I have worked with many young, idealistic contractors and I often encounter the odd circumstance when they have done much better on a job than they thought they would and feel a compulsion to bill the customer for less than the contract price. Their thinking, based on altruistic ideas of fairness, is that they should share their success with the client.
There are two problems with that impulse. The first is that they are thinking of their business in a very short-term timeframe. A single job does not a successful business make. Second, when they do blow a bid-and that happens to everyone at some point-they can’t turn to the client in the same vein of fairness and ask for more money. The good jobs need to be balanced against the bad jobs so the overall profitability of the company is secure.
One contracting friend prefers to think of profitability as risk. Profits are the rewards for taking the risk of a particular job. Riskier jobs garner higher profits.
I prefer to think of profits as security. Businesses need to be profitable. Without profits, employees don’t have job security, suppliers must struggle with inconsistent payments, and clients often face unmotivated workers and poor quality. With civic-minded businesses, poor profitability translates to poor charitable contributions and an unhealthy community environment. And, of course, businesses that are less profitable pay fewer taxes, which also hurt the community.
The last thing any small business can afford is to be operating on the edge of profitability. Without that security, small contracting companies can lose out on opportunities.
We also see in our society today, the opposite end of profitability, the end where greed resides. The housing industry meltdown, which was the primary cause of the worst economic period since the Great Depression, was founded on greed. Every entity in the line-up wanted a piece of the pie. Investors wanted bigger returns on their capital, mortgage companies wanted greater profits, sellers of mortgage-backed securities wanted higher returns, ratings agencies and real estate appraisers wanted more money, home builders and real estate companies wanted more growth and profitability. Finally, home buyers and homeowners wanted to get in on the real estate boom and line their own pockets. The housing bubble, like the tech bubble before it, was caused by greed. The result was catastrophic.
Finding that balance between profitability and greed can be difficult. At the same time, as we struggle to run and build our businesses, I think we all would feel comfortable if that were even an opportunity. Too often, our sole decision is how to be profitable, and greed-too much profit- doesn’t even enter the equation.
Focus on profits, build your business, provide security and be an integral part of the community. If you are tempted by greed, count yourself lucky then remember your better impulses.
