Kitchen & Bath Business - May/June 2020 - 19

SKILL SET

Get it Right

Learn how to obtain the markup you deserve

IF YOU'VE VISITED OUR WEBSITE or attended one
of our classes, you know I talk a lot about charging
enough for the service you provide.That's because
not charging enough is the major reason construction companies fail.
Here are some of the reasons contractors don't
charge enough for their work:
1. They guess at their markup. It's not difficult to
calculate the correct markup for your company,
but too many contractors don't know how. Or, if
they know how, they won't take the time to get
their numbers right.They just pull a number out
of the air or borrow their friend's markup and
hope it's good. Or they think there is an industry
standard they should use (there isn't).
The correct markup will give you the sales
price you need to pay all your job costs, all your
overhead and make a reasonable profit. If you
use a markup that's too low, the first thing you'll
lose is your profit. You might not be able to pay
all your overhead. It starts you on the path to
business failure.
Make sure the numbers you use are right for
your business. If you aren't sure, get some help.
My book, Markup and Profit; A Contractor's
Guide Revisited, will take you through the steps
of establishing your markup. And when you're
done, you can use that number confidently,
knowing your jobs are priced right.
2. They adjust their markup to be competitive. It
doesn't even make sense if you think about it.
When you adjust your markup (let's be honest,
it always gets adjusted down), you're lowering
your price to compete with another company
that very likely doesn't know what their price
should be, either. Remember, most construction companies fail because they don't charge

ABOVE Photo by Pepi

Stojanovski on Unsplash

MICHAEL STONE
offers business management and sales training
to construction-related
companies in the U.S.
and Canada with books
and training programs
available on his website
- markupandprofit.com
- as well as coaching
and consulting services.

enough for their work or service. If their price is too low, and you lower
your markup to be competitive with that price, are you charging enough
for your work? Of course not.
When you calculate your markup properly, that number is what you need
to determine the price your business requires to pay all job costs, cover your
overhead and make a reasonable profit. When you lower that markup, you
won't make a reasonable profit. You might not have enough to cover your
overhead. What are you working for, anyway?
Always remember, being competitive is an option; being profitable is not.
If you find yourself worrying about your price and/or your competition, get
to work on your sales skills. Price isn't the number one concern with most
of your clients. It shouldn't be yours, either.
3. They use variable markups. For this discussion, I'll define variable markups
as using one markup for labor, another markup for material, maybe no
markup on subcontractors and a different markup on every other cost. It's
complicated and doesn't help you get to the right price any faster.
Multiplying your total estimated job cost by one markup is the quickest
and simplest way to get to the right price for your work. When you start
using a variable markup, your focus is on price instead of selling your services
for a profit. Those who use variable markups are always fussing and worrying about their price. At the end of the year, they haven't made any more
money than if they'd used a flat markup. They usually make less money
because they are too busy worrying about price.
4. They use gross margin instead of markup to calculate their price, and they
use it wrong. If you're going to use your gross margin to calculate the sales
price of your work, make sure you're using the right numbers, the right way.
Let me explain. When you calculate the sales price using markup, you
multiply your estimated job costs by your markup. If your markup is 1.5 and
your estimated job costs are $10,000, multiply $10,000 by 1.5 and you'll
get a sales price of $15,000.
When you calculate the sales price using gross margin, you divide your
estimated job costs by (1 minus your gross margin). If your gross margin is
33.3 percent and your estimated job costs are $10,000, divide $10,000 by
(1-.333, or .667) and your sales price is $14,992.
Both methods will give you the same price if you calculate correctly, but
which one is easier to do? We recommend using markup because it's easier
and less prone to mistakes, both on paper and when you're doing mental
math on a sales call. On a scale of 1 (easy) to 10 (complicated), markup is
a 1. Margin is a 5 or 6.
Pricing jobs is a critical factor in a successful business, so take the time to
learn how to do it right. We like to see the good guys win. We want you to
make money in the profession you've chosen, and you can if you run your
business correctly. You can also lose your assets. So let's do it right.


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Kitchen & Bath Business - May/June 2020

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