Pros and cons of volume discounts
One of the first dilemmas tradesmen encounter after striking out on their own as independent subcontractors is when to grant volume discounts to general contractors.
While taken for granted in many industries, volume discounts are a controversial practice in the building trades.
Proponents argue that general contractors are entitled to discounts to the extent that the work they generate enables a subcontractor to reduce what they spend to obtain other work.
Imagine, they argue, if you could eliminate all the time spent qualifying and pursuing leads, making sales calls and preparing cost estimates for jobs that you never win? How much money is that worth?
Other savings could come from:
- Lower advertising costs.
- Lower referral fees.
- Lower bad debt reserves.
- Better communication and fewer headaches.
One the biggest benefits of doing a lot of work with a single general contractor should be fewer surprises and less stress.
Critics of volume discounts argue it violates several tenets of management that independent business people hold dear.
Foremost among those is independence itself. Relying on a single general contractor for more than 25 percent of your income is risky business even if a contractor is charging full price, some argue.
Moreover, you are taking that risk based on promises of future work that may not materialize.
Volume discounts also removes the general contractor’s incentive to do their job, which is to make sure the site is ready so their subs can get in and out quickly. In fact, subcontractors routinely pad their bids on jobs managed by general contractors who they deem incompetent or uncooperative.
With these pros and cons in mind, here are a few measures to consider before granting volume discounts.
Consult your accountant:
Ask your accountant or another financial professional to run numbers for a few likely volume discount scenarios to see how they impact your finances. A financial professional may also be able to help you assess the risk of your revenue mix.
Always take the most profitable job first.
Date before you marry:
Don’t offer volume discounts until the general contractor has proven their competency and you understand their expectations and business practices. This may require completing multiple jobs.
Remember that if you are doing a lot of volume with a general contractor, it’s because you have earned their trust. This gives you negotiating power. Consider negotiating an arrangement where they give you right of first refusal to bid on jobs, but you reserve the right to turn them down.
Some other considerations general contractors should provide in exchange for volume discounts:
- A constantly updated schedule showing when each trade will begin and complete their work on the job site.
- A budget for your area of work, showing what has been allocated based on your bid.
- Convenient access to the job site and parking as close to the work area as possible.
- Provision of all materials, power, water, work lights, heating, trash receptacles, and other amenities needed to perform your work.
- Prompt delivery of check and lien waiver upon job completion.