The Rule of One Third: Are you making a minimum of 33 per cent gross margin?
Markup on direct job costs (labour and materials) to reach One Third gross margin (33 per cent) is 50 per cent.
December 16, 2014 by Steve Payne
No matter how tough the cash guys are making it on everyone, it’s important to realize that being a renovation contractor eats up massive amounts of dough on overheads.
Overheads like worker’s comp and private insurance, licenses, permits, vehicles, fuel, gas, cellphones, accounting costs, tools and bits, advertising… you name it.
As you’ve noticed, these overheads can easily add up to as much as 20 to 25 per cent of all your billings. Or more.
So you have to make at least 33 per cent gross profit, just to eek out a 10 per cent NET profit at the end of the day.
And if you can’t put at least 10 per cent net profit in your pocket at the end of the day, why would you want to be in a risky business like this one?
Don’t take our word for the importance of making MINIMUM 33 per cent gross margin as a renovator.
Victoria Downing of Remodelers Advantage coaches her renovator members on attaining this number or much higher.
Mike Draper of Renovantage coaches his members on attaining this number or much higher.
Michael Stone of the well-known contractor training website www.marketandprofit.com, coaches his professional renovator readers on the importance of hitting 34 to 42 per cent in gross margins.
But ONLY about One Third (3 out of 10) of the respondents to our 2013 salary survey, for jobs billing between $10,000 and $50,000, were hitting the One Third (33 per cent) gross margin number.
GROSS PROFIT PRIMER
Gross profit EQUALS Total Sales (Billings) MINUS Direct Job Costs (Mostly Labour and Material) DIVIDED BY Total Sales (Billings), expressed as a percentage.
So if you bill $30,000 for renovation work on a project, such as a basement renovation, and the material costs $10,000 and your labour costs $10,000, your Gross Profit obviously equals $10,000.
This gross profit gives you a 33 per cent gross margin percentage ($10,000 divided by $30,000).
NOTE THAT THIS REQUIRES A MARK UP OF YOUR DIRECT JOB COSTS OF 50 PER CENT!
DO NOT CONFUSE GROSS PROFIT WITH MARKUP!
If you realize you are going to spend $20,000 on a job like the one above, and you only mark it up 1.33, you will get a total billing to the customer of $26,600.
Your gross profit will be $6,600, which is a gross margin percentage of 25 per cent ($6,600 divided by $26,600).
With overheads running at 25 per cent, YOU WILL HAVE WORKED FOR FREE.
You can make no money staying home and watching television. Why would you want to go out and renovate houses for no money?