Let us talk about markup...

Grumpy

Let us talk about markup...

Ok a topic that will vary from contractor to contractor but in speaking with various manufacturers, they all seem to think that marking up material is a flawed method of determining a price. They have all said to me "you make your money on labor". While how I arive at my price is none of their business it did get me thinking, since these guys were all commercial manufacturers...

Ok, here is how I currently do it. I figure my base labor let's say take your cost per hour and I double it to cover for WC, GL, and burdens. Insurance and Burdens only account for approximately 78% so there is some padding.

Then I figure my materials and tax and delivery and any equipment rental etc...

I add all those numbers up and then mark that number up. Yes labor gets marked up twice. The markup % is irrelevant. I'm mpre concerned with the method used.

Due to the increased cost of materials this year, and since we are marking up those materials, I have also noticed our profit go up on each job. I am also seeing that on the jobs with high end or expensive materials, we simply are not getting.

Am I to think that I should take my material equipment etc and pass that cost along to the customer with no markup? Am I then to think that I should then increase, perhaps double, my markup on labor.

At the end of the day I need to achieve a certain ammount of gross profit regardless of how I arrive at that number. But for the commercial boys I was really interested in how you markup your jobs.

__________________
-Grumpy
Chicago Gutters Chicago Roofing

user182

Due to the step rise in material costs I have changed my pricing method.

I mark up labor & material to cover my overhead. The mark up % for Labor is more than the mark up % for materials. Since the material cost have gone up I have increased the mark up on Labor & greatly reduced the mark up on materials.

I believe this will give me a competitive advantage because some of my competitors are still using outdated mark up methods.

My new mark up method produces the same amount of gross profit per day or per job as the old pricing method but I’m making most of the gross profit off of labor and a small amount off the materials.

Labor creates more overhead that material, so the mark up of labor should be more than the mark up for material. This is based on the theory that the more installers you have working the more your overhead is going to go up. Also the more jobs you do per year the more your overhead will go up.

The only bearing material has on overhead is that some premium shingles will take more time to install, but you covering that in your labor estimate already.

My estimating system allows me to set a separate mark up % for labor & material and net profit is added on last as a separate mark up %.

You should never use a single mark up factor to cover overhead and net profit. By adding net profit on last as a seperate % you know how much you will make off of that job. Contractors that use a single mark up factor are not sure how much net profit they will make off of each job.

Also the net profit added on for premium products should be higher that it is for average products. If you are taking time to offer the prospect better products then you should make more money off of it.

user182

Price should always be determined by the following major components:

• Labor and materials cost
• Dual overhead factors: an overhead factor as a % of labor and another overhead factor as a % of material.
• Your net profit % which is added on after overhead.

Using a single overhead factor will cause problems, look at these 2 examples.

Job #1
Labor cost $2000
Material cost $2000

Total Cost $4000


Job #2
Labor cost $1000
Material cost $3000

Total Cost $4000

Job #1 has twice as much labor so it should have more dollars factored in to cover overhead.

If you used a single overhead factor you would get the same price for both jobs. You would loose money on job # 1.

Ed the Roofer

Good points, except for one minor clarification, in my opinion. The more jobs that you do per year "Should" decrease your overhead on a sliding scale, percentage wise, due to redundancy.

The more volume, the better Net Profit is being made if you leave the costs charged alone.

Ed

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http://www.rightwayroofingcompany.com/ www.rightwayroofingcompany.com
Roof Estimates, Roof Repairs, Roofers, Roof Leak Help, Elgin, Carpentersville, East Dundee, West Dundee, Sleepy Hollow, Algonquin, South Elgin, Huntley, Lake In The Hills, Illinois

user182

I agree, but only within a given range.

Doing more jobs per year will definitely produce more profit if you are operating at less than full capacity.

The question is how much of an increase in volume can you achieve with your current operating model before problems occur?

For example you could increase volume to point were you are not able to give each customer the quality of workmanship and service that they deserve. This would lead to callbacks and complaints.

Callbacks and complaints will reduce profit and you’ll have to spend more money on advertising because you would get fewer referrals.

People create difficulties and that is where the increased overhead comes in, materials an inanimate object.

You can sell more material without increasing your overhead, but when you have to install it now your overhead is going to go up.

Or an increase in volume could add to overhead costs because you might have to hire more administrative people or get a bigger office.

Anyway I’m not sure that there is much of difference in the overhead % needed for companies of various sizes.

How many times have you seen a company grow tremendously and then it implodes?

Grumpy

There is fixed overhead and operating overhead. Fixed overhead doesn't go up much as you grow until you start getting into a larger office etc... however operating overhead jumps considerably the more you grow.

__________________
-Grumpy
Chicago Gutters Chicago Roofing

Ed the Roofer

But the operational overhead will probably correspond to the growth and additional revenue and profit, so it would be a wash.

Ed

__________________
Just Wait A Minute, I Will Be Right Back With A Link For That.
http://www.rightwayroofingcompany.com/ www.rightwayroofingcompany.com
Roof Estimates, Roof Repairs, Roofers, Roof Leak Help, Elgin, Carpentersville, East Dundee, West Dundee, Sleepy Hollow, Algonquin, South Elgin, Huntley, Lake In The Hills, Illinois

SinglePlyGuy

On the commercial side I try and keep it as simple as possible...

I know my fixed overhead and have a set % for that.

When I figure a job I take my base cost (material, labor, incidentals, etc) and multiply it by my overhead %.

The total cost is then marked up for profit.

I wish i had some mythical formula for figuring my profit but it depends on season, workload, etc. I know some folks dont agree with the theory of variable profit and swear by using fixed %'s accross the board but not me.

If I can do a short duration job (1-2 weeks) and make X per week then forget the numbers and make the target. If the estimate is on and the materials and -more importantly- man time is right, then we win.

If I'm off, well then I lose.

I know what my drop dead price is for each and every job based on what is going on at that point in time. Do I walk away from jobs? Yes quite a bit. But if I can keep a crew busy for a week with minimal impact on my office staff and make X for a week then lets do it.

Cash Flow > ALL

Grumpy

I think PROFIT > All, because if the cash is folowing in the wrong direction, it's just a matter of time. cash flow is important and i have given away some jobs on low profit to keep the cash flowing but there was profit. Like my controller says, "You can't do a job for a loss. You just can't."

__________________
-Grumpy
Chicago Gutters Chicago Roofing

SinglePlyGuy

Let me clarify my point by saying that I am not insinuating that a job be taken for a loss just to keep cash flowing.

I never would even consider taking a job for a loss.

I guess I was trying to say that my outlook on markup varies. I have a set routine for standard projects, but fast track jobs i approach differently.

If I can hit something quick then I dont worry as much about profit percentage than i do cashflow....and I mean POSITIVE cashflow. There always has to be SOME profit tho...thats a no-brainer.

So to rephrase.... as long as there is some profit, Cash Flow > ALL

Agreed?