How much to mark up cost plus work

Quoting Jobs With A Specific Profit Margin

There are many reasons people decide to run their own business and one of the most important is to make profits.  So let’s learn the proper way to work out how to quote for jobs with a specific profit margin.  Just like the last blog, it’s easier to follow the process by using an example.

To keep everything clear, we’ll use straight forward maths so the process is easy to follow and you can repeat it in your business.

Let’s say this Business has sales of $100…

Sales $100
minus
Cost of Sales (Labour, Materials etc.) $50
(For Labour, see previous video/blog.)
Overheads (Rent, Phone etc.) $20
Profit $30

From an accountant’s point of view, this is a profit margin of…

Profit/Sales = $30/$100 = 30%

For this example, let’s say 30% is the desired profit margin. But we also need to think about it from a cost plus work point of view and that means adding more than 30% to find the mark up rate required.

We do this by looking at it from the contractor’s point of view.  We know your labour, materials and overheads equal $70 and you want to make 30% profit on your job.  So the question is – what do you multiply your costs by (Y) to make a 30% profit?

Y = $100/$70 = 1.43 times the cost.

(1.43 x 70 = $100)

So there it is – an easy, no fuss method of making sure your profit margin of 30% is consistent for all your quoting.  You simply need to multiply the cost of work by 1.43 to achieve a 30% profit margin.

The next video will bring this calculation and the previous one altogether.  It’s quick and to the point so click on it and see how it all makes sense.

How to allow for overheads in cost plus work

Factoring in your overheads

Today we’re going to learn about how to allow for overheads when calculating cost plus work.  Knowing how to do this will help keep your business profitable and will ensure all your hard work pays off.  As in some previous topics in this series, using an example will help to demonstrate how this is done.  So follow along and remember, you can always call me (Ph: 0409 402 474) if you have any questions.

Overheads can be defined as ongoing costs (fixed or variable or both) to operate a business but excludes the direct costs associated with creating a product or service. This could be warehouse rent, utilities (electricity & water), mobile phones, vehicles and equipment, reception for example. For larger businesses these might be divided up into separate categories such as plant and equipment, administration and leasing.

Below is a simple Profit and Loss statement for a company.

Sales $100
Cost of Sales
Labour + Materials $50
Overheads
Rent & Phone $20
Profit $30

Accountants view overheads as a percentage of sales so we need to –

$20/$100 = 20%

When it comes to factoring in the real cost of overheads we need to take into account other factors to remain profitable.  To work out that multiplier we need to divide overheads by the cost of sales and turn it into a percentage –

$20/$50 = 40%

So when you are pricing up a job using the cost plus technique, you need to add up all the labour, holidays and employment costs materials, freight and phone etc. then add on $40% of that figure to cover overheads.

So read over this a couple of times so you understand the process and feel confident to use it.  If you have and questions feel free to call me to learn more.  I get a real sense of satisfaction helping trades and technical businesses become profitable.

The next step is to calculate profit and that is coming up in the next video.

How to Calculate Real Wage Costs

The real cost of wages

Knowing the real cost of wages to your business is critical for being able to put together accurate quotes that ensure profits for every job. The cost of hiring staff is expensive in Australia so you must make sure you have everything covered.

There are a number of steps that need to be followed to work out the real cost of wages and the easiest way to explain it is with an example. Below is an example from a plumbing company I’m working with.  By going through this exercise with him, he now understands the real cost of his employees to his bottom line.

Let’s run through the wages for an employee on $36/hr

Hourly Rate $36 x
Hours/Week 38 x
Weeks/Year 52 =
Wage/Year $71,136

Now let’s look at the Hours Paid for with Wages

38 hrs x 52 weeks = 1976hrs
Minus Holidays 4 weeks x 38hrs = – 152
Minus Public Holidays 11 x 7.6hrs = – 83
Minus Sick Leave 10 x 7.6hrs = – 76
Actual Hours Worked = 1665 hours

Now let’s look at the Real Cost of Wages by taking into account other expenses.

Wages $71,136
Super @ 9.5% $6,758
Payroll Tax (@ 2.4% > $650k) $1,707
Coinvest LSL (@ 2.7%) $1,921
WorkCover  (@ 1.27%) $903
Recruitment $1,000
Workcover $600
Total $84,025

Real Cost of Work/Hr = $84,025/1665 =   $50.47/hr

This is 40% more than the payslip rate.  ($50.47/$36 = 1.4)

The example above is for a single employee and is right for any other full-time employees on the same payslip rate.  You will need to work the example again for employees on different wage rates.Also, you’ll need to double check the various percentages in the example to make sure they are accurate in your state or territory.  Some percentages may even vary depending on whether your business is metropolitan or country.
So keep these calculations in mind because we’ll use them in the next video when I discuss Cost Plus work so you can learn more about profitability.

Watch this helpful video above to better understand the calculations.