[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.

 

[user182]

MArk up methods

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I believe this will give me a competitive advantage because some of my competitors are still using outdated mark up methods.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

Clarification of Mark Up

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

 

[user182]

How much growth is practical?

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

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.

 

[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

 

[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]

Cash Flow > ALL

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."

 

[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? :thumbup:

 

[Grumpy]

Agreed.

 

[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.

 

[Ed the Roofer]

.

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? :thumbup:

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

 

[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.

 

[user182]

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.

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]

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.

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.

 

[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.

 

[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.