How do I price Construction Jobs?
The way you price your jobs can be one of the most misleading ways of how you understand your business. Many business owners simply put a percentage on top of the costs they have had to pay or suspect to payout which may seem fine at the time but when we come round to looking at your gross profit margin, your figure is going to be way off!
We are going to look at Markup vs Margin which is very similar in nature but they have a big difference which can be costing you tonnes in profit. Learning the difference between the two can help you increase your bottom line and one step closer to your profit goals.
A simple example is you have spent £100 on materials and have decided to put £20 on a job. Great, now we have made £120 in sales and £20 profit, what’s your profit margin? You might be thinking 20%, if you are, you might be surprised…
This is where business owners are losing profits on every job they price. Your margin percentage and markup percentage do not equal each other! They are completely different and it is very important to remember this.
The way you price can show which method you are using. When you go to price a job do you:
• Look to reach a certain amount of money? This is Markup
• Or do you look to reach a certain amount of profit percentage? This is Margin
To show the difference between Margin and Markup, imagine you have a new job coming in, it is going to cost you £1000 to complete and you want to make £1000 profit so you have effectively doubled your money.
Under the markup method,
£1000 cost + £1000 profit = £2,000.
You’re thinking you have had a result as you have just doubled your money!
If we take a moment to look at the margin on the job, you’re probably thinking it is 100%?
However, if we calculate this under the margin method and see what profit we are actually making on the job:
£1,000 (profit) / £2,000 (total sales) x 100 = 50% profit margin.
This shows that we only made a 50% profit on the job, instead of the 100% we actually thought we made.
It is essential to do this so you know the profit on every job you do, your margins are the most critical pieces for you to grow your business and profits.
The lower your markup, the smaller impact this will have on your business, for example, an 11% markup is a 10% margin. Say if you hit the jackpot of a job and manage to put a 233% markup on it, the unfortunate news is this is only a 70% profit margin! This is still great but puts it into perspective of how large of a difference this can make to your bottom line.
Let’s say the common profit percentage a construction business would like to make is around 20%-30% and we would assume they are using the markup method.
A 20% markup would be a 16.67% margin and a 30% markup would be a 23.08% margin.
Every job you are pricing, you are losing 3.33% - 6.92% of your profits, imagine the effect this is having on your profits long term?
We help business owners ensure they are pricing their jobs correctly and know exactly how much profit they are making on jobs, keeping track of cost expenditure and managing the cashflow position to ensure they can afford to take on the job. When it comes to pricing it can often seem like there is not a right answer however there always is. As long as you have factored in enough profit to cover the costs such as materials labour including your time and the overheads of your operation (in proportion) you will have a successful long term business.
We often find businesses price at the bottom of the barrel to ensure they get the work or offering discounts on your work however this could be killing your company. Even though offering a 10% discount might seem a big deal and it is winning you business, it could be actually be costing you more money.
If you want to grow your business and have profits to reinvest into your business, understanding your pricing is the best thing you can do for yourself and your business. Feel free to get in touch for a chat about profit margins!
Frequently asked questions
This article has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.
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