Recipro is trying to support building contractors around Merseyside and found this five step guide to helping small building contractors .The phone is ringing off the hook, you’re keeping twice as many subs and employees busy as last year, and you’re booked for the next nine months. So why aren’t you making any money? The answer may be simpler than you think. Here is the first of five common reasons contractors big and small find their companies in the red.
1) Bad Math
A surprisingly large number of re-modelers lose money because they miscalculate their selling price. They assume that their gross profit percentage is also their mark-up multiplier. It’s not. To see what I mean, imagine a job where direct costs — materials and labour — are, say, £1,200.
Let’s also assume that you need to earn a gross profit of 33%. To find the selling price, many re-modelers incorrectly multiply £1,200 by 1.33, and sell the job at £1,596. Unfortunately, that’s £195 shy of what the job ought to be sold for. Not much on this little job, but over the course of a year, it adds up. On a total sales volume of £250,000, for example, you’re cheating yourself out of more than £40,000. There are two simple solutions to this problem. You can use a “Markup Multiplier” chart (see Figure 1), or you can abandon multiplication and use division instead. Divide estimated costs by the inverse of your gross profit percentage. In the example, divide £1,200 by .67 (1 – .33) and sell the job for £1,791.
To earn this multiply direct costs gross profit by this number
For other gross profit percentages, use this formula:
1 ÷ (1 – Gross Profit) = Markup Multiplier
Gross Profit: 33%
Multiplier: 1 ÷ (1 – .33) = 1.49
Hope this helps…. hang in there and read our next helpful post