45% in gross profit, you need to look at improving it because that's going to really open up your profitability. It's a huge lever you can pull, um, in your business to really open, open up your overall profitability, your bottom line profitability. You can get gross profit up. All right, so here are the things I'll look at. Number 1, ensure that you're doing production rate estimating and marking up your projects properly. So this is the number one thing that is the problem when someone, especially when someone first comes to us and they have, you know, a 40% or lower gross profit. The, that's usually the issue is that they're, they're not doing their estimates properly using production rates and they're not marking up appropriately to charge the client for the work that they're doing. And, and so to break this down a little bit further, what, what is production rates? If you're not familiar, production rate is basically how long does it take you to paint to paint a particular surface. So an example of a production rate would be an hour to paint one side of, or half an hour to paint one side of a door, and then one hour to paint a full door on both sides. That'd be a production rate. Or two hours to paint a, a window with, you know, a certain type of trim on it, or, you know, a certain amount of time to paint, uh, 10 linear feet of, of soffit and fascia, you know. So these production rates are a certain amount of time to paint a particular type of surface. And so you would want to have in your possession a list of production rates. How long does it paint? How long does it take your team or, uh, to paint those different types of surfaces? So that when you go out and do an estimate, you're just measuring the surfaces. You're just measuring the linear feet, the square footage of the walls, and you're adding up those surfaces and then multiplying it by your production rate to get how long is it going to take you to paint those walls, that trim, those doors, those windows, et cetera.

I love the— I was gonna say, I love the idea of production rates for, for a few reasons. It takes the guesswork out of it. I remember I had the privilege of attending a painting conference and, you know, I was in a room with a lot of really seasoned, well-experienced painters. And the speaker asked, he said, you know, look around the room here that we're sitting in and tell me, you know, what would you charge to paint the walls in this room? And he got like 4 different answers that varied anywhere from, you know, $1,500 to $4,000. And the reason is, is because, you know, as humans, we, we always have this optimism bias. We always think like, oh, this isn't going to take that long. I can knock this out. It's going to be a lot easier than, than it really is. Having a set production rate takes all the guesswork out of that. You, you pop open your laser, you know, tape measure or whatever, and within a few minutes you've measured the room and you have a set rate that is not subject to your biases, your optimism, you're eyeballing it wrong, and it helps you stay consistent. You know, even if it's only a few hundred dollars per room, you, you add that up job over job over job, and now all of a sudden you're thousands or tens of thousands of dollars in missed out revenue. Plus, I think customers respect it, right? I mean, if I eyeball the room and say, I think it's gonna be $1,200, you know, that's one thing. But if I actually measure it out and show them how I'm coming up with this calculation, I think they're more willing to accept that price, even if it's something that they weren't anticipating. So I love the idea of doing production rates.

Yes. Yeah, all, all the successful painting businesses that we're working with are using production rates with almost without exception. Uh, also reminds me a story, went to visit this, uh, $10 million painting business, and part of their sales process is to actually let the customer see that you're measuring. You have tools on a tool belt, you're measuring things to give that impression like, oh, this is a professional that's measuring things and, um, you know, they have some sort of expertise. They have like a clipboard, they have a tool belt, they're, they're measuring things with a laser pointer and getting precise about that. So I totally agree with you. It also will just come across as you're a professional and it will improve, probably improve your, your close rates in your sales process because people will perceive you like of this is a quality contractor that I'm dealing with here. Yeah.

Yeah.

So go ahead.

I was gonna say, and if I could just speak to a little bit to the emotional aspect of it too. So as a business owner myself, I have a very hard time with pricing, right? It's hard sometimes to charge what you're worth. Or to know what you're worth. And, you know, sometimes we tend to be people pleasers. We want to make the customer happy. We want to give them a number that we think they're going to accept. And so, you know, we're tempted to undervalue ourselves. A production rate is kind of like, you know, a scaffolding that prevents us from doing that because it's not about making a judgment call in the moment. It's X amount of feet costs X amount of dollars per foot. That's all there is to it. And it helps us to not undervalue ourselves. So I find, you know, having a set written rate that I can't deviate from, that would help me in my pricing a lot.

