In Markup & Profit Revisited, we explain how to calculate the markup you need to reach the sales price for your jobs. A common question we receive is whether or not you should adjust your markup based on the length of the job. This is an example:
I’m an electrical contractor who has read all your books and I have calculated our markup as 1.72 for a 10% profit based on this year’s sales goals. My overhead runs nearly $13k a month.
Stay with me while I break that down. If markup is 1.72, that means a project with job costs of $10,000 will have a sales price of $17,200 (10,000 x 1.72). The gross margin is 42% (7,200 / 17,200 = .419). With a stated profit goal of 10%, overhead would be 32% of gross sales.
We’ve been told overhead is $13,000/month. If overhead is 32% of gross sales, that means the monthly sales goal is $40,625. (13,000 / .32 = 40,625).
I have been asked to do a lighting upgrade for a big business. This project will take 2 men 3 weeks to complete. So my labor is 240hrs total x $64hr.
My material cost for this project is $68,000. Normally I’d take Labor ($15,360) + Material ($68,000) x Markup (1.72) = Sales Price ($143,378.20).
Here’s my question:
If I only take my Material ($68,000) x Markup (1.72), that equals $116,960! This is nearly $49,000 over my original material cost to cover Overhead and a %10 Profit. Since this job is only 3 weeks, I should only incur $13,000 in Overhead Cost?
Am I doing something wrong to come up with my Sales Price or do I really charge that amount?
This is when we look at the assumptions behind the markup. The monthly sales goal is $40,625. This job is $144,000 and will take 3 weeks. Something doesn’t add up.
It’s possible the markup of 1.72 is wrong. It’s possible the annual sales goal is too low. It would be a good idea to review both to make sure your markup is accurate.
It’s also very possible that this company routinely goes several weeks without work or with considerably lower than average sales. If that’s the case, they need to keep their markup as is and charge the price they calculated.
It makes sense to apply a “reasonability” test to your sales price as this contractor did. But keep in mind an old rule that’s still worth considering in many parts of the country where work can be seasonal: over the course of a year, you should expect to spend five months making money, four months breaking even, and three months losing money.
Too many put effort into manipulating numbers so they can reduce the sales price on a job. The reason you calculate your markup is to make sure the price you quote is enough to cover your job costs, all your overhead expenses whether you’re doing jobs or not, and a reasonable (minimum 8%) net profit. Anything lower than that will reduce your profit first, then leave you with less money to pay your overhead expenses.
Next week I’m going to talk about that $64/hour labor rate. For now, I want to leave you with one thought: don’t reduce your markup for one particular job. We recommend calculating your markup at least once a year, and checking it against your actual financial results on a regular basis to make sure you’re on track. Then use it.