Posted on 06/04/2019 at 02:00 PM by Electric Ease
Over the next few weeks, we will be discussing the gross profit margin. We’ll take a look at what gross profit is, what it means to your company, and how to calculate labor burden and make proper adjustments to labor on a project. Also, we’ll have some money-saving tips to help increase your gross profit.
Day 1 – What is Gross Profit?
According to Investing Answers, the profit margin is calculated by subtracting the cost of goods sold (COGS) from total revenue. Then divide that number by total revenue. The top number in the equation, known as gross profit or gross margin, is the total revenue minus the direct costs of producing that good or service.
To a contractor, this means the money remaining from a project after all of the direct costs associated with the completion of that project have been subtracted from the total sale of the project.
Why is gross profit important to know and understand? Think of gross profit as the pulse of your company. If margins are too low, your business may struggle. If margins become abnormally high, you may be at risk of bidding yourself out of contention. Once you begin to track project costs, you will have an accurate picture of what you need to adjust to make future projects more fruitful. You might need to adjust your labor burden by adding lower-cost labor to a project. There may be missing items in a bid such as scissor lifts or digging equipment. Finally, knowing your margin allows you to assess if certain projects are right for your company. Your company may not be the right fit for certain projects and that’s okay! Knowing your company’s strengths allows you to focus on projects that are the right fit to produce a profit.
Total Project Bid = $25,000
Direct Job Cost = material $9,500 + labor $6,000 + permit $200 + equipment $500 +fuel $100 + special tools $50.00 = $16,350
Bid $25,000 – Cost $16,350 = $8,650 Gross Profit
Gross Profit $8,650 / $25,000 = 34.6% Gross Profit Margin