Let us talk about markup...

Grumpy

Agreed.

__________________
-Grumpy
Chicago Gutters Chicago Roofing

user182

How does the size of your crew affect your mark up and gross profit?

Suppose you develop an annual budget based on a 5 man crew but you have the potential to double the size of your crew to 10.

Does that mean that you will lower your prices because you will get more jobs done per year?

For example, your 5 man crew might take 2 days to get a job done but a 10 man crew can get it done in one day.

Does that mean that you should lower your price so that it would be easier to sell more jobs?

Or would you leave your prices alone and make more profit off of each job?

OUTLAW

Jack,
Are you trying to sell a price?

We all know that OH is a function of time. Your rent is so much per month, your truck payment, your yellow pages, etc.

If you can do the job twice as fast, thats half the OH...........BUT WAIT THERE'S MORE


Will you do twice as many jobs this year?

If the answer is no or I'm not sure, then leave your pricing alone. Hell, raise 'em again.

__________________
http://www.ClarkRoofingAndSiding.com

Ed the Roofer

Not necessarily.

There needs to be a justifiable amount of profit for the risk/reward ratio.

I am using Low and easy numbers just for the sake of making my point.

Lets say that you can do 5 roofs per week and every job generates a meager $200.00 net profit.

$1,000.00 per week net profit seems quite liveable after all expenses have been accounted for, right?

Now, take one very small $5,000.00 job that the customer decides to not pay. (Other example scenarios could be a roof leak with interior damage that you are responsible for)

Now, for that one $5,000.00 job, you need to do the next 25 jobs just to get back to where you should have been at upon completion of that one job.

Also, now you didn't really make $200.00 net profit for those next 25 jobs, so you have an extreme amount of potential Risk versus the Reward hanging over your head.

Can you survive a one time $5,000.00 hit? Probably. But how many does it take to make you consider saying screw it and close the doors?

Ed

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Grumpy

The size of the crew affects markup and gross profit in two ways. 1) more men can knock out more squares per day meaning you can do more work per day meaning you can do more jobs per year meaning you are spreading your fixed operating expenses across more jobs thus lowering your over head. But there is a point of diminishing returns where there may be too many men and some might be in the way slowing down the job thus lowering your gross profit on the job. You've got to find the right balanced crew size for each job. Most jobs may be 5, some may be 3, others may be 10 on large commercial jobs. There is no one size fits all solutions.

Will I lower my prices because I am doing more jobs per year? No. Could I, in theory? Yes. However I am smart enough to know that if I am keeping two crews busy charging what I am charging, there is no reason to lower my price. However if there was a job I really really really wanted I would definetly have more willgle room to negotiate with the client. Although I always go in with my full price and do allow for some negotiation, but at the end of the day the company has to make so much to stay alive and there is only so much (or so little) that can be given. I am a fan of making more profit per job instead of just doing more jobs.

__________________
-Grumpy
Chicago Gutters Chicago Roofing

user182

I guess what you are saying is that lowering prices doesn’t translate into increased profits.

Lower prices = increase in sales volume

Increase in sales volume = decrease in overhead as a % of sales

I guess my real question is it possible that a company could be so small that is not efficient and therefore has to charge higher prices?

For example a company with single 5 man crew has to charge higher prices than a company that has two 5 man crews.

What is the optimum size of a roofing company that wants to deliver good service and good workmanship?

Could it be that a company that has sales volume under 1 million per year is inefficient?

Since there is a certain amount of overhead that every company will have does that make small companies less competitive because they have to charge higher prices?

If a small company with sales under 1 million doubled its size would the percentage that it needs for overhead go down?

Donovan

How can you do things this way? Please correct me if my logic is flawed.

I just don't see how you can apply a set % for overhead on all jobs. Not all jobs are created equal. If materials are less expensive on job A than job B and labor is the same, you are loosing money. On the other hand, if someone chooses to use more expensive materials on a job that would not take any longer to install than using cheaper materials, why should you make more money on that job?

My math:

60 sq roof using IKO 30s at 74.73 per sq (cheaper materials)
60 sq roof using Landmark 40s at 94.35 per sq (more expensive materials)

IKO roof 135/sq materials + 150/sq labor = 285/sq M&L
Cert roof 155/sq materials + 150/sq labor = 305/sq M&L

IKO roof 285/sq x 60 sq = 17100
Cert roof 305/sq x 60 sq = 18300

add in overhead at 6% of direct expense

IKO 17100 + 6% = 18126
Cert 18300 + 6% = 19398

add in 10% profit


IKO 18126 + 10% = 19938.60
Cert 19398 + 10% = 21337.80

Difference in your pocket (or NOT in your pocket) $1399.20

This is only 1 job. If you continually get jobs with lower priced materials, it will add up pretty quick. If however you get a few jobs with lifetime shingles, well then times are good.

