Some contractors may feel they are doing everything right, yet still find themselves taking home much less than they estimate and working long days and weekends. In Markup and Profit, consultant Michael Stone suggests reviewing two key metrics. Looking at the average error factor on estimates and the percentage of annual revenue sold at less than full markup can provide a lens into how a business can improve.
The error factor is the difference between the estimated cost for a job and the actual cost of building the job. Your estimate is used to determine the sales price (estimated cost x markup = sales price). If your estimated cost is too low, your sales price will be too low. The difference between the cost estimate and the actual costs will come straight out of the funds you need to pay overhead and profit.
You don't know your error factor until after you've built the job and can compare actual costs to the costs on your estimate sheet. It's important to do this comparison, both to improve your estimating skills, and so you know how much to add to your estimates to make up for those errors.
I have said many times that only a fool would cut their markup on jobs they quote. It's easy to start reducing your markup to make a sale, convincing yourself that you'll make it up on the next job. It seldom works out like that; in fact, I can't remember the last time I actually saw that happen.
If you have more work than you know what to do with, or if you have to work Sundays to keep up with the workload, your price is too low. You're cheating yourself and your family; only your clients are winning in this scenario.
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