A companion article to "A Smarter Way of Charging for Overhead and Profit."
Even if you find merit in Capacity Duration Method (CDM), you may be wondering whether it will contribute to business-like bids. A good way to run a check is to compare the bids that you create using CDM to the general level of construction pricing in your market. And a path to accomplishing that is to take a look at the square-foot charges you arrived at using CDM versus the prevailing square-foot charges of contractors in your area and at your level.
One-person company. For example, let’s say that you are operating a well-established one-person company and have bid on the 310-square-foot bed-and-bath addition mentioned on page 34, and that your numbers are as follows:
1. Direct construction costs at $160,000.
2. Overhead at $31,200.
3. Profit at $26,000.
4. Total bid at $217,200 ($160,000 + $31,200 + $26,000 = $217,200).
That pencils out to just over $700 a square foot for the addition’s 310 square feet ($217,200 / 310 = $700.64).
At the time I am writing this article in late 2022, $700 a square foot is a moderate price or, in some markets, even toward the low side, for good-quality residential remodeling in major cities. So, CDM did deliver realistic charges for overhead and profit for the addition. If you wish, you can run the numbers to see how well the method would work for smaller or larger jobs by your one-person company.
Larger company. Will the CDM method produce a business-like bid for a larger operation? Here, I will leave the math to you. But again, the answer is yes. The bid produced by the larger, three-lead company described above comes in at $777 a square foot. Though higher than for the one-person operation, that’s in line with what larger established builders have been charging in major metro areas during the recent good years.
Comparing your numbers. To compare your figures to other companies, you need to learn about the typical construction charges in your area. You can find rough but useful approximations in the construction cost catalogs available at online and even brick-and-mortar bookstores. You can simply run a search on Google. Alternatively, and best, you can join or organize a local builder’s association such as those described in my article “Your Best Opportunity for Business Education Might Be in Your Hometown” (JLC, Mar/19). Construction costs and pricing are frequently a subject of conversation at such groups. And, by the way, so are gross profit margins.
That conversation, too, can be of value to you. Knowing how your charges for overhead and profit as a percentage of your bids (selling price) stack up against other builders can be useful. Yes, to reemphasize, GPM is a crude, one-size-fits-all method of figuring overhead and profit. But it has some value as a way of comparing financial performance of companies in the same industry.
Thus, if you find that you are charging a relatively low percentage of selling price for overhead and profit, you have learned that you have room to bump up your overhead and profit charges.
On the other hand, a comparison of your GPM to that of similar builders might bring unpleasant news: that your overhead and profit charges are a low percentage of your selling price only because your construction costs are bloated. Whenever your costs are an unduly high percentage of your bids, they squeeze out room for overhead and profit.
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