I met Barbara at one of my estimating workshops. She had a residential design/build landscape company in Silicon Valley, just south of San Francisco. It was a great market and things were booming. However, for Barbara, things were going bust.
She told me that the more sales she did, the less money she made. Her bottom line was deteriorating and she needed to fix things – and fast. I asked her how she priced her work. Her response immediately told me what the problem was.
Barbara said that her CPA had told her to divide her direct costs on a job for materials, field labor, labor burden and equipment by 0.666. This would equate to a 50 percent markup and a 30 percent gross profit margin (GPM) that should cover general and administrative (G&A) overhead and net profit. ($100 ÷ 0.666 = $150 or $100 x 1.5 = $150. The GPM is $50 or 30 percent). This formula, I informed her, would virtually guarantee that she would eventually go broke. Her problem was in the formula she was using to price her jobs.
Read more in our July issue here.
