Pricing and Profit

Three posts sit in this category so far. They circle one problem: the arithmetic between what a job costs and what it gets sold for. I build the calculators on this site, and most of what gets written here started as an email from someone whose quote and whose bank balance disagreed. The errors repeat across trades. Same three, over and over.

Markup and margin measure against different numbers

Markup is a percentage of cost. Margin is a percentage of price. Add 30% to a $1,000 job and you charge $1,300, so the margin is 300 divided by 1,300, or 23.1%. To actually keep 30% of the sale you divide instead of multiplying: 1,000 / 0.70 = $1,428.57, which is a 42.9% markup. The gap is $128.57 per thousand dollars of cost. Push $400,000 of job cost through a year on the wrong formula and about $51,400 of profit never gets billed to anyone. Every pricing tool here, including the contractor markup calculator, prints both figures next to each other so the two cannot be mistaken for one another.

Labour priced at the wage rate

A $25 an hour employee does not cost $25 an hour. There is the employer half of FICA, state and federal unemployment, workers' compensation, whatever benefits exist, and paid hours that never reach an invoice. A common rule of thumb puts the burden at 20% to 30% above base wage. Treat that as a placeholder and replace it with your own payroll register once you have a quarter of real numbers. At 25%, the $25 wage becomes $31.25. Cost a 120 hour job both ways and you get $3,000 against $3,750. Apply a 20% markup to each and the quotes read $3,600 and $4,500. The first one loses money before anyone loads a van, and it loses it quietly, because the estimate sheet still shows a profit line.

Overhead applied to the wrong base, in the wrong order

Most owners know overhead as a share of revenue, then add that same percentage on top of cost. Those are two different percentages. Take a year with $500,000 of revenue, $350,000 of direct cost, $75,000 of overhead and $75,000 of profit. Overhead is 15% of revenue and 21.4% of direct cost. Add 15% to a $10,000 job and you recover $1,500 where the job needs to carry $2,143, leaving you $643 short before profit has been discussed at all. Sequence matters as well. Load overhead first, then apply profit to the loaded figure: $10,000 becomes $12,143, then $13,600 at 12%. Do it the other way round and the same job prices at $13,343. Running last quarter's closed jobs back through the job costing calculator is the quickest way to find out which of the three errors you have been making, because all three show up as the same symptom: busy months that end flat.

What will not appear in this category is pricing psychology, charm pricing or negotiation scripts. The subject here is arithmetic and the decisions that follow from it, including the decision to let a job go when it cannot be priced high enough to survive contact with your own cost base. If the individual quotes check out but the year still does not, the problem is volume against fixed cost, and that question belongs to the break-even point calculator instead, since a correct margin earned on too few jobs covers nothing.