As we explored in part 1 of this article, making money starts with knowing your annual overhead costs and break-even sales required to hit your goals. Next we will explore how to make a profit and calculate an accurate and profitable job estimate.
Determine your profit
The profit you want to earn is just that. It is the amount of money you want to make at the end of the year based on the risk you take and the return you want for being a business owner. I recommend contractors have an annual minimum net profit target return of 20 percent on their annual overhead (ROOH). Determine your annual overhead expenses and then multiply by 20 percent to determine your annual minimum net profit goal (pre-tax). Then for the hard part. Try your best to again estimate your annual sales you’ll generate over the next year as shown in example #1.
Minimum Profit (Example #1)
Estimated Annual Sales | $1,000,000 | $2,000,000 | $3,000,000 |
Annual Overhead | $500,000 | $500,000 | $500,000 |
Annual Profit Target 20% ROOH | $100,000 | $100,000 | $100,000 |
Total Overhead & Profit | $600,000 | $600,000 | $600,000 |
Overhead & Profit Margin | 60% | 30% | 20% |
Annual Job Costs | $400,000 | $1,400,000 | $2,400,000 |
Margin Conversion Rate | |||
MCR= 1.0 - Margin% | 0.40 | 0.70 | 0.80 |
In example #1 above, to calculate your final selling price on jobs to earn a minimum of $100,000 for the year, divide your estimated job costs by the MCR to determine your final selling prices.
Job Bid - Overhead Plus Minimum Profit (Example #2)
Direct Job Cost $ 1,000 $ 1,000 $ 1,000
Margin Conversion Rate
MCR = 1.0 - Margin% .40 .70 .80
Job Sales Price (Cost / MCR) $ 2,500 $ 1,428 $ 1,250
Set higher profit goals
An annual net profit return on overhead goal (ROOH) of 20 percent is too low for the risk most contractors take. I recommend you consider a higher profit target of at least 40 percent return on your annual overhead. Again, first determine your annual overhead expenses and then estimate your annual sales projected. Next multiply your annual overhead by 40 percent to determine a higher net profit goal for the year as shown in example #3.
Higher Profit (Example #3)
Estimated Annual Sales $1,000,000 $2,000,000 $3,000,000
Annual Overhead $ 500,000 $ 500,000 $ 500,000
Annual Profit Target 40% ROOH $ 200,000 $ 200,000 $ 200,000
Total Overhead & Profit $ 700,000 $ 700,000 $ 700,000
Overhead & Profit Margin 70% 35% 23%
Annual Job Costs $ 300,000 $1,400,000 $2,400,000
Margin Conversion Rate
MCR= 1.0 - Margin% .30 .65 .77
In the example above, to calculate your final selling price so you will earn a minimum of $200,000 overhead and profit for the year, divide your total estimated job costs by the MCR to determine your final selling prices as shown in example #4 below.
Job Bid - Overhead Plus Higher Profit (Example #4)
Direct Job Cost $ 1,000 $ 1,000 $ 1,000
Margin Conversion Rate
MCR = 1.0 - Margin% .30 .65 .23
Sales Price (Cost / MCR) $ 3,333 $ 1,538 $ 4,347
Estimating jobs to make a profit
To determine you final selling price on jobs you bid, use a job estimating template to determine your breakeven sales price, your minimum profit sales price, and your higher sales price.
Job Estimating Template (Example #5)
Projected Annual Budget
Annual Estimated Sales $2,000,000
Annual Company Overhead $ 500,000
Break-Even MCR (example 4) .75
Minimum Profit MCR (example 5) .70
Higher Profit MCR (example 7) .65
Bid RECAP 1,000 Square Feet
Labor $ 2,000
Equipment $ 400
Materials $ 2,000
Subcontractors $ 200
General Conditions $ 400
Total Job Cost $ 5,000
Final Sales Price MCR Sales Price Cost / SF
@ Break-Even MCR .75 $ 6,666 $ 6.66 / SF
@ Minimum Profit MCR .70 $ 7,142 $ 7.14 / SF
@ Higher Profit MCR .65 $ 7,692 $ 7.69 / SF
Converting annual targets to weekly goals
Next, it would be great to know how much work you need to perform every week to hit your annual goals. Using example #5 above, you need to cover at least $500,000 of annual overhead to break-even. If you can work productively for 50 weeks per year, you need to make at least $10,000 more than your job costs a week to pay for your annual overhead. In most parts of the country, an average of only forty productive weeks per year is the average for contractors. If you only can work for 40 weeks a year, you need to make at least $12,500 more than your job costs a week to pay for your annual overhead.
Convert Targets To Weekly & Daily Goals (Example # 6)
Break-Even Overhead = $500,000 / Year
Productive Weeks X 40 Weeks
Overhead Recovery Needed = $ 12,500 / Week
Break-Even Overhead = $ 2,500 / Day
Minimum Profit Goal = $100,000 / Year
Annual Overhead & Profit = $600,000 / Year
Productive Weeks X 40 Weeks
Overhead & Profit Needed = $ 15,000 / Week
Minimum OH & P = $ 3,000 / Day
Higher Profit Goal = $200,000 / Year
Annual Overhead & Profit = $700,000 / Year
Productive Weeks X 40 Weeks
Overhead & Profit Needed = $ 17,500 / Week
Higher OH & P = $ 3,500 / Day
Taking overhead and profit to the crew level
Let’s say your company has three regular crews each comprised of five men with trucks. Your crew cost might look like this:
Typical Crew Cost – 40 Weeks / Year (Example #7)
Labor – 5 Men @ $30/Hour $ 150 / Hour
Down Time @ 10% $ 15 / Hour
Truck $ 15 / Hour
Small Tools & Equipment $ 10 / Hour
Miscellaneous Supplies $ 10 / Hour
Total Crew Cost $ 200 / Hour
3 Crews x 3
Total 3 Crews Cost $ 600 / Hour
Total 3 Crews Cost $4,800 / Day
To determine how much you need to bill each day, 40 weeks per year, add the following costs to your crew daily rates shown above in example #7:
Break-Even Overhead $2,500 / Day ($104 / Hour / Crew)
Minimum Overhead & Profit $3,000 / Day ($125/ Hour / Crew)
Higher Overhead & Profit $3,500 / Day ($145/ Hour / Crew)
To break even in the example above, each of the three crews will have to be billed out $200 / hour to cover their cost plus $104 / hour to cover your company overhead = $304 / hour, plus what you want to earn for profit. If you want to make the higher profit amount, your crew billing rate is $200 + $145 = $345 / hour.
Understanding what it takes to make the money you want is not a simple task. It takes time and concentration to figure out your numbers. And then it takes discipline to actually ask and get the proper amounts you need to make a profit at the end of the year. Take the time to get to know how to make a profit, and then you might actually make it become a reality!