Understanding Costs and Profit

Is "the money I have left over" the same as "my profit"? Cabinetmakers analyze and discuss the figures from an example job. July 29, 2012

If you are left with about 40-42% of the total job cost as profit, would you say itís good? Example: a kitchen job for $5587. $1142 for materials, $960 for one week (40 hours) labor for two shop guys, and $1200 for a paint job. Iím left with $2285. Installation not included.

Forum Responses
(Cabinetmaking Forum)
From contributor M:
Does that include your expenses? If so, I would say that is very good. 20-30% profit margins are my target, but that is above and beyond absolutely all expenses!

From contributor S:
Your hourly labor rate should be much higher than $24 if youíre including all of your overhead expenses. My base labor rate is $65 but only you can determine your hour labor rate based on your actual expenses. To determine a ballpark your labor rate should be comparable to the hour rate of plumbers in your local area. Just stop and think about the amount of tools plumbers have compared to the amount of tools you have.

From contributor D:
Net profit is the sales price minus labor, materials, and overhead. Your equation does not include overhead. Your labor does not include workman's comp. If you're working from your garage and paying your workers under the table, then your number is probably accurate, but unsustainable. Eventually, an employee will get hurt, a tool will break, the neighbors will complain, the state will knock on your door - party over. If you're going to do business this way, my suggestion would be to eliminate the employees and take the risk yourself. Keep the noise and the dust low, and fly under the radar as much as possible.

From contributor K:
Others are correct in that you are not accounting for your overhead, but I also don't see where you personally made any money. If you are paying yourself out of what is left over after a project that is not the way to do it. Company profit is a percentage added on top of materials, overhead, labor (which includes your pay) and is what you pay your company, which allows for things such as capital reserves, emergency fund, equipment purchases, etc. Your net profit is what is left after all other expenses have been accounted for, and based on your numbers is nowhere near 40-42% and it might even be negative.

In addition, you are only accounting for $12/hour for your shop guys. Do you plan on paying payroll taxes? $12/hour is the base rate they are being paid, not the loaded rate. Remember, with employees you have to file quarterly. Let's say you want to pay yourself $50K per year. Well, the base hourly rate on that is $50K divided by 2080 hours which equals $24/hr. That does not include any payroll taxes, benefits, retirement plan, WC, etc.

So for example, if you just take your base hourly rate ($24/hour) and add it to the shop guys of $12/hr, assuming you also had 40 hours into the project (which it is probably more as someone had to sell it) your base labor would have been twice the amount.

Being that you said you had a shop, my guess would be based on the numbers you provided for the sale, you may have actually lost money on this, that is, unless you don't plan on making any money personally. Do a search above on "shop rate" or "LOMP" (labor, overhead, materials and profit) and it will provide a lot of detailed info. What it will not tell you is what your target net profit is. That is determined by you and your company goals and associated annual sales.