I am just beginning my career as a Home Improvement Contractor and am looking for any and all advice on doing it right. small projects up to $50,000 in value to start.
I need to figure out what my Gross Profit Margin should be in order to make this venture profitable. Any advice? It just me, no employee’s.
Thanks,
Brad
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Replies
38%
The awful thing is that beauty is mysterious as well as terrible. God and the devil are fighting there, and the battlefield is the heart of man.
- Fyodor Dostoyevski
*Snork*
Be nice guys, this was his first post.
All I know is that if you take what you want your takehome pay to be or what you need to live on,
Multiply that by about 2.6X to get a very ballpark gross for what you charge for your labor to cover the government take and payoffs (ok, 'tips') and tools and xprotation. Higher in big cities.
IIRC, 38% was the average gross profit margin from Remodeling Magazine's 2007 "Big 50" issue. Again IIRC, avg. net profit (after owner's salary, overhead,etc.) was 9%.FYI, my snarkiness is usually quite subtle.Jim
The awful thing is that beauty is mysterious as well as terrible. God and the devil are fighting there, and the battlefield is the heart of man.- Fyodor Dostoyevski
the number you WANT to report in the box "Adjusted Gross Income" is the number you're shooting for....
fill out out a schedule C with your projected expenses and sales to see how you're going to get there
I shoot for 40%. That number is high enough to accomplish a few things but low enough to keep me in the ballpark in competitive bid situations.
To accomplish the 40% gross profit margin, you need to mark up all your costs by 67%. So, if I have 1000 in costs on a job, my selling price will be 1,670.
Blue, a couple of things I question....generally speaking I like the idea of shooting for the higher Gross Profit Margin target but for a new fledgling home improvement contractor he might not be ready or able to sell based on that number. [And ultimatly he should use a Gross Profit Margin target figure and markup based on what his costs and net profit targets really are.]
The other thing I question and maybe you knew this was coming there is a real big problem with the philosophy (markup method) that has you apply one blanket markup to "all your costs". Unfortunately in real life practice marking up the sum of your costs 67% wont necessarily return you a 40% Gross Profit Margin.
I written about this problem before in both One of the Potential Problems in Using a Traditional Volume Based Markup and Comparing Markup Methodologies In Real Some World Pricing Scenarios and David Gerstel writes about the problem with that method too on pages 167 through 168 of his book Running a Successful Construction Company. If you don't already own a copy of the book you can read that section online via google books.
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Hello Jerrald
How do you put a link inside of a sentence?
Like this One of the Potential Problems in Using a Traditional Volume Based Markup ( I just cut and pasted from your post below)
When I do a link it looks like this
http://www.apawood.org/pdfs/managed/Z416.pdf?CFID=6909442&CFTOKEN=31910354 (APA web site)
Just curious.
Rich
Hey Rich, I write virtually all my posts here in HTML and 90% of the time I am using Dreamweaver as my HTML editor tool (and when I post I check the box that reads: Check here if HTML tags are in the message).
A sentence like:
....really looks like this when you look behind the scenes:
I happen to use Dreamweaver since I have it as part of my Adobe CS 3 suite but that's a pretty pricey tool for just writing good looking posts in forums. While I know of some good cheap and free editors for the Mac platform I am not too well versed on what good and inexpensive for the Windows platform. I do however hear some of my Windows contractor friends mention Coffee Cup HTML Editor from time to time so you might want to check that out. It's only $49.
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jerrald
Thanks for the answer.
I was just wondering how the other 1/2 computes. LOL
HTML is a different format and I use it when I get pics ready for BT in Picasa but that's all I really know about it.
But I don't really understand it.
Rich
View ImageView ImageView ImageView ImageView ImageView ImageView ImageView ImageView ImageView ImageView ImageView ImageView ImageView Image
Rich, hopefully this will print out for you the way I see it in the Reply page on the board.
In the line above there's the Bold-Italics-Underline.etc. Well, there's a globe with a what looks like a pair of glasses on it.
You type your message like Gerald. Hi-lite that message. Go up to the Line up top and click on that globe with the glasses. Right clic and paste your link when it comes up. That will insert the link in your typed message.
That is if you understand what I just wrote.A Great Place for Information, Comraderie, and a Sucker Punch.
Remodeling Contractor just outside the Glass City.
http://www.quittintime.com/
calvin
I give it a try in another post.
I've got to take the dog out for his nighttime chores.
Rich
calvin
It too me a couple of tries but i got it.
Thanks. Now I can impress all my friends down at the Kool-Aid stand. LOL
header design
Rich
I should have taken more care and written APA Header design.
I wouldn't drink the Kool-Aid just yet...
