by George Hedley
Answer this question: 'How much profit should we make?' I'll bet your answer was one of the following: - "5%, 10%, or 15%. More! As much as I can get!" In a recent survey I conducted of over 2,500 construction company owners, I learned:
- 66% of Companies Have NO Specific Profit Goals
- 70% of Companies have NO Overhead Goals
- 50% of Companies Have NO Sales Volume Goals
- 92% of All Company Employees Have NO Written Goals
Shoot for nothing, hit it every time!
Most companies shoot for moving targets by attempting to make 'as much money as possible' or 'more' than they are currently making. 'As much money as possible' is not a target. 'More!' More than what? These are not clear targets or goals. 5%, 10%, or 15% are not clear targets either. As your sales and job costs vary each month, your total markup earned changes, while your fixed cost of doing business remains the same. This causes your net profit to move up and down like a roller coaster.
After hearing me speak at CONEXPO, a young contractor asked me for advice. He told me his five year goal was to work too hard, make every decision himself, put out fires, keep his crews busy, be totally stressed out, not make enough money to hire the best people, get hopelessly in debt, and make no money. And, the bad news was he had achieved his goal! I am not impressed with people who are busy, overworked, underpaid, or boast about their latest sales conquests. I admire organized companies that hit their specific bottom-line profit goals and make the expected return for the risk they take.
A specific annual sales target of $3,000,000, an overhead target of $400,000 and a net profit goal of $120,000 are specific fixed targets you can shoot for and hit. Not More! Not as much as possible!
- What is your annual sales target?
- What is your annual overhead budget?
- What is your annual net profit goal?
Always make a profit!
The goal in business is not to stay in business or keep your crews busy. The goal of business is to always make a profit. According to a latest Construction Financial Management Association study, companies who have specific strategic plans with clear targets and goals make 33% more profit than companies without targets. According to Concrete Construction magazine, only 33% of all contractors actually make a profit every year. Additionally, 92% of all business owners reach age 65 with $0 net worth! It's not how much you make that matters, it's how much you keep (after overhead, job costs, staff, and a fair salary for the owner).
Run your company like a business
When I present my program "How to Build a Construction Company That Always Makes a Profit" at construction conventions, I repeatedly learn most small and medium size general contractors and subcontractors do not run their companies like a business. A "business" has a business plan, sales goals, job cost goals, an overhead budget, and profit goals. A "business" pays its president or owner a fixed and reasonable salary every month (plus year‑end bonuses from the net profit). A "business" prepares monthly financial statements, profit and loss statements, income statements and balance sheets. Most importantly, a "business" makes a profit!
A "business" without ALL of the above is not a "business." It is a place to go to work; a place to "try" to make some money; a place to "try" and cover expenses; and a place to "try" to have some leftovers to pay for the owner's lifestyle.
Get a return on your investment!
If asked to invest $100,000 in a friend's new start‑up contracting business, what annual return would you want? - 10%, 15%, 25%, 50% or more? After considering the risks, I would never invest in a new construction business that didn't offer at least a minimum guarantee of 15% to 20% annual return on investment. Your fixed cost of doing business (overhead) is an investment in your future ability to make a profit as well. Every year you decide what overhead costs you will need to run your business. You staff accordingly, rent an office, seek jobs to bid, and hope enough business comes in to make a profit. Likewise, you must also make a minimum 15 to 20% annual return on your fixed overhead investment you commit to in advance every year.
Aim at a fixed target
Construction companies should make a minimum 20% return on overhead every year. This is the minimum target to shoot for. If your annual overhead is $400,000, you should expect a minimum net profit pre-tax of $80,000. Remember this is the minimum! The minimum to me is way too low to shoot for. I recommend aiming at a target of 40% to 50% return on overhead as a higher target to hit. For example if your overhead is $400,000, your pre-tax net profit goal would be $160,000 to $200,000. Now you have a minimum target and a higher target to shoot for. These are specific goals you can aim at and then track your progress.
What is your fixed cost of doing business?
First determine your fixed cost of doing business or annual overhead costs. Overhead costs include everything you need to run your business without any jobs under construction. Overhead costs include:
- company management
- administration & accounting
- marketing & sales
- your office & utilities
- computers & supplies
- all non-job charges business costs
Job costs are not a part of your overhead and include everything that occurs out in the field or on the jobsite and must be job charged. Your job costs should include:
- project management
- pro-rata share of owner for project management or supervision time
- all field labor
- field labor burden & fringe benefits
- field workers compensation insurance
- liability insurance for jobs & labor
- field trucks & equipment
A typical $3,000,000 construction company's overhead is shown in the example below. Your task is to calculate your accurate fixed annual cost of doing business. This is the 'nut' you have to crack before you can break even every year. Always include a fair and reasonable salary for the owner or president of your company. If your owner runs some jobs, split his or her time between overhead and job costs such as project management or supervision. Also, field labor job costs must include workers compensation insurance and liability insurance. These are not overhead charges as they don't occur unless your field crews are working on jobs. Be sure to put those costs into your job costs and not into overhead. Another mistake I see is putting all of your company vehicles into your overhead. Most vehicles are used out in the field and should be job charged including the insurance, gas, and maintenance.
