Notice what is NOT included in your annual overhead cost: field labor, field labor worker's compensation insurance, field labor benefits, field trucks, field equipment, gas and maintenance for field vehicles, job insurance, job supervision, and project management.
#MARKED UP PLUS#
Don't forget to include in overhead a regular salary plus vehicle expenses for the owner or President who manages the company. It includes your office or warehouse expenses, phones, utilities, office supplies, postage, computers, website, office equipment, office staff, administration costs, bookkeeping, sales, marketing, advertising, estimating, accounting, legal, banking, company insurance, and closed job expenses. Overhead comprises of every cost needed to keep your doors open for the entire year with or without any work under construction. The annual fixed indirect cost of running your company is called overhead. It all starts with what it costs you to keep your business open.
#MARKED UP HOW TO#
Next, let's figure out how to determine the margin you need to hit your overall overhead and profit goals. If you are selling your jobs using markup versus the margin method, you could be losing lots of money. Job Sales Price = Direct Job Costs / MCR = $1,000 /. To make the overhead and profit margin you want, determine the final job sales price by dividing your direct job costs by the MCR as follows: Using the example above, to make 30% margin on the job (not mark-up), convert 30% margin using the 'Margin Conversion Rate' (MCR) formula: To determine your job selling price, you must DIVIDE your direct job costs by the 'Margin Conversion Rate' (MCR). Let me show you how to calculate the margin needed to make the overhead and profit you want. To earn 30% margin on your sales, you would have to markup your costs 42.8%. In the example above you are not making 30%. Margin % = Difference between direct costs & sales price divided by the sales price. Mark-Up % = Percentage of money added to direct job costs to cover overhead AND profit. The difference between mark-up and margin is a simple concept to grasp and will make you more money than you are currently are, if you follow these steps when pricing your next jobs. Or how much to add to their bids to break-even or make a profit at the end of the year. Most contractors also don't know the difference between markup and margin. They use an industry standard square foot, lineal foot or some other ballpark pricing method to calculate their bids. They don't know or calculate their real costs of doing work on a regular basis. I call it 'stupid low' when contractors bid jobs to get them at a cheap price to get work and keep their crews busy. These 'guestimate' contractors leave a lot of money on the table every year charging too little. Not knowing what it takes to cover your actual job costs, overhead and profit keeps contractors busy doing work for too little a price.Ĭontractors who don't charge enough for the work they do, ruin it for the business owners who know how to run and manage their companies like professionals. The typical standard bidding style is to price work low enough to beat their competitors at whatever customers will pay. My guess is that over seventy-five percent of all installation contractors don't know the right mark-up to use to cover all of their annual overhead expenses plus make the net profit they want. I left shocked at the number of business owners or estimators who don't know how to price their work. I just spoke at a national convention of specialty contractors. Editor's Note: This part I of a two-part series.
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