You’re in business to make money. That means knowing costs and pricing jobs realistically.
By Marc Hequet
This job’s a tough one; the design is different, the material expensive. The customer is haggling. Can you price it to meet your target margin? Do you know what your target margin is? Can you even price it to break even?
It’s the time-honored dilemma. When a prospective job comes in the door, do you know if you can afford to do it? How much should you charge? It’s the most fundamental business equation: revenues – expenses = profit. You’re in business to make money, not to break even, and certainly not to lose money—though in tough times it can be tempting to cut your price below cost just to get the business.
To stay in business, the break-even point is “zero”—the place you start when figuring target margins and prices. Know your break-even costs on any given job, including the hidden costs, such as nonsalary benefits for employees. Sit down with your accountant and go over all of your costs, fixed and variable, before working out your pricing plans and any special deals.
Labor is a critical factor, but direct labor costs are only one part of the equation. Mark Battersby, a writer and retired tax and financial adviser in Ardmore, Pa., offers a starter list: “What it costs to open up the doors in the morning,” he says. (Or to paint or replace that door occasionally.) “What it costs to turn on the lights. To have a receptionist to greet people.” When you’re costing out a job, remember to include these mundane particulars. “These are fixed costs,” says Battersby, “that have to be spread out over the process.”
Small firms tend to calculate job costs by the seat of their pants, he notes. That can work, sometimes for years, but it puts you at risk of skipping critical detail. “How much electricity does it take to run a sewing machine?” asks Battersby. “It fluctuates. Is the machine on all the time? Is it drawing power? Do you have the lights on all the time?”
Can a small business possibly hope to track all of this? Maybe. Some software products claim to help, but software or no software, says Battersby, the process can be so convoluted “a small businessman would go crazy or broke.”
An even break
In the fabrication business, the focus is often on good sense and experience. Greg Schmieler has a confession: “I don’t know how much electricity it takes to run a sewing machine,” admits the president of Laurel Awning Co. of Apollo, Pa. “I do know,” Schmieler adds, “what my labor burden is, my raw material costs, my travel costs. I do know what my break-even point is and what I need to sell my jobs for to make them worthwhile and get the margins that I want.” (For more information about this system, see “Schmieler creates customized cost accounting system.”)
There’s the key. Schmieler studied accounting in college—and that turned out to be good grounding for what he does now. You needn’t slice job costing too fine, says Schmieler. “I don’t count how many angels are on the head of a pin,” he says. “I figure what my margins need to be.”
How? Schmieler built his own Microsoft® Excel® spreadsheet over the course of about three months in 2004. He keeps it updated and has used it ever since. That’s his preferred tool for costing jobs.
To get started on your own economic investigations, Schmieler suggests an hour-long conversation with your accountant, who should be able to comb out your costs. For example, your $40,000-per-year worker—counting benefits, vacation, lunch breaks and everything else—really costs you more like $60,000. Finding those numbers is crucial in figuring your hourly costs.
Mark Matson, president of ACF Tarp and Awning in Fort Worth, Texas, has a similar approach to costing jobs: He monitors key variables and counts on other factors to follow suit.
An occasional mistake for ACF in the past was off-target estimates of how much material a particular job required. Now the company uses a computer-aided design (CAD) program, says Matson, that “has really improved on this for us.” Matson’s CAD software shows how many feet of tubing and yards of fabric it will take to do a job—critical measures that point directly to the overall cost of the job.
Subtleties lurk, of course. “A commodity in one industry,” says Matson, “may be a necessity in another.” For example: A client wants custom-fitted truck tarps made of 18-ounce coated vinyl with zippers, inspection ports and Velcro® closures. Another client wants a cover to protect a $1 million machine. The second cover may be made from the same material, but would take more time and detail to make. Consequently, Matson figures in a premium. “You wouldn’t use the same price per yard for the material used,” says Matson. Yet, he adds, “It still gets down to dollars per yard.”
In any case, Matson says, don’t cut prices just to land a job. If you offer a discount to get the business, you had better run some more numbers, fast: How many more sales dollars must you generate to offset the lower margin? Do you have the capacity for the greater volume? The trained workers? Can you find enough buyers? Can unused inventory find a place in other projects?
Working in variables
Larry Wodzien costs out his boat-fabric jobs in two ways: First, he quickly figures the likely price in his head, because he’s been at this business for years. “The longer you’ve been doing it, the more comfortable you feel,” says Wodzien, co-owner with his wife Mary Wodzien of Grand Traverse Canvas Works in Traverse City, Mich.
But Wodzien also cross-checks his first ‘guesstimate’ against the prevailing cost of materials and how much time the job might take. Is it going to be a ‘headache’ job? If a worker tears into old boat upholstery and finds rotten wood below, that means more time and more material costs. Moreover, setting prices doesn’t happen in a vacuum. Up the shore about 40 miles from Traverse City is an affluent area where boat owners are accustomed to paying for upholstery jobs. Wodzien doesn’t hesitate to build in a reasonable mileage cost.
Even so, it’s still a balancing act—covering your own costs, being fair to customers and treating your competitors with respect. Up the shore, fabric outfitters may regularly ask half again as much as Wodzien in his more modestly priced home base, so he may charge, say, 35 percent more than his usual fees. “I don’t want to be undercutting by a huge amount,” he says.
Make or break
In any case, the key to pricing is remembering what you pay the people who do the work. “Your labor is make or break,” says Wodzien. If you estimate that it will be an eight-hour job and it takes 12 hours—well, “just chalk that up to experience,” Wodzien shrugs, “and make a note.” On-target estimates are a big part of job costing, and so are skilled, reliable employees.
What about rental equipment? If you’re in that business, it calls for still more calculated nuance. Gary Stansberry, a partner with the law firm Hageman, Stansberry & Associates in Granbury, Texas, offers this checklist for rental costs that apply to tents and other contexts:
- Direct job costs include labor—payroll plus overtime, payroll taxes and benefits.
- Delivery includes truck and fuel or third-party shipping.
- Remember third-party contractors, contract labor, hotel, meals and travel.
- Direct overhead costs may apply to a specific job—warehousing, employee health premiums, worker’s compensation outlays, labor for warehouse management, warehouse equipment and supply, as well as repair, maintenance and cleaning expenses.
Meanwhile, notes Stansberry, rental businesses incur the same overhead as build-to-sell operations: labor, insurance, rent, utilities, property taxes, computers, advertising, bad-debt collection, professional fees for accountants and lawyers, phones, office supplies, license fees, interest and credit-card fees, travel, entertainment and training.
If you can stay on top of it, tracking changes as they occur, careful cost analysis may turn out to be the best thing you ever do for your business. Since he built his own cost-tracking spreadsheet, says Laurel Awning’s Schmieler, he’s consistently made more money. So when you’re detailing a customer estimate for that complicated or ‘headache’ job, take the time to balance it against your real costs—fixed, variable and hidden—and remember to factor in things like the changing cost of fuel and materials.
If the numbers on a particular job don’t work out in your favor—should you say no? Schmieler thinks so. “Certain jobs belong in other people’s shops,” he says. Unless you’re certain that the work will lead to more profitable jobs in the near future, perhaps you should point that customer to another business with a different set of spreadsheets.