I recently had a conversation with a client who had noticed that he usually failed to sell jobs that were labor-heavy, but had no idea why this was happening. When I asked him how he put his estimates together, he described three main steps:

• Multiply hours of labor by charge-out rate
• Price materials and add a 25% markup
• Add a 10% markup to subcontractor costs

There are two problems with this method. First, it's a "hybrid": Some components of the sale price are based on costs (materials and subs); some are not (labor). Second, the markup varies, and the labor charge-out rate was a black box.

To figure out what was causing his problem, we first determined what markup was underlying his charge-out rate. After working through my Labor Burden Calculator, we found that an employee being paid \$25 per hour was costing the company \$37.50 per hour. The charge-out rate was \$60, so the markup on labor was 60% (\$22.50 ÷ \$37.50).

### Three Scenarios

Let's look at three estimates with varying proportions of labor, materials, and subcontractors. Remember, in all three the cost to the company is identical (\$54,000).

Job A: Equal costs. The company will spend equal amounts on labor, materials, and subs. After a 60% markup is applied to labor, 25% to materials, and 10% to subs, the job would be sold at \$71,100, for an overall markup of almost 32% and a margin of about 24% (see tables, left).

Job B: Labor heavy. Here, most costs are for labor. With the same markups as Job A, the selling price would be \$84,169. Overall markup is almost 60%—nearly twice that of Job A—and margin is also higher—almost 36%.

Job C: Sub heavy. Job C relies heavily on subs, with only 200 hours of labor. If I again apply the same markups, Job C would be sold at \$64,875, making the overall markup just over 20% and the margin just under 17%.

### One Markup for All Costs

When you look at the numbers, it's easy to see why my client was having a hard time selling labor-heavy work. His high markup on labor inflated his sales price well above that of his competitors. Our exercise also taught him something else: He was underpricing jobs on which most of the work was done by subs.

It is certainly possible to apply multiple markups, but the overall markup must meet your company's requirements. The lesson here is that once you've determined the markup your company requires to cover annual overhead and achieve your target profit, applying that markup across all costs will produce the same selling price no matter what the mix of cost categories. This is the simplest way to arrive at a price you can trust to meet your targets.