When a customer asks to see your estimate, what do you say, let’s see, how about “that information is confidential,” “we don’t release that,” “why do you want to know?” “stammer, stutter, gulp” or how about this, “I show it to them. No problem.” and we get the jobs we should. No, this isn’t organic fertilizer — read on. We all know that 50 to 67 percent markup or more is needed on raw costs to give service that stands out and a fair profit, but how on earth is that number going to look to old Charlie Customer? That’s right, out-of-sight!
Can we satisfy his concern for value and still have the needed markup to give us our 33 percent — 35 percent gross margin? Yes! And in a way that will make even the doubting Thomases or Joneses comfortable, no aces up sleeves or used car lingo. How? Make some of your overhead items a line-item expense and put them in your estimate. Go along with me here.
Do your cost estimate for labor, materials, subs, equipment, the way you’re used to doing, and when you have the cost total, figure the markup as you would normally but keep the number aside, over in the left margin somewhere safe.
Let’s look at some examples of overhead that we can quantify and put in the estimate. Normally your time to figure an estimate would be covered by overhead, but instead we’re going to put your cost to generate the estimate (what you pay your estimator per hour — burdened) in as a line-item expense, e.g.: 8 hrs. estimating prep @ $40/hr. = $400. A site visit takes the project mgr. 2 hrs. @ $35/hr (burdened) = $70.
Invoices are prepared for the client twice a month so a five-month job has five months x 2 per month, or 10 invoice preps @ $125 each (includes bookkeeper’s time to itemized entries, lien release, postage, courier and lender package) = $1,250.00. Figure that your project manager will spend 55 hours supervising in addition to any actual labor so 55 hrs. @ $45/hr. = $2,475. These items total to $4,195.
That amount of cost, the $4,195 (I’ll call them “in-house costs” or IHCs) would usually be covered by your normal markup, but we have shown each as a line-item cost in the estimate so the percentage markup doesn’t have to be as high now; matter of fact, you subtract the $4,195 from the markup amount you set aside (over in the left margin) to find out how much in dollars you still need to get to make your target margin and the markup dollars are less. If you will use this type of cost entry (there are a lot more you can use), the IHCs are part of the cost estimate. What’s next? Subtract the total of the IHCs from the original markup; what’s left is the actual dollar markup needed. How do you figure the markup now? Divide the needed dollars by the estimated cost including the IHCs and that’s the real percentage markup you show.
My company regularly showed clients that our markup for Overhead and Fee was between 22 and 28 percent, which is a perfectly acceptable, nongreedy number.
Is this underhanded or subversive? Not on your floor joist it’s not. All you have done is to put a hard number down in place of a percentage. Does it really cost $125 to prepare an invoice? Check out the real time and effort and see — these are real costs and using them takes out some guesswork or wags.
Now, when they ask, you can show your prospect you are charging an acceptable profit and overhead — and it’s the truth, gee what a novel idea . . . while you’re here!