Determining Your Billing, Job, or Bid Cost is critical to Calculating the correct Job Sales Price . These 8 Steps shows you just how to do that
As a former Contractor, I made every mistake possible and nearly lost it all in 2001 when I was hundreds of thousands of dollars in debt and nearing bankruptcy. One of the main reasons I had gotten in so deep was a simple lack of understanding on how to calculate an proper job sales price. Lucky with some timely consulting I was able to learn some very critical lessons which put me on a path to success and finally selling the business in 2005 for a considerable amount. Since then I have dedicated my new career to creating software and solutions for small and medium size business by bringing them the much needed systems, frameworks and know-how that enabled me to overcome serious debt incurred and nearly running my business into the ground.
Today I wanted to discuss some of those fundamentals and frameworks of business finance so that you can ultimately gain full control of your finances and you give you tools know-how to set correct Job Sales price for your Jobs & Services. This is an area I got wrong nearly one too many times, and I hate to see others making this mistake. While you can hire an accountant to take care of your accounting needs, understanding these principals is fundamental to any business success.While competitive rates, industry standards, customer expectations and similar price points are all important factors in setting a correct job sales price, none of these matter if the job sales price is at a loss or below our profit margin goals. For this reason the starting point for setting a job sales price should be from a mathematics standpoint. In other words, we must make sure we are not actually losing money on the job price we set and ideally set a price that reaches or exceeds our profit margins, while staying competitive. By understanding the fundamentals and following the right frameworks, you may very likely have a lower price point and still reach your profit margins which would ultimately allow you to win more job and increase your profits.
The only way to get to the ‘right Sales Price’ is to first know your costs of completing a job, or cost of having employees work within a given time frame or shift. The following 6 Steps will describe how to calculate those costs as well as add the correct profit margin, enabling you to set the right price, every time:
1. Overhead – This is one of the most critical, but often overlooked, costs when determining a job sales price. Overhead expenses must be added in as part of your Labor Burden Cost (or Actual Hourly Cost) which is very important when totaling hours Jobs or Shifts. or a shift. I have written an article here, detailing how to calculate that Labor Burden Cost here in this post. (You may also wish to calculate your Actual Labor Burden Costs with this Free Online Calculator)
Overhead, in its simplicity, is any cost not directly related to any specific Job, Customer or Service. Overhead items tend to be costs that a business has regardless of the sales and is generally items like Office Lease, Property Insurance, Office Utilities, Office Supplies, and Office Staff Payroll (if they are not directly involved in the product or service produced for customers). Any regular or recurring expense that cannot be tied to a specific job or service should be classified as Overhead.
The Employees which are responsible for carrying out the service you offer, creating the products, or doing the work for your customers are responsible for covering the Overhead expense of the business, plus a certain % for Profit Margin. Because of this, Overhead must also be assigned to an employee cost. Because different employees work a different hours we cant simply divide the overhead cost based on the number of employees. We must go deeper than that. Overhead cost must be divided equally among the Actual Work Hours of all of your non- office staff employees on a per-year basis.
2. Gross Projected Sales – These are the sales that we are expected to generate within the next period (for our purposes this can be a quarter, 6 months or a year) It’s important to know and write down these Projected Sales because its going to be a baseline for our Minimum and Ideal Profit Margins coming up next.
3. Projected Material Costs – For the same period we also want to Estimate the Material Costs. This amount should not include any labor costs, as we are just concerned with the Cost of Materials at this point. This amount should include the Total Cost of Materials, which may include freight or shipping on materials, delivery fees, or any other material-related expenses that are used for a specific Customer, Job or Service. If you charge a specific markup % on material to cover certain transportation, logistics and deliver fees, you can also include that here within the Projected Material Costs
4. Minimum Profit Amount – This is the minim amount of profit you need to make within the same giving period. Its important to write this figure down as its going to be a base point for our Minimum Profit Margin
5. Ideal Profit Amount – This is the Ideal Profit Amount you want to make within the given period of time. This should be a realistic amount based on past and present business within the company.
6. Minimum Profit Margin – This is a calculated % amount that is going to give us the Minimum Profit Margin on our labor. We want to make sure that the Employee Profit Margin on Labor stays above this %. The Minimum Profit Margin = (Gross Projected Sales – Material Costs – Overhead) / ((Gross Projected Sales – Material Costs – Overhead) – Minimum Profit Amount) – 1. This will give us the Minimum Profit Margin as a decimal.
7. Ideal Profit Margin – This is a calculated % amount that is going to give us the Ideal Profit Margin – This is a calculated % amount that is going to give us the Ideal Profit Margin on our Labor Costs & Martial Costs (or Total Job Costs). Those Labor Costs must be Fully Burdened Labor Costs, meaning not just the amount you pay your employees, but the entire cost of the Employee, which includes their portion of the overhead, benefits, employer paid taxes, insurance & Paid time off. This is known as Employee Labor Burden.
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(This is our ideal Profit Margin, so maintaining this margin will help us reach our Idea Profit Amount for the period we have selected. The Ideal Profit Margin = (Gross Projected Sales – Material Costs – Overhead) / ((Gross Projected Sales – Material Costs – Overhead) – Ideal Profit Amount) – 1. This will give us the Ideal Profit Margin as a decimal.
8. Calculating the Job Sales Prices – Now that we have the basis for calculating our Profit Margins, we can then simply Add in these margins on top of our Labor & Material Expenses to determine both our Minimum Sales Price & our Ideal Sales Price. We can also use these calculations on top of Actual Labor Costs to determine how much income should be generated from staff working within a give time-frame or shift, which is vital to all companies with employees.
Even if we run a restaurant we can use the above calculations to determine how much income we need to generate for a given dinner or lunch service . Our Minimum Job Sales Price would be Minimum Sales Price = Total Job Costs + (Total Job Costs * Minimum Profit Margin) and our Ideal Sales Price would be Ideal Sales Price = Total Job Costs + (Total Job Costs * Ideal Profit Margin)
An application I have recently updated takes care of all of this and much, much more. I would love to get your feedback on this. Please have a look at the new and improved Labor Burden Calculator.
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1. Overhead – This is one of the most critical, but often overlooked, costs when determining a job sales price. Overhead expenses must be added in as part of your Labor Burden Cost (or Actual Hourly Cost) which is very important when totaling hours Jobs or Shifts. or a shift. I have written an article here, detailing how to calculate that Labor Burden Cost here in this post. (You may also wish to calculate your Actual Labor Burden Costs with this Free Online Calculator)