Yep. So doing the production rate estimating, getting those, the amount of hours it's going to take your team to produce that project. That's, that's the, what you want to get to. Uh, so, and then that's the second part of this is obviously adding up how much materials, right? How many gallons of paint is it going to take? And then what you want to do is do your marking, your markup, your, the cost of what it's going to cost you to what you're going to charge the client. And a simple way to do this or a simple way to think about this is charge twice what it's going to take you to actually do the job. So basically, if it's a— you do the math, let's say you had 100 budgeted hours for a project doing your production rate estimating, and you on average are paying your painters, let's say, $25 per hour. You have to add in your burden because you have to pay workers' comp, you have to pay payroll taxes. Use like, um, as a ballpark is like 30%. So if you multiply $25 per hour times 1.3, that would be $32.50. So $32.50, multiply that by the, uh, 100 hours. And so that would be $3,250 for the labor. And then, um, let's say that you had to buy $1,000 in materials. Um, that's what it's going to cost you to go to the paint store, buy all the materials and the, uh, sundries. And so $3,250 plus $1,000 of materials comes out to $4,250 that it's going to cost you to do the job. Now you're not going to charge the customer that. You're going to charge the customer twice that, and that's going to set you up to get a 50% gross profit. So that $4,250, multiply it by 2, and you charge the customer $8,500. So that's the kind of like the quick down-and-dirty way to make sure you're charging properly. Now, obviously, you can shoot for a different gross profit than 50%. Maybe you want to shoot for 55% or, um, maybe 45%, but you got to make sure your, your math is, is right. Because sometimes, a lot of times, I'll go through this, um, exercise with a painting business owner, like, how are you getting your prices? And we'll kind of go through, walk through it together, and it turns out they're not marking up materials, they're just charging the, the the customer exactly what it costs them. They're marking up the labor, but they're not marking up the materials. So that's going to skew your gross profit. You got to mark up both things like that. So just make sure you're charging your customers properly. So you're getting at least 45% or higher for your, your financials. Okay, so that's number 1, doing production rates. Oh, go ahead.

I was just gonna say, like, don't be afraid to charge a decent price, right? Nobody wants the cheap lobster, right? You go to the restaurant and they say, hey, this lobster is $20 and this lobster is $5. Which one do you want? Immediately we put more value on the more expensive one. Like, nobody wants a half-butt paint job with inferior materials and, and, you know, bad craftsmanship. They're Customers are not afraid of price. They're afraid of value. So if you can offer them value, they will be willing to pay the higher prices. So I, I, I know it's hard, like, like mentally we're thinking, you know, we gotta be cheap, we gotta get the job, but don't be afraid to charge what you're worth. Customers who want high quality work are going to expect to pay more for it.

Yeah. And so number one, look at your production rate, uh, make sure you're doing production rate estimating and then marking up properly. And then, so that's number one. Number two, you can also price related, increase your prices. Um, so that it kind of goes with number one, but maybe you can do something to kind of supplement the justification for for increasing your prices. Like maybe you bundle in any paint, exterior paint job with a pressure wash. They get that in a color consultation automatically as part of the bundle. So if you get a full exterior, you're also going to get a pressure wash, uh, and you're going to get a color consultation to, to help the client choose the colors for, for their project. That's included in the price. You know, pressure washing is pretty inexpensive for you to do, but it's an actual value add for the customer. And then, you know, because maybe you also pressure wash the driveway or something like that, like, and maybe the roof or whatever the case is. And then the color consultation, you know, that relieves them of having to pick the colors and figure out— they're not, you know, decorators, they don't know what to do, but you include that in, and that can be a relatively cheap thing for you to do for yourself, like, to get a color consultation. but it could be a big value to your, your customers so they don't have to figure out and go to the paint store and all that stuff. It's taken care of for them. Um, and so think about your offer. What is your offer to your customers? What, what are their pain points? Do they, do they, you know, need help with color selection? Can you handle that for them? Um, maybe scheduling is a thing. Maybe you have an open schedule or you're able to get subs on quickly. Maybe you can get things done quickly. You know, they can sign up today and you'll be out there next week. You know, think about that in your offer to, to be able to increase your price. And then, as you mentioned, Richard, improving the sales process so that you're communicating that value in your sales process by having timely communication, being professional in your appearance and in your process, and, and build and building that trust in your sales process so that you can command those higher prices because they feel like they're going to be getting a premium, um, job from you. All right, so that's number 2, looking at increasing your prices. What's that?

