But there's another cost that doesn't always get enough attention.
The cost of running the business that delivers the job.
Your office staff, vehicles, insurance, software, rent and management team all have to be paid for.
And if your quotes aren't contributing enough to cover those costs, you can win plenty of work without making much profit.
The mistake is thinking markup equals profit
Say you estimate a job will cost $10,000 in labour, materials and subcontractors.
You add 20% and quote $12,000.
That gives you $2,000 above your estimated direct costs.
But it doesn't mean you've made a 20% profit.
- 1That $2,000 represents a 16.7% gross margin on the selling price, not 20%.
- 2The business still has overheads to cover.
- 3That's assuming the job actually comes in on budget.
If labour runs over or materials cost more than expected, the amount left gets smaller.
That's why you need to understand the difference between markup, gross margin and net profit.
Know what your overheads cost
Start with your annual operating expenses that aren't already included in your direct job costs.
That might include:
- Office and administration wages.
- Rent, utilities and insurance.
- Software, accounting and professional fees.
- Vehicle costs not allocated directly to jobs.
- Management and supervision costs not already charged to jobs.
Be careful not to count the same expense twice.
Then work out how much gross profit the business needs to generate to cover those costs.
For example, if your annual overheads are $400,000 and you expect $2 million in revenue, you need a 20% gross margin just to cover those overheads, assuming your forecasts are accurate.
That leaves no operating profit.
If you want the business to make a profit as well, your pricing needs to allow for it.
Three things to check before sending your next quote
Have you allowed for the real labour cost?
An employee's hourly wage isn't their full cost to the business. Make sure your labour rates account for the relevant employment costs and the productive hours you can realistically charge.
Are you using margin or markup?
They're not interchangeable.
If you want a 30% gross margin on a job with $10,000 in direct costs, the selling price is approximately $14,286. Adding a 30% markup would give you $13,000, a considerably different result.
Does the job contribute enough towards overheads and profit?
Some jobs may be priced differently for good commercial reasons.
But that should be a deliberate decision, not something you discover when the accountant finishes your year-end figures.
Don't just quote to win
When work gets harder to find, it's tempting to sharpen every price.
Sometimes that's necessary.
But if you don't know the margin you need, you can end up buying yourself more work instead of building a more profitable business.
A quote needs to do more than cover the cost of the job. It needs to help pay for the business you're trying to build.