I’m a truth and fact kind of guy. I have learned over my years in the restoration industry that the truth is rarely what we “think” it is. We need facts that get to the truth. In this blog I am talking about the truth about profit margins for completed work.
When asked, “what is your typical profit margin on your work,” many contractors give themselves the benefit of the doubt without actually knowing. They “think” they are earning 80% profit on mitigation work and 40% on reconstruction. This is a pretty standard response when I ask the profit question. When I ask, “how do you verify this?” many contractors stutter and stammer with no answer other than that they “think” their percentage is right. What role do the facts play in these assessments? Not much!
The only way to know what the profit margin is on any job is through rigorous job costing. The only way to know one’s typical profit margin is to average a series of jobs that have been rigorously job costed. Job costing is simply the process of recording costs related to a job. If done correctly it is easy to determine the job’s gross profit by dividing the amount spent by the amount invoiced. For example, if the invoiced amount from the estimate is $12, 254 and charges are $8,267 ($8,267/$12,254) = 33% profit. What is important about job costing is that without it you have no verifiable way to prove job performance. The truth is always in the numbers. Did you make the expected profit or not, and if not, why not? Digging deeper into the numbers yields the truth. What does it take to do a good job with job costing?
- Assign the job to a single person. The job cost administrator is responsible to enter every charge for equipment, material and labor to the appropriate customer electronic file.
- Require every receipt from every purchase paid by credit card, check, or vendor account be submitted to the office on a regular daily basis. A purchase order system helps to insure this goal is achieved. My next blog is about the implementation of a purchase order system.
- Every day the job cost administrator must gather and enter into the customer electronic file each receipt for equipment, materials and labor. Typically, the charge is entered into the project management software your company uses such, Suystem100, Job Docs, PSA, DASH, or QuickBooks. Then scan and convert the receipt to a PDF and upload it into the electronic job file in the event you need to retrieve it later.
- Regularly print a Job Cost Report showing completed jobs, invoiced amount, job costs amount, and percentage of gross profit.
- Review underperforming jobs to find out why they didn’t achieve your profit goals. Get the facts in order to obtain the truth and then fix what is wrong with policies, procedures, or systems that will help insure more consistent per job profit performance going forward.
- Inspect whatever you are going to expect! Supervise well, hold others accountable for their performance, and stay on top of the details to insure compliance and quality.
That’s it. That’s how you get to the truth about performance and profit margins. If you do this regularly, you will find problems and can fix them in a timely manner. If you job cost but don’t review the results you have wasted your time. If you want to improve your business, its production performance, and its profit margins you need the truth and the facts that unlock it.
Reference: 6-Month Coaching Plan - The Profit Maker: Make More Money than Ever Before Managing Your Business Like A Pro! Subscribe and receive our weekly blogs in your email inbox at http://growmyrestorationbusiness.com/blog/ - scroll to bottom of the page.