Many remodeling contractors do not know the difference between markup and profit on their building projects. Consequently, they are not charging enough money for their services.
The difference between markup and profit could be the difference between a healthy profit and, if you are lucky, a break-even on your remodeling jobs. It is important to get this distinction clear early in your business so that you do not continue to give away money that should be going into your bank account.
Here is the difference and why it is so important. Your markup is a percentage of your costs and your profit margin is a percentage of your final price. If your markup is 50%, then for every dollar ($1) of cost you have you are charging the customer one dollar and 50 cents ($1.50).
You estimate that a job is going to cost $20,000. You put a markup of 50% onto that estimate; so you add $10,000 to the amount and your price to the customer is $30,000. You have achieved your markup of 50%; but your profit margin on that job is really 33.3%. The $10,000 is one third of $30,000 so it is a profit margin of 33.3%.
Please note that this is the minimum you should make in the remodeling business. Is it enough? That depends on how big you are and how much overhead you have. If you are a small one person shop with maybe a helper or two and you perform all the administrative functions yourself, it should be enough.
I knew a remodeling company in the northeast that was quite big, owned its own building materials and lumber company; and charged a markup of 150% or a profit margin of 60%. If the job cost them $10,000 they charged the customer $25,000. They bought everything at much better prices than most of us can; but they also had the corresponding overhead that went with it.
I think that a much fairer markup to you, the contractor, and to your customer is 67%. That is a profit margin of 40%. We will cover this and the associated costs breakdown in much more detail in our July Newsletter.
You are a business person, first and foremost. You have risks associated with your business; you have resources you bring to the project; and you supply material and labor. You are entitled to a fair return on your efforts. A 33.3% profit margin may keep you in the black but you are not going to build a sustainable remodeling business with that kind of profit margin because there will not be enough left over at the end of the year to build cash reserves and grow your business.
I know that some of you are going to say that you cannot get this kind of profit margin in your area. Too many times I have seen that statement proven wrong. If you really feel that you cannot get it then you need to get our newsletters and learn how to get it.
{ 1 comment… read it below or add one }
It should be added that during this current recession (we are even trying to grow and do what we can to save on cost), the best the residential market is giving is between 20 – 30% if you try more you simply will not win the bid and get the job.
In the commercial remodeling you can aim higher (around 50%) and in government contracting you may land or not a job with 65% profit margin.
Up to last year our closing rate was 30% this year it is about 20%
However they always say…..”I never lost a dime on jobs I did not get”….and even this is ignorance in my book because it cost on average $300 to acquire a new client if he / she did not come from referrals.