Over in the JLC Markup & Profit forum I’m conduting a poll to see what kind of Markup and Pricing Strategy contractors use for pricing their projects. I’m doing it over there because their forum software allows me to create a poll but I interested in both getting resuts from the crowd of here at Breaktime and maybe we can talk about it here too so here goes. (Click to take you to the JLC site where you can enter the poll)
What type of Markup/Pricing Strategy Do You Use
In the free online articles section of Linda Case’s and Victoria Downing Remodelers Advantage web site the is a real short article on Markup entitled (ironically enough) The Volatile Issue of Markup and I want to quote their descriptions and examples of the differing types of markup strategy for the purpose of taking a poll here.
| Joe is planning for his next business year. He is committed to achieving a net profit of $25,000. He’s planning to sell and produce a volume of $300,000 and his overhead runs $65,000. This leaves $210,000 for job costs. Let’s explore the different ways that Joe could develop a sales price for the jobs he sells. |
The first method they describe is what I have been referring to as the Traditional Estimated Total Volume Based Markup (if you use this method vote Option 1)
| 1. Across-the-Board Markup With this method, every dollar of Joe’s job cost ($210,000) earns the same amount of gross profit. This is the most widely used pricing system in the industry — simple, easy for planning but not flexible. Joe needs $90,000 in gross profit. |
The next three types they describe I am going to group together since they are really just different variations of what I’ve been referring to as the PROOF/Indexed/Labor Allocated method (if you use one of these methods vote Option 2)
| 2. Differential Markup Labor, material and subs are each marked up with a different percentage. Usually labor is very heavily burdened with gross profit. $65,000 Labor X 100% or 2.0 mark up = $130,000 $17,000 Subs X 30% or 1.3 mark up = $93,000 $70,000 Materials X 10% or 1.1 mark up = $77,000 TOTAL $300,000 This system will allow Joe to earn more gross profit on heavy labor jobs and less on light labor jobs. 3. Labor-based Markup 4. Schedule-based Markup |
The fifth type of markup strategy they mention the is called Flexible Markup Based on Conditions and Type of Job (if you use one of these methods vote Option 3) And what I interpret they are talking about there is where the contractor looks at his/her costs and decides “I want to be able to make X amount over my direct job costs on this job” and charges accordingly.
| 5. Flexible Markup Based on Conditions and Type of Job Choose your markup. Make sure it can be monitored at least monthly. |
And for the next option I’m going to add one of the pricing methods I’ve seen contractors use and call it Charge According to the Market (meaning your pricing is based on what you know or think other contractors are charging for the same product or service.(If you use one of these methods vote Option 4)
And for the last option in this poll I’ll describe as Other and hope whoever votes for “Other” will explain their method a little.(If you use one of these methods vote Option 5)
(Click to take you to the JLC site where you can enter the poll)
Replies
you didn't aim this at me, simce I'm an HO, but anyway...
JLC now requires registration and depending on how its software feels can take awhile to get registered. maybe since they've been up and running it goes quicker.
as an HO I like the system Mike Smith uses,can't remember the name, but he has all his markup on labor.
as the payee I like this because you don't get the perception of getting overcharged and you still get your overhead and profit.
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bobl Volo, non valeo
bobl, Mike uses the PROOF system which was the second option in the examples I gave above and while it's called other things in other business environments (in the automobile service industry it called Indexed and it the aerospace parts and job shop industry they don't call it anything special it just the way they do things there) he literally practices the PROOF method as it's taught by PROOF Management Consultants which coincidentally is also just how I learned it too. Since it's use does cross over into other area business environments I usually refer to it now as PROOF/Indexed/Labor Allocated method or PILAO for short since sometimes I find practitioners who use it who have no idea it's called PROOF by so many builders and remodelers out there.
"as the payee I like this because you don't get the perception of getting overcharged and you still get your overhead and profit." Good point. That's one of the key advantages to using it that I find too. When showing different options to clients such as different doors they don't see grossly inflated prices for the door ($360 to $400) that they know can be purchased at a lumber yard or big box for around $240. And yet the contractor still makes the money he or she needs to cover overhead and profit off of the labor involved.
The one possible downside to it however is that in comparing the labor rate of a PROOF/Indexed/Labor Allocated method contractor to a Traditional Estimated Total Volume Based Markup contractor the PROOF type contractor will have a much higher labor rate. However again in the case of carpentry contracting using PROOF often puts the labor rates right in the neighborhood with trades like Plumbing, HVAC, Electrical etc. since those trades since the practice is a lot more widespread there.
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'the PROOF type contractor will have a much higher labor rate."
As a HO/customer I think is is more "acceptable" since customers often see high labor rates in a lot of places.
think it is easier to accept a higher labor rate than large markups on material.
some of this also gets into whether folks price out their labor or get it as part of the markup, charging indirect to order/pickup rather than direct. get the impression here and JLC that is what some folks do, charge those costs indirect._____________________________
bobl Volo, non valeo