![]() Let’s test this to demonstrate the simplicity of determining markup. Total anticipated indirect costs (overhead and profit added together) divided by total anticipated costs of goods sold (COGS) for that same period of time (typically one year) equals the markup to apply to your estimated costs. The greater the risk, the greater the profit should be. Remember, as a business owner, think of your salary as compensation for your day-to-day responsibilities at the business, and your net profit as the compensation the business deserves for taking the risk of offering services. And by thinking of it as an expense to be paid, it becomes part of the price of every job your business sells. It should not be a surprise in April when your historian does your tax returns. Think of net profit as an expense that must be paid. The third piece of the pie is net profit. Overhead expenses include things like marketing, office rent and heat, office supplies, office staff payroll, production manager salary and your salary as manager if you are not working in the field. The next biggest piece of the pie will be your overhead. Total COGS should be the breakeven cost for your business to build a project, or the cost before any gross profit is added. Typically your labor, materials and subcontractor costs-things your business actually sells. The first, typically the biggest, is your cost of goods sold, or COGS. When you price a job, there are three major pieces of the pie that make up the total selling price. Again, if you are guessing, you are acting stupidly. ![]() The risk is compounded because the costs and expenses between two businesses are always different. It’s risky because there’s about a 1 in 10 chance you’ll be copying someone who knows what they’re doing. For lack of a better way to say it, this is stupid. Too many remodelers copy the markup other competitive businesses in their marketplace claim to use, rather than determining their own. That means about 85 percent are using what has become known as the WAG method of pricing their jobs: a wild-ass guess. My experience indicates fewer than 15 percent of remodeling business owners understand this important component of properly pricing a job before it is sold. It’s a shame so few remodelers know and understand how markup and margin work.
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