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FiveReasonsContractorsLoseMoney

Thephoneisringingoffthehook,you'rekeepingtwiceasmanysubsandemployeesbusyaslastyear,andyou're
bookedforthenextninemonths.Sowhyaren'tyoumakinganymoney?Theanswermaybesimplerthanyouthink.
Herearefivecommonreasonscontractorsbigandsmallfindtheircompaniesinthered.

BadMathAsurprisinglylargenumberofremodelerslosemoneybecausetheymiscalculatetheirsellingprice.They
assumethattheirgrossprofitpercentageisalsotheirmarkupmultiplier.

It'snot.ToseewhatImean,imagineajobwheredirectcostsmaterial,subs,andlaborare,say,$1,200.Let's
alsoassumethatyouneedtoearnagrossprofitof33%.Tofindthesellingprice,manyremodelersincorrectly
multiply$1,200by1.33,andsellthejobat$1,596.Unfortunately,that's$195shyofwhatthejoboughttobesoldfor.
Notmuchonthislittlejob,butoverthecourseofayear,itaddsup.Onatotalsalesvolumeof$250,000,for
example,you'recheatingyourselfoutofmorethan$40,000.

Therearetwosimplesolutionstothisproblem.Youcanusea"MarkupMultiplier"chart(seeFigure1),oryoucan
abandonmultiplicationandusedivisioninstead.Divideestimatedcostsbytheinverseofyourgrossprofit
percentage.Intheexample,divide$1,200by.67(1.33)andsellthejobfor$1,791.

MarkupMultiplier

ToEarnThisGrossProfit MultiplyDirectCostsbyThisNumber

20% 1.25

25% 1.33

30% 1.43

35% 1.54

45% 1.82

Forothergrossprofitpercentages,usethisfurmula:
1(1xGrossProfit)=MarkupMultiplier
Example:GrossProfit:33%
Multiplier:(1x.33)=1.49

Figure1.Tocalculatesellingprice,findyourtargetgrossprofitinthefirstcolumn,thenmultiplyestimatedcostsby
thecorrespondingmultiplierinthesecondcolumn.

CheapLaborCorrectingyourmarkupmathwon'thelpyouifyoudon'tknowwhatyourgrossprofitshouldbeinthe
firstplace.Thebiggesterrorsoccurwhenfiguringoverheadforlabor.Contractorshiringemployeesforthefirsttime
oftenforgettoaddfederalandstateemploymenttaxestothebasewagetheyuseinestimatesthatcoststhem
about8%rightoutofthegate.Forgetworker'scompinsurancepremiums,anditcancostyouanother10%,
dependingonwhatstateyou'reworkingin.

Establishedcompaniesavoidtheseelementarymistakesbutoftenmiscalculatewhatitcoststosupportvacationpay,
sickpay,holidays,andotherbenefitsfor"nonproductive"time.Thesecostsshouldbebuiltintowagerates,but
manycontractorsincorrectlybasetheircalculationsontheassumptionthattheiremployeesworkafulldayeveryday
allyearlong.Thefactisthatfulltimeemployeesareproductiveforbetween1,750and1,850hoursperyear.For
another150to250hours,they'regettingpaidfortasksyou'reprobablynotchargingfortruckrunsformaterials,
settingupandbreakingdowntoolsandequipmentatthestartandendofeachday,supervisingsubs,orjust
standingaroundtryingtofigureoutwhattodonext.

Onewaytoensurethatyourtruelaborcostsarecoveredistocalculatethecostofalltaxesandbenefitsforeach
employee(Figure2).Oryoucanusethisshortcut:Theruleofthumbisthatemployeesincompanieswithbasic
healthinsuranceandvacationbenefitscostbetween45%and55%morethanwhatyoupaythem.Ifthat'snotwhat
you'rechargingforthemplusaddingyourmarkupontopyou'relosingthousandsofdollarsforeachemployee
everyyear.

TrueCostofEmployees

TaxorBenefit CostasaPercentageofBaseWages

FICA 7.65%(15.3%ifyou'reselfemployed)

FUTA/SUTA 1%(federalandstateunemploymenttax)

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Worker'sComp 10%(variesbystateandtradeclassification)

HealthInsurance 12%(basedon$5,000peremployeeperyear)

Vacation 4%(2weekspaidvacation)

Holidays 2%(6majorholidays)

Personal/SickDays 2%(56days)

ToolAllowance 1%(basedon$450peryear)

Escalation 2.5%(assumes$1payraise6monthsintotheyear)

Total 42.15%

Example:Thelaborrateforanemployeewhoisbeing
paid$20perhourshouldbeabout$28.50.Atagrossprofit
of33%,thisemployeeshouldbebilledtoyourcustomerat$42.50perhour.

