Margins, Mark-Up & Making Money!
Follow these steps when pricing your next jobs and you will make more money than you are currently because you know the difference between mark-up and margin.
OVERHEAD Example:
Operating Fixed Expenses |
Annual |
Administrative Salaries & Benefits |
|
- President / Owner (Non Job Charged) |
$ 100,000 |
- Estimator / Sales |
$ 65,000 |
- Non- Job Billable Project Manager |
$ 20,000 |
- Office Staff (Non Job Charged) |
$ 60,000 |
- Labor Burden For Overhead Only! |
$ 45,000 |
Vehicles (Non Job Charged) |
$ 18,000 |
Office, Rent & Utilities |
$ 36,000 |
Office Supplies & Equipment |
$ 20,000 |
Telephone, Communications & Postage |
$ 18,000 |
Internet, Website & Computers |
$ 12,000 |
Estimating & Bid Expenses |
$ 10,000 |
Sales, Marketing & Promotion |
$ 36,000 |
Office Insurance (Non Job Charged) |
$ 15,000 |
Interest & Banking |
$ 3,000 |
Professional, Legal & Accounting |
$ 12,000 |
Service, Closed Job & Warranty |
$ 20,000 |
Miscellaneous |
$ 10,000 |
Total Annual Overhead |
$ 500,000 |
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. These field costs should be included in your total job costs as they are not needed unless you have jobs to build.
An exception needing to be included in your overhead is the non-job billable portions of your project management, field supervision, field labor, and field vehicles you pay for while they are not working on a job. For example, if you have to keep paying a superintendent during the winter months, you'll need to add that portion of his salary to your overhead. And if you can't bill-out for your vehicles every day, you'll need to include the downtime days in your overhead cost.
Determine Your Break-Even
When all your construction jobs for the year bring in enough money to cover all of your direct job costs plus enough to cover your annual overhead costs, you break-even even without a profit. To make a profit, you must add your overhead costs plus a profit margin to your bids. Your overhead margin is easy to calculate. It is the total sum of your annual overhead costs divided by the sales you anticipate for the year.
Overhead Margin = Annual Overhead Expenses / Annual Sales
To calculate your break-even overhead margin to use on your bids to break-even, you'll have to estimate the annual sales you'll be able to collect for the entire year. In example #3 below, you have estimated three different levels of annual sales: $1,000,000, $2,000,000 and $3,000,000. For each sales level you estimate, you'll have a different Overhead Margin needed to add to your bids to allow you to break-even.
Break-Even Analysis (Example #3) |
|
|
|
Annual Overhead Expenses |
$ 500,000 |
$ 500,000 |
$ 500,000 |
Estimated Annual Sales |
$1,000,000 |
$2,000,000 |
$3,000,000 |
Overhead Margin To Break-Even |
50% |
25% |
16.66% |
Break-Even Analysis (Example #4) |
|
|
|
Direct Job Costs |
$ 1,000 |
$ 1,000 |
$ 1,000 |
Margin Conversion Rate |
|
|
|
MCR = 1.0 - Margin% |
.50 |
.75 |
.8333 |
Job Sales Price (Cost / MCR) |
$ 2,000 |
$ 1,333 |
$ 1,200 |
Editor's Note: In part 2 of this article, we will explore how to calculate your profit and develop a profitable job estimate. In the meantime, learn these important factors and calculate your annual overhead and break-even for your company.
