When scaling your business, the number one thing you want to keep in mind is your profit margin. Profit margins are how much you are making with each project minus any overhead costs. Percentages do vary with 4 to 6% for commercial contractors. It can also get up to 23% for residential contractors like remodelers. A lot of this depends on risk and liability for the company. Proper bookkeeping is crucial if you want to increase your percentage. Let’s break down what a profit margin is.
A major factor when figuring out your profit margin is your overhead costs. These can be anything from your insurance, utility bills or even your office rent. Although these are not usually included in an estimate, they can make up a lot of your business’s expenses. It’s best to remember them when you’re making up an estimate.
Project costs vary by a lot. You need to keep this in mind when estimating. By mastering estimation, you can increase your chances of having a better profit margin. Keep track of your expenses and try to protect yourself from underestimation.
When you are on a job estimation, don’t forget to mark up any supplies or labor. If you want to make any profit on a job, you will have to up charge some of the prices. This gets tricky to do right. You don’t want to overprice and a client finds a cheaper contractor. Or you might underprice and lose money. Try to add some wiggle room in case the customer wants to negotiate price. Keeping your profit margin goals in mind is a good way to work backwards when figuring out how much to markup.
The best practice is to have goals in place of what percentage of profit margin you want to reach. This depends on the market, your competition, and what you want for your business. Here is a good article on the correlation between markup and profit margin. If you are struggling with any of this, make sure you have a good bookkeeper on your side to help out. They can help you with job costing and making sure you have accurate numbers when figuring out your profit margin.
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