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I think you had an extra "http" in there. Try this:
APA Header Design
Jon Blakemore RappahannockINC.com Fredericksburg, VA
Jon
Well back to the drawing board.
My link didn't do anything, i just got the Google Opps page.
I guess I am not going to impress the girls at the Kool-aid stand today.
Rich
Rich,If you edit your post, you can select the "Edit HTML version" near the bottom of the page. It's a little confusing at first, but I think you will be able to find the problem.It looks like your HTML was right on, you seem to have just added a few extra characters in your URL. As you already know, URL's are very unforgiving.Here is what the link you embedded was pointing to:http://www.http.com//www.apawood.org/pdfs/managed/Z416.pdf?CFID=6909442&CFTOKEN=31910354If you take out everything from the first "/" (forward slash) to the first ".com", I think you will be on the right path.
Jon Blakemore RappahannockINC.com Fredericksburg, VA
Jon
I tried it again this morning with a whole new post and I could not copy and paste into the dialog box.
When the dialog box appears the http// is already there.
Yesterday I copied and pasted but forgot to remove the http//
Rich
What browser are you using?
Jon Blakemore RappahannockINC.com Fredericksburg, VA
Jon
What browser are you using?
Internet Explorer
I got it to copy and paste the night before but not this morning.
Rich
Rich,
I'm in Internet Explorer now. Let me try this.Breaktime Link
Jon Blakemore RappahannockINC.com Fredericksburg, VA
Rich,
I think I know why you may have had problems. In IE, I see two boxes: "WYSIWYG" (which stands for "what you see is what you get") and "Source". You can paste a link in WYSIWYG mode and then click over to Source mode and modify the link. It may look daunting, but it can be done quite easily.
First, paste your link:
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Then, change to "source" mode:
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Thirdly, change the text between the brackets in the a href section:
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Finally, here is what your post will look like:
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If you open the notepad file, you will see the code that I have up unto this point. Once you get the hang of it, it comes rather quickly.
Jon Blakemore RappahannockINC.com Fredericksburg, VA
Jon
Let me try again.
APA Header Design
Rich
Jon
OK I got it this time.
Right click and copy or select hyperlink did not work. That is my usually method of copying hyperlinks.
This time I highlighted and then I used Control C and then Control V.
Now I can impress Suzie Q at the Kool-Aid stand. Yippee
Now I can be as cool as Jerrald. LOL
Rich
PS thanks for taking the time to school this computer challenged nail driver.
Edited 5/21/2009 9:28 am ET by cargin
No problem, I will be sure to look you up when I have any grain truck questions.
Jon Blakemore RappahannockINC.com Fredericksburg, VA
Jon
No problem, I will be sure to look you up when I have any grain truck questions.
Buy them cheap and use them hard.
Best tool we own. We use it every day.
Did you check out my cool link?
Rich
Jerrald, I did know it was coming and I most certainly welcome your input. The amount of time and detail that you offer on this subject should be a welcome offering from a fledgling business person who has no business training. In addition to studying your suggestions, I'd suggest that this young person involve himself in some serious business classes at the local community college.
Hi Jim,
Good advice...all I would add is not just classes at a community college but something more specialized to contractors and the building industry. I have had my fair share of college business classes and while good, some are more theory and not real world aspects of things like running a construction company. I think the classes given by your local builders association or any given as part of a state's continuting education program for your license might be good.
I am going to post a link to something I just got via email in another thread to not hijack this one that might be helpful to alot of folks here.
Mike
Briefly,.... that's a good question Brad. According to the NAHB's Remodelers Cost of Doing Business survey successful small volume remodeling contractors typically report Gross Profit Margins that range from 30% to 45% of total sales. In my opinion that's too wide a range for you to go into business using an unqualified number you pickup online in a forum.
I think Mike Smith's advice here is the best I have heard so far. Filling out a Schedule C based on what you estimate your costs will be is better than just picking a number from the many numbers people will throw out at you. In other words you have to figure out and develop your own overhead cost category budgets yourself.
As I often do I would highly suggest you pick up a copy of Ellen Rohr's book How Much Should I Charge?: Pricing Basics for Making Money Doing What You LoveView Image and it will do a great job of guiding you through that process.
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You could ask your banker for their SIC industry comparison, which shows what the average is across the country. 40% seems about right, though. Your Gross Income should be what you charge, minus direct job expenses. That includes materials, any rental equipment, tool consumables AND YOUR TIME. I.e., come up with a number which you are willing to work for. Either by the job, or by the hour. I find it best to come up with an hourly figure, and just plug that into your estimating. I'm not saying you need to quote hours, but you need to know what your time is worth. If you know how much time time is involved with a particular project, it will be easier to estimate labor costs. Your Gross Profit Margin should cover all of your administrative expenses, such as accounting, legal, office space, utilities, and anything else you do outside that job running the business, including bidding other jobs. What is left over is you profit.
