Pricing and "Profit"

A question about how to price several small jobs leads to a discussion about the difference between the wages you pay yourself and the profit your company earns. August 28, 2010

I am trying to figure out how I am priced in my local market. If anyone is from around Nashville, TN and could tell me about what they would charge for these jobs I would be very thankful.

Job # 1

This cabinet is about 10' tall and about 17' long. The middle lower section is 24" deep, while the side lowers are 20" deep. The upper middle section is 18" deep, while the side uppers are 12" deep. 3/4 MDF, poplar face frame construction. Just priced for cabinet and install raw.

Job # 2

This is 8' tall 12" deep, one side is about 20", the middle is about 8', and the right side is about 50". This is MDF, poplar face frame, poplar moldings - installed raw.

Job # 3

This is 8' long by 7' tall, 24" middle lower, 20" sides and the same upper proportions as the first entertainment center. All the end panels are raised panels. MDF case, poplar face frames, installed raw.

Forum Responses
(Business and Management Forum)
From contributor N:
How have you survived this long and still have projects to bid?

From the original questioner:
I don't get your question. I have work scheduled for four months out now. I just get very few turn downs on bids so I am trying to figure out if I am too low. I feel like I make enough profit, but with such a high rate of bids turning into sales it am starting to wonder.

From contributor N:
What method of job costing do you use?

From the original questioner:
(Labor) + (materials) *.40 is my projected profit, which I usually hit. I also figure in an hourly rate for my time that is included in the labor. I shoot for a 40 percent profit margin after I have paid myself for my labor.

From contributor F:
You are forgetting overhead. Materials + labor + overhead + profit = selling price.

From contributor L:
I donít know your hourly rate, but Iím guessing your prices are too low. It sounds like you are in the same situation as I am, getting almost everything you quote, and keeping busy for three to four months backlog. I just met with my accountant for year end, and she suggested raising my prices 20 percent from where I was and evaluate after a little while. Good luck with your pricing.

From contributor Y:
Here are my guesses, without putting much time into it. I am interested in this thread because I am also backed up and getting almost every bid. I don't have any experience with putting something in raw, but here it goes.
1. Around $5000.
2. Around $3000.
3. Around $2500.

From the original questioner:
My overhead is very minimal, but I should have been clearer on how I factor things. My material cost includes my overhead. I am a smaller shop. I have my overhead done in such a way that a month of five day work weeks, I know what it costs for me to be in business. I have a daily amount that covers my insurance, electricity, and various other costs. I own all my tools out right, and also my shop and work vehicles. So my overhead is probably really low compared to other peoples. I have been told in the past by customers to raise my rates because we do not charge enough, so I am trying to get a feel for what my market is.

From contributor G:
To the original questioner: what was your bid on those projects?

From the original questioner:
$3000 on the first one, $3800 on the second one and $2200 on the third.

From contributor F:
Iím not sure how you can accurately apply your overhead to your material cost. You could certainly add your overhead to your labor cost though.

Example: this year it costs you $20,000 in overhead. You are able to apply 1200 direct labor hours to your product. Your overhead rate is $20k/1200 hours or $16.65 per hour. Now assume you want to make $30 per hour. Your labor rate is $30 + 16.65 = $46.65 per hour.

Above is all overly simplified. You also need to factor your time for indirect labor into your overhead (sales, marketing, taking out the trash, etc) which would be 800 hours based on a 2000 hour year for the above example.

I donít know how you would add overhead to your material costs. Some projects may require $50 in materials and take 100 hours to complete while others may require $1000 in materials and only take 1 hour to complete.

From contributor F:
I should also mention that just because you own all your own equipment, shop, and vehicles, does not mean you shouldnít be compensated for them. These things should be factored into your overhead as well.

From the original questioner:
The way I do it is labor + materials *.40. The labor is the total cost for my employees to work on it, not just their hourly wage. If I pay a guy $15/hr after everything is factored in he costs me about $19 an hour. As for the overhead it costs me about $90 a day. In an overly simple way of looking at jobs I just add $90 a day to every job I do like one would a drawer slide or another door.

From contributor Y:
I am in a rural community in the Midwest.

From contributor F:
In effect you are adding $90/day instead of $11.25/hour ($90 day / 8 hours). Overhead canít be considered a material because there is always a time factor. It costs $XX per year or $XX per month or $XX per week, or $XX per second to operate the business. There are direct costs (materials and direct labor) and indirect costs (overhead and indirect labor) and profit. To price properly, and profitably, you really should know all these costs and apply them appropriately. I think your overhead rate is way too low even without knowing your costs.

Have you included, heat, hydro, cell phone, land line, fax, property taxes, business cards, web site, computer stuff, office supplies, rent (even if you own the building you should be paying yourself), gas, vehicle maintenance, property maintenance and repair, machinery maintenance and repair, etc? Have you included all your indirect labor - marketing, sales, bookkeeping, taking out the trash, customer meetings? At $11.25 per hour (or $90 per day) you are only recovering around $16k for all of this.

