Why contractors don't provide free bids or estimates anymore

April 19th, 2024 Los Angeles California  Adobe Stock Photo

The Rising Costs of Being an Independent Contractor

     In today’s economic landscape, independent contractors face a myriad of challenges that can significantly impact their profitability and operational stability. With inflation hitting unprecedented levels, the cost of doing business has soared, affecting everything from material costs to essential services. This has forced many contractors to reconsider their pricing strategies, including the once-common practice of providing free bids or estimates.

No More Free Lunch... Or Free Estimates

     Traditionally, independent contractors have offered free bids as a way to attract potential customers and showcase their expertise. However, with every aspect of business becoming more expensive, many are now charging for these estimates to cover the time and resources spent. This shift reflects a broader trend in the industry where professionals must find new ways to sustain their businesses amidst rising costs.

Fueling the Cost Surge

     One of the most significant and immediate impacts on the cost structure for independent contractors is the price of fuel. As contractors frequently travel to job sites, the surge in fuel prices directly affects their bottom line. This increase in operating expenses is not easily absorbed and often has to be passed on to the customer, affecting competitiveness and demand. In the Western United States the cost of fule right now is a whopping $5.85 for regular gasoline alone. The state of California charges an additional $2.00/gallon of fuel on top of what the mainstream industry across the rest of the USA charges based on free market pricing. The same goes pretty much for states along the western seaboard from Washington to Southern California. Trying to account for a day of service in your van or truck can easily cause an independent service company to expend 25 gallons a day per service truck.  That adds up to well over $140 / per day / per service truck for a busy day of visiting multiple properties and navigating the busy hiways just to get the customers an eyes on bid for their work.  

Insuring Against the Tide

     Insurance is another critical area where costs have escalated. Whether it’s liability insurance, vehicle insurance, or workers' compensation, the premiums have risen sharply year over year by leaps of nearly 100% per year; for the last decade. These are essential for safeguarding the business and compliance with legal standards, but they also carve a substantial chunk from the profits. In a Blue-State like California, lawmakers make no concessions for the self employed and make great strides to over-reach the taxes, licenses, and insurance burdens that the independent self employed contractors have to face just to run a business and to feed their families.In California you can not own a pickup truck and license it as a personal vehicle; California has purposely ensured that a pickup truck has to be licensed as a commercial vehicle - and the insurance for a commercial vehicle is 300% to 500% higher than regular personal insurance. What about the registration of the truck or van you need so badly to be in business? Glad you asked - The cost to register or renew your truck or van in California is upwards of $500 to $1500 a year depending on the year of the vehicle.  Comparitively; Tennessee, a Red-State, you can own any vehicle and list it as a personal vehicle and your registration is no higher than approximately $75 to $110 depending on the year of the vehicle.

The Administrative Burden

     The costs associated with maintaining proper licensure and permits can also be substantial. These bureaucratic necessities are not just one-time costs but require regular renewals and sometimes, expensive compliance audits. For many small business owners and solo contractors, navigating these requirements is not only costly but also time-consuming. In a Blue-State like California independent contractors have to be licensed for any kind of work over $500 for any estimated work or approval of contract.  Get caught going above that and you will be reported to the state by the insurance company when they audit your books for your insurance rates as they are now doing.  I went through an insurance audit last year as i have to do every year so the underwriters can charge us as much as possible, and we noted that the Insurance Auditors made certain to notify the CSLB (California State License Board) that we had contracted to companies to perform minor residential home repairs for us under $500 and made sure to notify them that the vendors were not licensed by the CSLB. Our Insurance rates doubled year over year even though in the 30 years we have been contractors, we have never had an insurance claim.  When asking why our rates doubled, our agents make no reservations whatsoever in telling us that the underwriters set the price according to what the state legislators allow them to. And when you get the audit forms from your insurance underwriters or agents you can easilly detect that the questions are aimed at targeting your business practices and vendors so that they can justify in their own way as to charge you the most amount of fees, and prices for renewals.  The latest trick from the Insurance Underwriters and Agents, seems to be to run you as close to your renewal date as possible so that you don't even have a chance to get additional estimates from other insurance agencies.  All of this leads us to believe that the government bureaus are stacking the decks against the independent contractors, and the insurance companies are makeing off like bandits and laughing all the way to the bank with your hard earned money. 