Some people might take exception to what I wrote about "including bidding other jobs," but rememeber, you are looking at this as a business. You must factor in what it takes in time and resources to line up the next job. You need to run your business as an ongoing business, not just "a job."
There are two ways to sell your business, on price, or on product. You will never get ahead selling on price. You don't even want the customers who select contractors based on price. They will end up nickle and diming you to death in the end. Make sure you do quality work, and focus you selling effort on that. Write on your bid a detailed scope of work, including material specs, and if you get underbid, ask if you can compare. Whoever underbid you might be taking short cuts, or use inferior materials that you might want to make the customer aware of, so that your bids can be compared fairly. Don't be too quick to lower your bid. If you get every job you bid, you are too cheap. You might be up against a hack, and if you underbid him/her, you are only cheating yourself.
When you bid on price, you end up creating stress for yourself in the long run. Your margins become tighter as you keep lowering your price. You are forced to do lesser quality work, and even slight over-runs cause stress either because you can't afford to cover them, or you have to go back to your customer and ask them to pay more. Not to mention that you end up working more hours for less pay. I can live with being expensive, but I think my reputation would suffer if I kept underbidding jobs and overpromising results. Plus, my wife would probably leave me.
On a final note, make sure all contracts are in writing. Include all specs for materials and scope of work. And any change orders should also be in writing. If it adds to the cost of the project, let your customer know, and pass that along to them.
Sorry for the long winded response that probably covered what you already knew already. Just got on a roll.
Thanks... this is great advice! Gives me a better perspective on how to bid my work. I have been spending the better part of the day wrapping my head around what to charge as my overhead, fees,and the rest. I think i finally have it figured out.
I have been reading "Running a Successful Construction Comapny" (for Pro's by Pro's); it has great info on the basics. I decided to give up my Purchasing Director job for a volumn home builder here in Canada and try it alone. This is something I have been wanting to do for the last 8 years. Its time to make money for me and not someone else.
Anymore advice? I'd love to here it.
gross profit margin? whats that? i know what gross profit means,but that margin is throwing me.
i gotta tell ya. my gross profit doesn't mean squat to me all i care about is what i net to go home and buy dinner with.
then i build from there i need xxxx plus this expense,that expense etc. then that gives me what i need to charge.
i think we get to the same point just different ways of going about it.
YOU ONLY NEED TWO TOOLS IN LIFE - WD-40 AND DUCT TAPE. IF IT DOESN'TMOVE AND SHOULD, USE THE WD-40. IF IT SHOULDN'T MOVE AND DOES, USE THEDUCT TAPE.
Edited 5/19/2009 7:50 pm by alwaysoverbudget
Brad
Anymore advice? I'd love to here it.
Run back to your day job as fast as you can, while you still have free time, a body that works, paid vacation, other benefits, evenings , weekends and a retirement plan.
Seriously self employment can consume you and your life. And if you are not careful you won't get paid very well or have any savings.
Listen to Jerrald and Mike Smith. Stay tuned to BT and ask stupid questions. Be prepared to get hammered. Avoid getting addicted to BT.
Set parameters for time spent on work and pay yourself 1st. LOL
Good luck
Rich
Reading books, asking questions and taking classes are all great, but you should invest in some time (possibly several hours) working with your CPA to identify ALL of the costs that need to be figured into your rates. Some costs are constant (liability insurance, licenses, etc) and exist whether you work or don't. Other costs are job specific (insurance riders, permit fees, subcontractors, etc) and only exist during that job. You gotta know which is which, and price your work to recover them all.Using averages will get you in the ball park, but knowing and understanding how your actual costs affect your rates is vital. If your actual costs are below the "average", you might find yourself losing jobs because you're bidding high. Conversely, if your actual costs are above the "average", you might go broke although you're working your tail off.
Edited 5/20/2009 10:04 am by Dave45
Hi Brad,
I may buck the system but I figure mine according to each job, the time it takes and the risk involved.
If I am building a whole house and its going to take a while, I want a higher percentage If I am just coordinating a repair job using some subs it might be as low as 10% to still get the job and yet make a little off of it. These I see as more advertising jobs than profit-making ones.
I honestly have followed no set rules for things across the board. Alot of it depends on how busy I am, how bad I want the job and how much I think the job is going to benefit me to obtain future work.
Just my two cents of course.
all depends on how much you need to live ...
and how much you pay yourself.
if U bill yourself out at $10 / hr / labor ... you'll need a high markup.
if U bill yourself out at $1,000 / hr / labor ... you can skip the markup.
there is no one size fits all. Too many variables.
Jeff
Buck Construction
Artistry In Carpentry
Pittsburgh Pa