From contributor D:
To the original questioner: are you asking this because you don't know what to do with all the money you are making or you are going broke? Your cash flow will tell you whether your calculations are in the ballpark or not. If you are busy and making money, then you can try gradually raising your rates and see what happens. If not, then you need to take a very careful look at where your money is going, and refigure your calculations accordingly.

From contributor L:
If you are getting almost all your bids you are leaving money behind! Would you like to have better tools, more in your retirement account, grow your business? Without knowing the competition it's hard to tell what percentage of your bids you should be getting. I feel good at 1/3rd. The only thing you have to sell is your time and that is running out every day. If you have very low overhead that should allow you to put more money away for other things, not necessarily give someone else an especially great deal.

From contributor G:
If you want a 40% gross profit you have to divide your material and labor by .6. If material and labor is $200.00 and you multiply it by .4 it is $80.00. So your bid would be $280.00 which makes you gross profit around 29%.

If you take the 200 and divide it by .6 your get $333.00, $133 is 40% of $333.00
40% gross profit is about right but the way you are doing it you are getting 29% gross profit. Which may be why you are so successful on your bids? If the customer starts dancing when you give him the price something is wrong. Does that make sense? Another factor is charging what the market will bear in which case raise your prices.

From contributor S:
You are way too low with your pricing. You're in a larger market, and you're charging trim carpenter prices for a small market. I guess everyone values their time differently, but if you're willing to take less, than that's what you're worth. If you're work reflects a higher quality though, you should be charging more. You're not only hurting yourself, but your also hurting the industry. All of us want to make more money, but it's difficult if some shops are giving work away. I consider my work to be high end, and I price it accordingly.

With a quick glance, I think you should be double what you're charging. I won't say it doesn't matter what your labor costs are, because it does, but you really need to establish a shop hourly rate (based on numerous factors), and use that as your labor rate. Just because you pay someone $15 per hour doesn't mean that should be your labor rate. You could charge $30, $50 or $70, etc an hour for your shop labor rate. My base rate that I use to estimate projects is $75 an hour even though I do have guys I pay $15 an hour to. If I estimate it will take 200 hours to build and install (and draw and deliver and meet with client), that will be my labor charge. Then I mark up materials at least 20%, but sometimes 100%. Then I will add a profit margin to the top of that. Sometimes it takes longer to build a project than I estimated, and that's where the profit margin might take a hit, but you learn from it. So in summary, charge more!! You deserve to make more. Don't settle for less. Be willing to lose a job because you put your foot down about price.

From the original questioner:
I think I am not being very clear with myself. I have a hard time sometimes conveying what I am talking about. I have been in business for around five years and a lot of the jobs I do are the same. I do not guess I have been very clear with the way that I price things and my profit margin. I am clearing between 35% and 45% on each job as profit after everything is paid. That being labor, materials, electricity, insurance, etc, everything. Last year I averaged 42% profit. Using arbitrary numbers I was able to write off 100k as business expenses, so I brought home 42k. That is just using round numbers of what I am talking about as profit margin.

Contributor F - I use 90 a day as a figure, we are a smaller shop and we tend to not work eight hour days. I have a scheduling; get the job done, mentality. We might work 35 hours one week and 60 the next. I realize itís not the best to do, but that is the way things are currently done because of space limitations and time limitations.

Contributor S - I value my time very well, it is the most valuable asset I have. That is why I am trying to adjust my prices. I lowered my prices at the beginning of this year to compensate for the slow down I saw coming up. In the past the lionís share of my business has been for several contractors. I saw that they were slowing there subdivisions and developments down, so I started to try to compete in a homeowner market too. I did not realize however that it was such a busy market and I would do so well.

One of the main reasons for me asking all of this is that I am thinking about opening a show room. I have been talking with a manufacture of closet components and a box cabinet manufacture also. The work I am losing is coming from people using companies like California closets or similar lines and also from people using box cabinets. So I was toying with the idea of dabbling in those markets. But also at the same time using the showroom for showing some of the custom things we make.

From contributor E:
35-45% net before tax profit is good for any business. $42 K for a yearís work is not, that's just wages. Something is wrong with your figures.

From the original questioner:
I used that figure because it worked with 100k easily as a round number. I figured it would be better than if I rattled off a number with a digit in every place and some change on the end. Plus I would have to go dig through my tax boxes to find the real number.

From contributor T:
What's being said is this: profit is what's left after you've paid yourself, along with all other labor, material, and overhead expenses. So, using your example, you would have made a modest income ($42,000) and zero profit. Even my accountant makes the mistake of referring to my income as profit. If you decided you should earn $52,000/year and paid yourself accordingly, with the same numbers you would have an $8000 loss at year's end.

This is one of the flaws of sole proprietorship. I make whatever is left over after everyone and everything else is covered. That's fine, just don't call it profit. To your original question, if you've been working for builders but now work directly for homeowners, you can raise your prices as much as 50%, since the builders were marking your prices up all along at least that much.