I'm sorry, it's not just about putting the paint on the wall. It's about what kind of experience does the customer have from start to finish, and they're going to be willing to pay more if you present yourself professionally, if you do all the little extras that make them feel special, that make them feel like they're getting a high-quality job. Think, you know, I mean, obviously putting the paint on the wall, that's the commodity that we're selling. But if we can give them a really great experience so that they feel good about themselves the entire time, they will be willing to pay more for that.

Yeah, exactly. Well said. So that's number 2, looking at ways to improve your offer so you can increase your prices. All right. Number 3. So we talked about the first 2 were about pricing. Making sure that's dialed in. And those are— that's usually the, the issue with the gross profit is that you're just not charging enough. Um, now we're getting into the other side of the equation, which is the cost or what you're paying to get the job done. Um, so number 3 is ensuring you're paying your subcontractors properly if you're using subcontractors, and we'll get to employees here in a second if you use employees. So ensure you're paying your subcontractors properly. So some, one client I was talking to when we were first onboarding them, I asked, you know, looking at their profit and loss, their subcontractor percentage of revenue was, I think it was a little over 50%. I was like, so how are you, you know, communicating? Are you, do you use budgeted hours and give that to the, like, how do you determine what to pay the subcontractor? And this person said, you know, they were just giving them 50% and just telling them, yeah, I'll just pay you 50% of whatever I charge the client. And so they were just telling the sub like, I'm just giving you 50%. And then the sub tried to negotiate the percentage higher, like, hey, can I get 55% of the project? Because, you know, I'm really doing all the work. And so now it was like negotiating over the percentage that they're going to get of the project. So first of all, don't ever— if you're paying your subs a percentage of the job, don't ever tell them that percentage or have the negotiation around the percentage. Um, try to use the budgeted hours that you did in the first step, right? You're doing production rate. There's that production rate. Those production rates should give you budgeted hours. And if you're using a tool like PaintScout, when you do your estimate in PaintScout, it will actually generate a work order. That has the budgeted hours by surface. So we'll have windows is budgeted for 10 hours, the doors are budgeted for, you know, 5 hours, the trim is budgeted for X amount of hours down the line. So when you're negotiating with subs, you can, you can give them the work order and say, okay, here's all the hours and how, what's, what's budgeted for everything on this project. If you're saying you're not getting paid enough for this project, tell me where specifically Did I not allocate enough budgeted hours? Was it the windows? Was it the trim? Was it the doors? Okay, and if it was, if I didn't allocate enough time for the doors, how much time do you need for the doors? And so it puts it back on them. If they say, oh, I'm not getting paid enough, or I want more money for this job, you haven't— you go back to the budgeted hours and say, okay, where specifically did I not budget enough money? Because maybe they're right, maybe just missed something. But a lot of the times the subs just want more money. They're not necessarily— you did get it on target, especially if you're using production rates. They just want more money. And so that kind of handles that objection. So bottom line is try not to pay subs as a percentage of the job, or at least not let them know about it. Focus them on the budgeted hours. And also probably just need to generate what you pay them based off the budgeted hours as well, because that's how you generated the price to begin with. And use a work order. I like PaintScout's work orders that they generate there that have the budgeted hours right there on the work order. Another tactic you can use with subcontractors is— this actually happened today. We were looking at their profit and loss, and their materials were super high. It was over 20% for materials, and the subcontractor pay was more or less in line, but the materials were super high. So, and, and what was happening was he was having his subcontractors buy the materials and just go to the paint store and buy it on the account. And so what we kind of determined was that they're probably— they, their pay wasn't tied to the materials, like they weren't, um, they had no reason to watch how much they were paying for materials. So there was probably a lot of waste going on, which is why his materials were kind of high, over 20% in this case of revenue. And so we changed the system and say, okay, instead of just, uh, paying the subs their money, um, and, and then also having to pay for whatever materials they purchased, now I'm going to pay them let's say 50% of the project goes to the subs, but whatever amount they purchase in materials, it comes out of that 50% so that it doesn't hurt me if they go over on the material budget. It hurts their money, not my money. So taking