The True Cost of Bartering

A recent thread on Paint Talk raised an interesting issue. A contractor was considering painting a service station in exchange for placing signs on the property. This is a creative idea worth exploring. However, the costs of doing this are substantially higher than might appear.

The contractor estimated 2 to 3 days of labor and 15 gallons of paint to do the job. Some might conclude that, if he does the work himself, the job will only cost him the price of the paint. This is inaccurate. The actual cost will be much higher.

To illustrate my point I will use the following numbers: his selling price is $40 an hour; his advertising costs are 5%; he pays $20 a gallon for paint. I will also assume that the job will take him 3 days and he will do the work by himself.

Three days of labor equals 24 hours, or $960 in labor. His paint will cost him $300. This puts the value of the job at $1,260. That is the price he would charge if this were a paying customer.

Some may argue that this deal will only cost him the price of the paint. Such a claim ignores the value of his time, as well as the fact that he will still incur overhead. What is essentially happening is that he is being paid $1,260 to do the job, and he is immediately spending that money for advertising.

If he simply did the job without the barter component, 5% or $63 of the job would go to advertising. The other money would cover direct costs, overhead, and profit. But as this deal stands, 100% of the job goes to advertising, with nothing remaining for overhead, profit, or direct costs. In other words, he will be short $1,197 for overhead, profit, and direct costs. Yet these costs are real and must be paid. If he spends nothing further on advertising, he will need to do $23,440 of work before he recovers the $1,197 ($1,197/ 5%). Of course, if his actual numbers are different, the amount of work required to break even will also differ. Also, keep in mind that these numbers do not include the cost of the signs.

If we assume an average job size of $3,000 and a closing rate of 50% (both of which are probably high), he will need 8 jobs and 16 leads to break even. The question he must answer—after using his actual numbers—is whether this seems like a reasonable number of leads to require.

I can’t say whether this is a good deal or not. But the answer isn’t as simple as adding up the cost of the paint. The true cost of bartering is much higher than that.