The Labor and Tax Matrix

     Minimum wage in much of California is around $20/hour; and if you are a salaried employee your salary has to be a minimum of 2 times the minimum wage or better based on a 40 hour work week; or around $1600/ week for salaried workers plus tax and insurance burdens can cost a company to be paying an easy whopping $1800-$1900 a week for one skilled salaried worker alone. Labor costs continue to rise as the market adjusts to inflation and the increased cost of living. For contractors, this means higher wages to attract and retain skilled workers, compounded by the increased burden of payroll taxes. Speaking of taxes, the self-employment tax is a significant expense for independent contractors, who must pay both the employee and employer portions of Social Security and Medicare taxes. For a C-Corp, which is what Hire A Pro is, the exorbatant costs of doing business in California are so overreaching that to stay in business takes a miracle these days.  For the independent contractor just trying to make ends meet, every company is looking at a Federal Return Cost of 33% of their gross procedes, and that does not include the cost of taxes on us as a California contractor, starting with a "Franchise Tax" with a minimum $800/ year ; plus out of pocket costs on top of the high cost of living, eating, and operating from day to day there are added taxes at the pump, at the store, at the lumber yards, and the list goes on and on. What about Workers Compensation costs? We haven't even gotten to that yet, but trust us we will eventually get to that in another article. The California Franchise Tax is a tax charged by the state of California to businesses for the "privilege" of being incorporated or registered to operate in the state. This tax is administered by the California Franchise Tax Board (FTB).

Struggling to Make Ends Meet

      All these factors culminate in a precarious situation for many independent contractors who find themselves struggling to break even, much less make a profit. The rising costs have squeezed margins to the point where many are just trying to cover the basic expenses of labor and taxes, with little left over for growth or even stability. What about the necessary and daily consumption of food? Well just this morning i decided i needed a break and some solice of thought while i sat down at IHOP to have some breakfast.  Hungry for the Country Fried Steak & Eggs, some black coffee and a glass of milk, it cost me exactly $29.47 for the food. I always tip 20% no matter what so on top of that i added a small gratuity of $6 for a whopping cost of $35.47 for what should have cost me about $12 plus tip.  Where are we going from here and what is happening to the American family these days? Eating out is a luxury only the wealthy can afford these day in reality. However as a contractor taking your lunch is not always easy, and hitting the drive thru is almost easier becasue of the convenience and the time being on the road and navigating from one household to another or from one job to another. 

Navigating a Tough Market

     So, what can independent contractors do to navigate these challenging times? Here are a few strategies:

Adjust Pricing Strategies

   Transparently communicate the reasons for price increases to your clients. Most customers understand that quality services come at a cost, especially in these economic conditions. Does that mean they will understand? While they may sympathize with you all the customer wants is cheap prices and the highest quality workmanship.  Oh yes, and a guarantee. Do not forget that guarantee. 
  
Innovate and Diversify

   Look for new services to offer that require less overhead or tap into emerging market needs. Upselling your services is easy with the market as rife as it is with the aging wear and tear that rips a home and business with time. Preventative maintenance is the key though; always try to get your customers to engage with your services in a preventative maintenance program and charge prices that are hard to say no to.  In the long run these fees and charges will add to your bottom line and definitely make an impact for the positive.
  
Streamline Operations

   Use technology to reduce costs, improve efficiency, and manage administrative tasks more effectively. Use software like REALIST8PRO that helps companies and service business to streamline operations, control and track production, engage in real time with clients, tenants, customers, and other contractors alike all while keeping your work orders easy to use and keep records for you from photographic documentation to communications with your clients and customers and internal operations alike. Take a look at https://realist8pro.com to see for yourself how this business software can make your operations streamlined and easy to navigate with an owners optics and key performance indicators to track your every sales and work order from end to end.
  
Seek Financial Advice

   Work with financial advisors to better manage taxes and expenses, ensuring you make the most out of your hard-earned money.

     The road ahead for independent contractors is undoubtedly challenging, but with strategic planning and careful management, it's possible to navigate through these turbulent times. As the market continues to evolve, so too must the strategies of those who are carving out a living independently. By understanding these pressures and adapting accordingly, independent contractors can not only survive but thrive.