Recap on Margin vs markup
I’ve talked about margin before… and I want to talk to you about it again.
You know from reading earlier blogs the calculated difference between markup and margin (and also that most builders use the wrong calc and leave money on the table….
See link here to read more.
So as a recap, the definition of MARGIN is OFFSITE OVERHEADS + PROFIT.
Let’s break it down a bit further, what things get covered as part of your offsite overheads?
- All company insurances that do not relate directly to a job
- All office/yard expenses, leases, stationery, power, phone, security, furniture etc
- All staff time where they are not able to charge directly to a job, so office staff, directors fees, board members etc
- Pricing jobs, either internally or externally that you do not win
- Memberships and subscriptions
- Plant, vehicles, equipment including maintenance
- Bank fees, tax, interest
- Professional services, accountancy and legal
I bet if you sat down and added all of those items up, the number wouldn’t be small! In fact, it might give you a fright, so make sure you have a bracing cuppa tea handy when you do!
So you add them up and then you start reverse engineering.
Say your total Offsite Overheads equal $100k per year. Now you need to add in your desired profit, this is the money that makes the stress of being in business worthwhile! It’s also the money you might use to grow your business or reinvest etc.
For the purpose of easy maths, let’s say this is another $100k per year, so in total, $200k per year is the total margin you would need to achieve.
How many jobs do you need to win to gain that margin? How many do you price a year at the moment? What is your conversion rate? (jobs priced vs jobs won).
If the average job you win is $250k, and you win 4 of those each year, then that is $1mill turnover.
To meet the margin requirements, you would need around a 20% margin applied to all of the jobs you price to cover it. Because you don’t know which jobs you will definitely win, you must apply a 20% Margin to all of them…. Make sense?
If you can’t stomach applying a 20% margin to all jobs, then what do you need to do? It's easy, you need to increase your conversion rate or price more jobs. Maybe both! Just remember, if you are pricing more, then your cost of Offsite Overheads might go up…..
I know this is a bit of brain gymnastics… however, SUCH a worthwhile exercise to do.
Its also a jolly good reason why margin should be calculated first prior to deciding what percentage you apply to your jobs, and why choosing to cut your margin to win work is a false economy!
So after reading this info, the next time someone asks what a good margin is to apply to a job, what will your answer be??