Someone please tell me if I am looking at this whole thing wrong. I just don't think it is safe to base your overhead on a % of materials. Overhead for the year will be the same no matter if you spent 100.00 or 1,000,000 on materials right???

I think overhead should only be based on labor hours. The more hours on the job, the more overhead allocated to that job. The example above shows the same amount of time spent but a significant difference in the results.



Sorry for the rambling, I am up way past my bedtime. Let me know what you all think.

Grumpy

Donovan, first off you could not have picked a worse brand, IKO, Yuck.

Secondly I feel that the company should earn more if selling higher priced materials. for example, a sales rep usually earns a commission % of the net sale. Therefore costlier materials means more markup.

I don't know if you are a hack or not, but all the hacks I have met think the same way you do.


Having said that in the coming weeks I am changing my pricing formulas on my spreadsheets. The markup will be higher on the labor and lower on the materials, but there will also still be a % across the board. Anyone that is NOT marking up materials is losing alot of profit potential.

One manufacturer said to me basically the same thing you said, but in his words "You make your money on the labor, not materials." Bah humbug! I said, I markup EVERYTHING I sell. We were actually discussing manufacturer waranties at the time, and he also said "I don't know of anyone marking up the warranties." Bah humbug again I said, I mark up everything I sell, there are no freebees. Granted, as stated above I will be adjusting the markup on marterials, and I suppose warranties, but I certainly will still be marking them up!


I could go into a lot of details here, when I was in business my 3rd year I asked my accountant what our markup needed to be. He looked at our total revenue, our total expenses, our forecased expenses and forecasted revenue and shot me a number. Let's say 30%. Now this is based on the laws of averages, across the board. It did not incorporate job specifics.

So then I began applying this magic 30% to jobs and saw that on some jobs we were way way way cheap, like residential gutters for example. Then on some jobs we were way way way high, like a commercial roof for example. At the end of the day I need to gross a certain ammount per crew, so that magic 30% was not so magic because I might markup my gutter jobs 60% and my commercial roofs 20%. FYI these markup numbers are ficticious.

But the bottom line is you should markup everything you sell, weather you apply the same markup to your labor as you do your materials is up to each person to determine. However at the end of the day you need to have a target margin and need to price to achive that daily target.

__________________
-Grumpy
Chicago Gutters Chicago Roofing

OUTLAW

I have to disagree with you Grumpy. If your mark up is based on marking up labor and materials you can get yourself into some bad situations.

Say for even numbers your labor cost with burden is $25 per man hour.

Say you are doing a job that calls for 10k in material and 2k in labor.
Job costs is 12k.
Mark that up 50%
Your total is 18k
You have 6k gross profit off of 80 man hrs.

Now ajob that is 2k material and 10k labor
Same mark up Same total

You have 6k profit on 400 man hrs.

Its abig difference.

It would take a 5 man crew 2 days to produce the first job. Your gross would be 3k per day. Same crew would take 10 days to produce the second job with a gross of 600 per day.

Mark up labor and materials consistently and you will end up getting more jobs like job #2 and not as many job #1. Sure you are still at 50% mark up, but the money you are making each day will not be consistent.


Lets price these jobs with a labor only mark up.

For simple numbers we will say that a labor selling price of $80 per man hr has been predetermined.


#1 10k material and 80 man hrs at $80 per
total is 16,400
gross is 4,400
with a 5 man crew that is 2200 gross per day

#2 2k material and 400 man hrs at 80 per
total is 34k
gross is 22k
with a 5 man crew that is 2200 gross per day.

These numbers a hypothetical. Your price per hr should be based on your overhead and your profit goals.

Im just trying to show you the relationship between your labor price and a daily profit goal.

__________________
http://www.ClarkRoofingAndSiding.com

Donovan

First off Grumpy, I do not use IKO. They were used only as an example. Secondly I can assure you I am no hack.

Maybe my first post was not very clear.

If you have been in business for more than a year you should have a pretty good idea what your actual overhead numbers are. Say your overhead for the year will be $50,000. You work on average about 230-240 days a year. Overhead comes out to about $215 per day.

Using my example above to remove and replace the 60 sq roof will take 4 days. You know you will have to make $860.00 to cover overhead for that job. Material brand or price will have no determining factor as to how much you will make on that job to be applied to overhead.

Materials + Labor costs + Overhead = your cost to do this job

Your cost + profit goals = Sales price.

In the end you are marking up materials, labor, and overhead. I know you like to mark up everything and this accomplishes that markup. You make a profit on everything you touch. With my way, cost of materials have no bearing on how much you make on each job to cover overhead.

I hope this post is a little more clear, but if I am still off base, let me know.