(Fixed Cost Of Doing Business) Fixed Expenses
Salaries (Includes Burden & Fringes)
- President $ 80,000
- Estimating $ 70,000
- Administrative $ 45,000
- Accounting $ 45,000
Vehicles - Non Job Charged $ 15,000
Facility, Rent & Utilities $ 25,000
Office Supplies & Equipment $ 15,000
Telephone, Shipping & Postage $ 10,000
Estimating & Bid $ 10,000
Marketing & Promotion $ 10,000
Insurance - Office Only $ 20,000
Interest & Banking $ 3,000
Accounting $ 10,000
Legal & Professional $ 10,000
Technology $ 10,000
Service, Closed Job & Warranty $ 12,000
Miscellaneous & Other $ 10,000
TOTAL ANNUAL OVERHEAD $ 400,000
Markup versus gross profit
To make a profit after paying all of your overhead costs and job costs, you must know the markup and gross profit you can make in the market you compete. For starters, be aware of the difference between markup and gross profit. Markup is the percentage you markup your job costs when bidding a job. Gross profit is the total overhead and profit you make as a percentage of total sales. See the examples and formulas below for converting markup to gross profit.
Job Costs $100,000
Markup (OH & P) X 20.00%
Total Markup $ 20,000
Total Bid $120,000
Gross Profit (OH & P) 16.67%
Mark-Up Vs. Gross Profit
Overhead & Profit $20,000
Mark-Up = ------------------------- = ----------- = 20.00%
Overhead & Profit $20,000
Gross Profit = ------------------------ = ------------ = 16.67%
Converting Markup To Gross Profit
20% Markup = ??? % Gross Profit
Markup % .20
---------------- = -------- = 16.67 % Gross Profit
1 + Markup 1.20
Markup Gross Profit
35 % 25.93 %
30 % 23.08 %
25 % 20.00 %
20 % 16.67 %
18 % 15.25 %
15 % 13.04 %
12 % 10.71 %
10 % 9.09 %
8 % 7.41 %
6 % 5.66%
Track your bottom-line performance
One of the best ways to determine the markup and gross profit you can expect in your competitive market is to look at your trends on completed jobs. Keep a completed jobs chart handy and updated at all times. Include the start date, job name, project manager, superintendent, foreman, contract amount, bid markup, final actual markup you made, and the gross profit percentage you actually made after project completion. Study the competition and economy trends to determine what sort of markup you can hope for on future jobs basedon what you have been getting.
Markup Markup Gross Profit
Start Job PM Supt Fore Contract Bid % Final % Final %
2/12 A JP BD HG $100,000 22.0% 20.0% 16.67%
4/17 B PS CT MK $150,000 16.0% 15.0% 13.04%
6/21 C FV WR PL $ 75,000 20.0% 22.5% 18.37%
8/13 D JP PF SD $125,000 18.0% 17.5% 14.89%
9/14 E PS MN CF $ 50,000 20.0% 25.0% 20.00%
Average $100,000 19.2% 20.0% 16.67%
Volume and sales goals
You are now ready to determine what your sales target you must hit to achieve your net profit goal. You know your fixed cost of doing business or annual projected overhead. You have a pre-tax net profit goal of 20% to 40% return on overhead. You are tracking the trends of your completed jobs and are aware of the markup and gross profit you can get in the marketplace you compete. Now it's time to figure out how much volume you need to hit your goals.
7 Step Formula To Always Make A Profit:
Low Goal High Goal
1. Fixed Annual Overhead $ 400,000 $ 400,000
2. Return On Overhead Goal X 20% _____40%
3. Annual Net Profit Goal (Pre-Tax) (1 X 2) = $ 80,000 $ 160,000
4. Projected Gross Profit (OH & P) (1 + 3) $ 480,000 $ 560,000
5. Average Total OH & P Markup Projected 20.00% 20.00%
6. Average Gross Profit Projected / _16.67% 16.67%
7. Annual Revenue Goal (4 / 6) = $ 2,879,424 $3,359,328
Looking at the 7 step formula to always make a profit shown above, the company's annual overhead is projected at $400,000. The return on overhead goals are 20% minimum with a high target of 40%. This gives the company a minimum pre-tax net profit goal of $80,000 and a high goal of $160,000. This will require a total gross profit to achieve the overhead and profit targets of $480,000 and $560,000 accordingly. By studying completed contracts and looking at the market trends, the company determines they can achieve a 20% total overhead and profit markup and a 16.67% gross profit margin. To determine how much volume they need to hit their goals, divide the total gross overhead and profit projected (#4) by the gross profit percentage anticipated (#6). ($480,000 / .1667 = $2,879,424 annual sales at an average markup of 20%)
This is the best way to determine the total sales you need to hit you goals. Companies without precise overhead and profit goals never make enough money and probably won't make a profit. It's hard to hit a fuzzy target that doesn't exist and moves around. Companies who track costs, target profit, control overhead, watch what they keep, are organized and in-control, stay one‑step ahead of their competition. Fix your overhead, set clear profit targets, and then shoot for the revenue you need at the markup you can get to achieve your goals. Keep targets in front of you all the time. Share them with your people. Track your progress. Make it happen. See you at the bank!
ABOUT THE AUTHOR
George Hedley is the best-selling author of "Get Your Business to Work!" As a professional speaker and business coach, he helps entrepreneurs and business owners build profitable companies. E-mail: email@example.com to request your free copy of "Everything Contractors Know About Making A Profit!" or signup for his e-newsletter. To hire George to speak , attend his 'Profit-Builder Circle' academy or find out how he can help your company grow, call 800-851-8553 or visit www.hardhatpresentations.com
George Hedley HARDHAT Presentations
3300 Irvine Avenue #135
Newport Beach, CA 92660
Phone (949) 852-2005 Fax (949) 852-3002
Email: firstname.lastname@example.org website: www.hardhatpresentations.com
George Hedley owns a $75 million construction and development company and
Hardhat Presentations. He speaks to companies on building profitable businesses,
leadership, and loyal customers. He holds 3-day in-depth "Profit-Builder
Circles" open to construction company owners in an interactive roundtable
format every 3 months. His "Profit-Builder System" includes proven
tools to always make a profit, build equity, create wealth, win profitable
jobs, motivate your people, and enjoy the benefits of owning a profitable company.