PoorJobCostAccountingGotthemarkupthingdowncold?Youmaystillbelosingmoneybecauseyour
estimatesareoutofdate.Theculpritispoorjobcostaccountingormaybenoneatall.Ifyounevercomparean
estimatewiththeactualcosttobuildthejob,thenyou'reflyingblindandprobablymakingthesamepricingmistakes
overandover.

Onceagain,laboristhebiggestproblemarea,particularlyforcompanyownerswhonolongerbangnails.Thelonger
they'vebeenoutofthefield,themoretheyunderestimatehowlongaprojectwilltaketobuild.Butevenproduction
managersandleadcarpenterswhoareonsitealldayoftenomitorunderestimatedowntimeforexample,time
spentloading,unloading,andmovingmaterialsandequipment,ortimespentassemblinganddisassemblingstaging.
Theymayalsounderestimatetimetheythemselvesspendsupervisingsubs.Andalmosteveryestimatorforgetsthe
goldenrule:Workexpandstofillavailabletime.Thecrewthatyouestimatedwouldneedsixhourstocompleteatask
aregoingtobepaidforafulleighthourday,nomatterwhat.

Thesolutionistorequireemployeestofilloutatimesheeteveryday,notingnotonlythenumberofhourstheyspend
oneachjob,butalsowhattheyweredoing.Then,whenthejobisdone,comparelaborhoursandmaterialinvoices
toyourestimate.Iftherearebigdiscrepancies,findoutwhybeforeyoumakethesamemistakeinthenextestimate.
Besuretocheckwhoactuallyperformedthework.Sometimestheactualcostisoutofwhackwiththeestimate
becauseamoreexpensiveemployeedidthework.Keepinmindalsothatwhenyou'reestimating,it'seasytoforget
thatdelayscreatedowntimeandthatnotallmaterialordersarecomplete,undamaged,and100%correct.

Can'tSayNoSoundaccountingandestimatingpracticeswon'tsaveyouifyou'retakingonjobsthatyoushouldn't
bedoing.Earlyon,itmaymakesensetotakeeveryjobthatcomesalong.Butdon'tbefooledintothinkingthatall
projectsareequallyprofitableandallcustomersworthworkingfor.

Nobodyisgoodateverything.Bycomparingprofitfiguresfordifferenttypesofjobsandthencomparingjobsize
you'llbegintoseeapattern.Focusonthetypesofworkandtheprojectsizethatnetsyouthemostprofit.
Remember,biggerisn'talwaysbetterit'sthepercentageyouputinyourpocketwhenit'soverthatcounts.

NoMarketingOnereasonit'ssohardforsomecontractorstosaynoisthattheyhavenoplanforgenerating
businessexcepttotakewhatevercomesalong.Inotherwords,theydon'tmarkettheirservices.Forcompaniesthat
startedinthe90s,marketingmaybeacompletelyforeignconcept.Afterall,thephonesstartedringingattheendof
the1991recession,and,inmostpartsofthecountry,theyhaven'tstoppedringingyet.

Buttheywillunlessyouactivelydosomethingtokeepcustomersinterested.Don'ttakeyourreputationforgranted.
Evensatisfiedcustomerswillforgetaboutthewonderfuljobyoudidforthemifyoudon'tkeepintouchwiththemtwo
orthreetimeseachyear.Itdoesn'ttakemuchfreemaintenancecheckupsinthespringandfall,acardatthe
holidays,aphonecallafterabigstormtoaskaboutdamagebutyouhavetomaketheeffort.

Somebusinesshappensbyitself,butit'snotalwaystherightkindofbusiness.Ifyouknowwhatkindofworkismost
profitableforyou,markettoprospectswhoaremostlikelytohireyoutodoit.Beginwithpastclients,thenaskfor
referrals.Itwon'thurttospendalittlemoneyonabrochureandpostageforamailing,oraboothatthelocalhome
show,orsponsorshipofaLittleLeagueteam.Spending2%to3%oftotalrevenuesonmarketingwillpayforitself
manytimesoverinnewandrepeatbusiness.

BySalAlfano
SalAlfanoiseditorofRemodelingmagazineandapasteditorofTheJournalofLightConstruction.

Thisarticlehasbeenprovidedbywww.jlconline.com.JLCOnlineisproducedbytheeditorsandpublishersofThe
JournalofLightConstruction,amonthlymagazineservingresidentialandlightcommercialbuilders,remodelers,
designers,andothertradeprofessionals.

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