In over 25 years of working with contractors, there is one number that a lot of folks I meet don’t understand – and getting that one number wrong is killing their profits!
What sparked this post was a recent call with Joe – a remodeling contractor. We were barely on the phone for two minutes, when Joe launched into a rant about how he felt he’d been doing all the right things in his business, and yet, his bottom line and bank account were not showing the return for all his hard work!
Maybe you’ve been there too at some point? It’s super frustrating.
Making a profit begins with the markups in your bid
When I asked Joe his strategy for marking up his costs in bidding he replied – “I mark up what I think I can get. I mark up according to what I hear other contractors in my area are marking up, like 10% and 5%, or 15% and 10% on some projects.”
This was part of Joe’s problem. I explained to Joe that unless you have a large company, your overhead percentage is never that low. I know this because in the past 25 years I’ve worked with hundreds of small to mid-sized contractors, and I see their numbers.
I could see the irritated look on Joe’s face as I spoke. “Well, then how the hell do people who only mark up that much on their bids make any money? And how am I supposed to compete against those guys?”
As I asked Joe more questions, I could see he was not clear on the one number I knew was a factor in how he priced his work, and ultimately in the profits, he was or was not making.
Watch today’s video and learn what Joe and I figured out in his business that allowed him to start being more strategic in his bidding, and let him start adding more profits to his bottom line. You can also read more below.
Numbers don’t lie
“Fair question I said, but before we go there, let’s talk about what your ACTUAL overhead breakeven percentage is. The amount you need to mark up JUST to break even on the bottom line. Then let’s talk about strategy for including that number in your bids.”
The first rule of making money is knowing your numbers. And many people who think they do know what their overhead breakeven percentage is, are calculating it wrong.
I showed Joe that the number on the profit and loss statement that is often the place where a lot of contractors get tripped up and use the wrong number in bidding.
If you look at the percentage next to the number on your profit and loss statement that says “expenses” or “overhead expenses” that is NOT your overhead breakeven percentage.
In Joe’s case, this number showed 23.84%. Then I showed Joe how to calculate his REAL overhead breakeven percentage.
That number was nearly 37% – a dramatic difference.
The number many contractors get wrong
Your TRUE overhead breakeven percentage is calculated by taking your total overhead costs for a period (12 months) and then dividing that number by total cost of goods sold for the same period. That is your accurate overhead breakeven percentage.
Below is a link to an article that walks you through this formula in more detail.
When I told Joe his overhead breakeven percentage, 37% – the amount he needs to mark-up his costs just to breakeven on the bottom line, his eyes got big and he exclaimed, “I can’t put that on my bids, I’ll never get work!”
I totally appreciated what Joe was saying – maybe your thinking that too. So, let’s talk about how to cover those costs when bidding.
Get strategic about your numbers
Here are a few tips for how to incorporate those costs into your bids NOT just as a line at the bottom that says 37% overhead markup…
- Include things like project coordination, accounting, temp facilities, etc. into your general requirements.
- Have project management as a line item on the bid – projects don’t manage themselves. Do this even if you as an owner are the project manager. At some point, it will be someone else.
- If you have transportation costs, fees, vehicle costs, or other indirect costs like tools, incorporate that into your bid as well – either as a line item, as part of the cost of labor, or in general requirements.
- Mark up labor base costs for not just taxes, benefits and insurance, but also vacation, profit sharing, bonuses, tools, phone, vehicle, payroll fees, etc. This is what I told Joe to do as his labor makes up most of his cost of goods sold.
Those are just some different ideas to give you of ways that you can show in your bid line items specifically related to covering your overhead cost so that it’s not just this big number at the bottom of your proposal.
Have a strategy for covering your overhead costs when bidding is the first step growing a more profitable contracting business. It all starts having the right numbers.
What we haven’t talked about here is profit and marking up for profit, which was the second conversation Joe and I had, but I’ll leave that for the next post.
In the meantime, go get my article “Go Beyond Breakeven” and calculate the real overhead breakeven percentage for your company, and stop selling yourself short on bids.
As always, if you have any questions or comments to add to the topic – please drop a comment below or feel free to reach out to me. I’m happy to help and very interested to hear how others get on with implementing these tools in their business.