Markup & Profit

Tuesday, May 01, 2007

Calculating the correct Markup for your company

Heading into the summer months, your fence or deck building business has many financial opportunities. Most of you would like to make a good profit this year. If you didn't last year, you are even more determined to be profitable this year.

Let’s look at how the smart people make money in this business.

To begin, you can decide to be either competitive or profitable. You can’t be both. If you decide to be competitive, remember that no matter how low you price your work, there will always be someone willing to be more competitive, and undercut your price. It's business suicide.

Statistics are clear that nine of ten contractors will fail in this business. The overwhelming majority of them fail because they are not charging enough for the work they do. So if you are busy trying to be competitive with other companies who under price their work, what does that make your numbers?

If you decide to be profitable, you need to learn two things. How to price your jobs at a profit, and how to sell those jobs. This article will discuss the first, we will discuss selling those jobs in the future.

To assure long-term success, you must make 8% net profit on every job you do. This gives you a cushion against mistakes and Murphy's Law that can put your company in jeopardy. We know from our coaching clients that an 8% profit on all your jobs gives you the ability to pay your bills and focus on running your company. Do you like the idea of being able to sleep at night without worrying about how to pay your bills?

Your basic formula to establish your price is Job Costs times Markup equals Sales Price. This is the simplest method of establishing the sales price for your work. A specialty business that builds fences, decks or other outside work will normally have a markup ranging from 1.35 to 1.55. Accurate estimating and tightly controlled overhead spending will allow a lower markup.

Example: Add up your labor, materials, any subcontractor quotes and any other costs such as rental equipment, plans, permits, etc. on your estimate sheet and get your total. Let’s say for the Kopetski job, that total is $5,690.

Then: $5,690 X 1.45 = $8,250 sales price. The smart salesperson knows they always quote using odd numbers so this $8,250 number would then become $8,297 to the Kopetski’s.

Suppose your labor figures for the last several jobs have been higher than you estimated. Your labor is running 6% high. To correct for this, when you estimate the next job, add 6% to the labor estimate and then total your costs. Apply your markup, then sell and build the job. Now, you will find your estimated amounts and actual job costs coming in much closer together. That is smart estimating.

How do you set your markup, especially if you haven’t been in business very long or your numbers were not consistent over the past few years? You don’t know what your volume of work was or will be and you need that number to set your markup. Here is a very simple method that works.

Figure out how much money you wish to pay yourself for owning and running the company. Remember, this is an overhead expense. If you are working on jobs, your wage is a job cost. Never consider your salary as payment for working on jobs. If you do, you are giving your work away. What if something happens to you, and you need to hire someone to work on the jobs in your place? You won't make a penny. Additionally, the net profit from your jobs is not your salary. Net profit belongs to the company for growth and re-investment, etc. Pay yourself a salary. A good rule of thumb is 8% for owner's salary, 8% for profit.

In the next 12 months, let's say you want to make $70,000. $70,000 ÷ by .08 (8% of sales) = $875,000. That means you must sell, build and collect $875,000 for the company to support your salary of $70,000. Now we have a sales goal that will meet your salary needs.

Now, establish your overhead numbers. Overhead expenses are any expense that can be charged to two or more jobs. Materials, labor, rental equipment, etc., are almost always job costs. Overhead is the rest of the stuff you spend money on and you must pin that number down tight. Don't forget your salary.

To calculate the markup, look at what we know. We know our sales goal is $875,000. We know we want a 8% net profit of $70,000, and our overhead expenses are (in this example) $210,000 (or 24-28% of sales). That means our job costs will be $595,000.

Job costs ($595,000) plus Overhead ($210,000) plus Net Profit ($70,000) = $875,000

Markup is calculated by dividing Sales by Job Costs -
$875,000 ÷ $595,000 = 1.4705 = 1.48 (Always round up)

So, until you revise your markup due to changes in overhead expenses or adjustments to your sales goal, your markup will be 1.48.

In a future article, we will talk about why you cannot cut your markup on larger jobs. This is one of the old myths in this business that gets so many contractors into financial problems.

You can learn more and get far more detail about your markup in our book, Markup and Profit; A Contractor’s Guide. You can find this book on our web site at:

To learn to sell your services at a good profit, take a look at our new book, Profitable Sales; A Contractors Guide which you can find at:


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