I have updated my business operations of how I do my pricing and finally seem to have come to an understanding that most of you have already come to. T&M is not the best way to go for a business. But laying that aside for a little bit, I have a question that I need some advise on. I have a customer now, that I gave a estimate for, and the price seems to be high but taking in all the specifics, it seems the best I can do under the circumstances. I felt I had to tell them this is only an estimate, not necessarily a "firm" price. Ok, when the job is actually done, and say my actual cost comes under this amount, what percentage of mark-up and profit would you figure? I know this might vary from location, business overhead, etc., but with the normal overhead, etc. what would you charge? I'm still trying to update my procedures. My last trip to the IRS sort of shocked me into making some changes Thanks a lot. Steve..
Issue #1: Standard markup is 10% AND 5% (note the word ‘and’).
Example: $10,000 [cost] + 10% [overhead]= $11,000
Now add profit: $11,000 [cost and overhead] + 5% [profit]= $11,550
Doing it this way as opposed to a straight 15% you make an extra $50 but considering you have to pay your own overhead until you get funded from the contract means you need to make something for that out of pocket expense of being your own banker.
Now that is “Standard Markup”, which is the markup you show your client should they need to know for some reason, like a break down on a change order or on a budget you may have run when negotiating a job with a client. On a hard bid don’t show your numbers or your estimate to anyone.
The real markup is what the market will bear.
Example when there is lots of work available and I am not that hungry: Jobs 5k to 19k- 15 and 10 Jobs 20k to 39k- 12 and 8 Jobs 40k to 150k- 12 and 6 Jobs 151k to up- 10 and 5 The key here is to pay attention to your market and get a feel for what you can charge. If you are not sure then just do a straight 10&5.
Example when there is not a lot of work available and I am hungry: Jobs 5k to 19k- 10 and 5 Jobs 20k to 39k- 10 and 3 Jobs 40k to 150k- 9 and 3 Jobs 151k to up- 8 and 3
When I have to have work, or layoffs start I will take them at 3% or even cost if I have to just to keep my good guys. One year I even took one at below cost and project managed it well enough to pull a 3% profit out of it.
I have heard some flack here about the “market will bear” attitude, but contracting is not a nice business, and there has to be balance for the lean jobs and bad “guesses”.
Issue #2 You might want to clearly define two things:
Estimate: An estimate is a proprietary document you generate for your own benefit to make and educated guess as to what it will cost YOU to do a job. Keep in mind there are times when all your crews are busy and it will cost YOU more to do this job than other contractors, this is your guess for YOU. This document is part of the hard bid process and showing it to your client in no way benefits you. If you guess to low, then suck it up and guess higher next time, but if you guess to high don’t feel guilty because you need that extra money to make up for the times you guessed to low.
Watch your job, be a good PM and if your estimate is too low work hard to make it up through working smart. Once you give your client a hard bid based on an estimate, there is no going back for T&M unless they change your scope or otherwise impact your job.
Budget: A budget is a document you generate in conjunction with your client when negotiating a job or when the scope is not clearly defined.
This is a tool to do several things- a) It helps your client figure out how much money they need to borrow for the project as part of the lending process. Most jobs are bank financed on some level and a good budget helps the money flow.
b) It gets your foot in the door, and while it’s no guarantee you will get the work it will give you an inside look of what’s on the plans and extra time to work up an estimate, and sometimes you will be the only one estimating the job once the scope is defined and the money for the project is secured.
c) It will drive the scope based on what the client can afford. How many times have you had a client who wants way more than they need, or has an architect with very expensive tasted in fixtures? The budget is a great tool to bring the designers down to earth.
d) It builds working relationships with your client, they need your experience and know-how to get their building built and the budget is a great way to share it without really committing to the work.
Once the job it out of design and budget phase you do an estimate and hard bid then build the job and if you did it right everybody wins.
[This message has been edited by ITO (edited 02-28-2007).]
ITO thanks for your response. It's a great help. I have been charging 20% for mark up on materials only and no other mark up, and it comes up a little more compared to your 10 and 5 or a little less than your 15 and 10. Of course if I stayed with my 20% and then took 10% it would be more. And to help cover expenses, I may have to. On the jobs of coarse that you just give a price, you have the option of making more Or less Thanks Steve..
On the mark-up issue it can vary, we have mark-ups on material that can range from 20% to 400% It all depends on how the material is purchased, how it is stored, and how it is delivered or staged, for an example your mark-up on rigid conduit may have to be 200% if you are unloading the delivery, and staging it to another area, don't confuse this with the labor units assigned for the conduit installation task, that is a mistake made many times, the thought being that is part of my labor units, estimating in this manner can end up setting back your schedule. And don't confuse mark-up with profit, on the high rise and new plant construction projects, the contractors averaged 25 to 35% profit year end, notice I said year end not job end, when estimating they use the expanded mark-up's but it's nothing the customer will see, material is part of a profit center, to feed the cost of purchasing, tracking, and staging. Also don't mix your overhead or operating expenses, with, either material, or profit accounts, they are seperate issues, but control of those accounts do reflect on your bottom line.
What you may want to do is figure your break even cost, the amount it costs you to get up in the morning, then understand the cost of staging a job with manpower and material, then after that add your desired profit, what you will need to build some assets in the business, without that profit, you just have a job. and a bad one at that.
Customers will complain about pricing, no matter what your price is, as ITO noted you may do better working with a customer that has a known budget, as he said the budget helps the money flow, as I described above they were all budget projects, and for the contractor to come out with 25 to 35% year end he has to control his costs to work within that budget.
"for example...if you are a 2 man shop and sell approx $100,000 in material (your cost) and you only markup 20%, you'll lose your shirt."
Exactly, that was my downfall comming from large dollar projects, and trying to apply the same methods.
I tagged along with a plumber today, it was a very intresting day, first stop, a shower stem replacement, and tiolet base resecured, $750, customer thanked him and praised his work, then on to a kitchen sink faucet replacement $425, then clean out celllar sump pump pit $280, big oh thank you and offered a tip.
[This message has been edited by LK (edited 02-28-2007).]