Are you calculating your profit correctly when you bid?
For a lot of landscape contractors, the profit you end up with after a job or at the end of the year doesn’t always hit expectations. You’ve estimated a job to include a healthy profit, but it still doesn’t end where you expected. There aren’t any major inefficiencies or setbacks that you can see.
So what gives?
A lot of contractors confuse profit margins and markup. So they add the markup and budget the difference between cost and markup as profit. Let’s use a $10,000 job as an example. If your goal is a 10% profit margin, you would set your bid at $11,000, right?
Nope!
The formula for profit margin is:
(Sales – Costs) / Sales.
With our example, we get:
We budgeted for a 10% profit but ended with 9%.
So what happened?
Profit is a fraction of the selling price, not the cost. If you determine a 10% profit based on costs and use that to set the price, you’re not actually earning a 10% profit, you’re just boosting the cost by 10%.
That means you’re shorting your profit by 1% before you even start the job! One percent doesn’t seem like a lot, but if it happens on every job, you’ll definitely notice at the end of the year.
Solving for profit margin
To avoid this, simply change your profit formula when setting your price. Use:
Total Costs / (1 – Target Net Profit Margin)
In our example, it looks like this:
Or, using decimals:
So if you want to realize a 10% profit on your $10,000 job, you need to set the price at $11,111.
So the next time you’re bidding on a job, make sure you’re using the right formula to calculate your desired net profit margin. Or better yet, use a system like LMN that automatically adds in target profit margin!
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