Contractors I know who do this one thing when bidding make more consistent profits on their projects and their bottom line.
Before I jump into telling you what that one thing is, it’s important to understand this . . .
Here are the links I mention in my video – check it out https://suiterbusinessbuilders.com/markup-vs-margin/
How gross profit dollars differ from gross profit margin…
Gross profit dollars are the difference between your bid price and your project costs. Gross profit margin takes that gross profit dollars and divides it by your bid price. That’s your rate of return or your gross profit margin. It’s a percentage. Basically, margin is synonymous with percentage
They both mean the same thing, so whenever you hear margin, it just means that it’s a percentage.
Percentages are what I call the great equalizer. They’re the great equalizer because it gives you an opportunity to have a benchmark of what you want to be making on every job regardless of how much the dollars go up, or down.
I’ve often seen where a company will grow rapidly in revenues, but then their gross profit margin (rate of return) goes down. While it looks like they are making more, in fact, when that gross profit margin starts to decline, so does their bottom line, and their business can often end up losing money.
If you’re like a lot of contractors, you’re working as hard as ever and you’re not making the profits you’d like, and you want to figure out how to NOT work so many hours AND make more money. One of the best way to do that is to manage gross profit margin.
So how do you manage gross profit margin?
The first step is to set a gross profit margin goal.
How do you do that?
One way that I do this with clients is to look at five years’ worth of profit and loss statements and look at how margin has trended year to year.
- Is there a gross profit margin pattern, or is it all over the place?
- Were they making higher margins in the earlier years and now it’s declining with higher volume?
- Is their gross profit margin within industry standards (what the market will bear)?
Often, I notice gross profit margins declined as volume goes up, or they are below what I know the market will bear. This knowledge is based on my working with many contractors here in Northern California.
For yourself, look at your own data and ask these same questions. As for “what the market will bear” here are a few ways you can find that out:
- Go ask your CPA. If they work with other similar contractors, they may be able to tell you if your gross profit margin is within the range it should be (what the market will bear).
- Go ask another contractor in your field. Your first thought might be, “Why would another contractor share that information with me?” Because successful people want to help other people to be successful. Choose somebody who has built a profitable contracting business, and who’s in your area of specialty.
- Keep in mind – a company that does $2M a year is going to have a higher margin than a company that does $30M a year, so listen for that distinction.
- Check with trade associations or groups specific to your field of work – they may have resources that can help you come up with a gross profit margin goal.
Wherever you look to find your gross profit margin goal, the important thing is to set a goal. Then start to manage your bids against that goal.
The ONE thing…
If you do this ONE thing on every bid before it is finalized, you’ll make a more consistent profit on all your projects, and your bottom line. It’s super easy…
- Once you’ve got a bid price, subtract your cost, that’s your gross profit dollars.
- Then calculate gross profit margin (gross profit dollars, divide it by bid price).
- Then ask yourself this “does that gross profit margin match up with my goal?”
- If not, go back to the drawing board, and see where you may not have marked up enough.
The most profitable contractors that sustain success, are the ones who manage to a gross profit margin goal. In fact, they manage their entire business on specific, measurable goals.
Are you ready to be one of them?
Your mission should you choose to accept it…
- Set a gross profit margin goal for your company.
- Verify every bid before it goes out to ensure it’s at or above your goal.
Start managing this one number in your bidding, and you’ll grow a more profitable business. And who knows, maybe you’ll even be able to stop working so much!
If you’re wanting more information on markup vs. margin, I’ve explained it in my article titled Markup vs. Margin Explained.
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 on Facebook or LinkedIn. I’m happy to help and very interested to hear how others get on with implementing these tools in their business.
p.s. My book, The Profit Bleed is all about how you grow a sustainably successful contracting business. In it, I give you the thinking and the tools (there are a ton of free resources you can download) that will help you build the business and life you desire. For a limited time you can get it for FREE – check it out.
Vicki Suiter helps people see their businesses differently, then gives them the tools to do things differently. Since beginning her business in 1990, Vicki has helped hundreds of companies achieve the kind of success they never dreamed possible. Today, in addition to consulting, Vicki is an in-demand speaker at industry conferences nationally and internationally. Vicki’s articles and opinions have been widely shared in print and across the web. She is also the author of the book “The Profit Bleed” How managing margin can save your contracting business.