I cringe when I hear of contractors leaving money on the table by adding overhead and profit to their job costs. Don’t do it. Let’s take a look.
As an example, you know that your overhead costs average 32% of your total revenue, and you want a 10% profit. That means your average job costs are 58% of your total revenue.
You just estimated a job with total job costs of $1,000. You arrive at your sales price by adding overhead and profit to the job costs:
$1,000 + 32% overhead ($1,000 X .32 = $320) = $1,320
$1,320 + 10% profit ($1,320 X .10 = $132) = $1,452
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Now, job costs of 58%, overhead at 32% and profit at 10% means you should be using a 1.72 markup times cost to get to the sales price for your work. (For more on how to calculate your markup, read the book Markup & Profit; A Contractor’s Guide, or watch the videos.) If you prefer to use margins, you have a Gross Margin of 42%.
Now calculate your sales price:
Markup of 1.72: $1,000 X 1.72 = $1,720
Margin of 42%: $1,000 / (1 – .42) = $1,724
This means for the same job, you now have an additional $270, or $270 per thousand dollars of job costs.
Why? Because your gross profit (overhead + profit) of 42% is 42% of TOTAL REVENUE. If you use those figures and add them to your job costs, you are treating them as 42% of JOB COSTS – and they aren’t. You short yourself.
Do your own numbers and see for yourself. Don’t hurt your business.
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses and their lives. He is the author of the books Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations. More here.