the materials out of the subcontractor pay so that they are now invested in making sure they're efficient with the materials that they're purchasing. All right, so that's number 3, making sure you're paying your subs properly, you're not overpaying them. The next one would be ensuring you're paying your employees properly if you're using employee crews. And it's similar with this first item, which is giving your employees the budgeted hours for each project on the work order, right? Should have the amount of time that's allocated for each surface ideally. And then you need to give them the expectation like, hey, This is what's budgeted for this project. So I'm expecting, I'm expecting you guys to beat this budget or at least meet the budget. And if you're not going to, there needs to be a reason behind that. And so giving those budgeted hours with the work order and that expectation is super important to keep your employees on budget. And then you can even start to consider performance pay system. So protiv.com, P-R-O-T-I-V dot com, that is, uh, some software that does a really cool, um, integration with time trackers and tools like DripDrops or Pain Scout. And it'll pull in the project amount of budgeted hours and, uh, it will also sync with the time tracker like ClockShark or Busy Busy or QuickBooks Time, and you can set a budget, budgeted hours for the team, and then how much they get paid if they beat the budget, how much money they'll get paid. And it's basically a real-time performance pay tracker where they can log into their app, their ProTiv app, at any point in time, the employees on the job site, to see where they are on the budget, because again, it's syncing with the time data. And they can see how much they're gonna— they're making per hour based off of how, how much they're beating the budget on that project. And so it's a real-time feedback that they get to see. So they can basically— it's a motivation tool. So they can see, oh, if I work faster, I get it done more quickly and get things knocked out, I can actually make, you know, $40 an hour or $50 an hour as opposed to my base rate of $25. And so that's another tool that you could use to encourage your team to beat budgets if you're— especially if you're using employees in this case. All right, so that's number 4. Number 5 is looking at your paint store discount, you know, going to your paint store rep and seeing if you can get a lower discount, especially if your volume's increased in recent, you know, months or years and you haven't talk to them in a while, talk to them about getting a better discount. Because if you have a decent amount of volume, you know, and you haven't talked to them about this in a while, that could be something that you could get a lower rate, a better discount for your, for your paint supplies. So that would be something that I would look at as well. So those are the 5 things that I would recommend looking at. First, number 1, do production rate estimating if you're not already, and making sure you're marking up your, uh, your labor materials properly, at least basically 100% markup. Charge the customer twice what it costs you. That's number one. Number two, look at increasing your prices by maybe bundling services with pressure washing, color consultations, improving that sales process to command higher prices. Number three, make sure you're paying your subcontractors properly. Based, based off of budgeted hours and a work order. Potentially look at taking materials that they purchase out of their, their pay that they're getting. So they'll be more efficient with materials. Number 4, looking at how you're paying your employees. Again, based off of the budget hours that you gave them from the production rate estimating you're doing. Hold them accountable, set those expectations. Consider doing a performance pay using a tool like Protiv.com. And then number 5, ensure you're getting good discounts from your paint store.

You mentioned getting good discounts from the paint store, and I remember the painter that I worked for, he would always offer his discounts to the customers, and it was very kind of him. You know, he was trying to do right by them. But yeah, I talked to him one day and I was like, you know, You spend a lot of money and a lot of time and your own fuel to go down to Sherwin-Williams, Benjamin Moore, you know, gather all this stuff. You spend a good hour every morning doing this. Why shouldn't you be getting paid for it? So it's perfectly fine to mark up your materials. You know, even if the client is paying MSRP for the paint, they're saving money because they don't have to go down to the paint store and get it themselves. So, and you should be compensated for that. So it's, you know, get those favorable rates to keep your material costs down and then make sure that you are, you know, reselling that paint or marking up that paint to the customer. And so that way you're getting compensated for your time and you're helping get those gross margins a little bit higher.

Absolutely.

Cool.

Well, that wraps it up for our episode on improving gross profit. Love to hear your thoughts on uh, what you've done to improve your gross profit in your painting business, if you go to Facebook, type in Grow Your Painting Business. Love to hear your thoughts or ideas for future episodes.