Do You Just Wet Your Finger & Hold It In the Air?
Here’s a better way to “guess” how much to charge.
In today’s issue…
Pricing projects correctly, part II
466 words, total reading time less than 2-1/2 minutes
Last week, we identified the major components to be specified for a project – what we call Equipment – as the only element of the project where the costs are known before you start working on the project. Fortunately, this “quantifiable” piece is usually more than half the total project price.
The other pieces you need to specify are Install Parts, & Labor.
Install Parts are the low-cost items used to install & interconnect the system components. They are typically purchased in bulk and stocked on the trucks. Heroic efforts can be taken to track parts consumption by job, but it is frankly impossible to keep an accurate count of the feet of wire & cables and the number of pieces/widgets used on a project. The costs to do so exceed any economic benefit.
Better, we think, to track your purchases of Parts. Create a separate COGS account for the spools & master cartons and bags of stuff you buy. You’ll have an accurate total on your P&L each month. Charge each project 10-20% of the Equipment total to come up with a Parts “allocation”, and measure these revenues in their own, separate Income account. Over time, you’ll be able to see if revenues are enough to generate a healthy margin on Parts (50-60% is good, higher even better!). If they’re not, increase the per-project allocation.
Likewise, Labor costs cannot be known before actually doing the project. As with Parts, you need to establish an allocation. In our experience evaluating hundreds of companies, Labor charges need to average at least 50% of Equipment charges for a CI to make a decent profit on Labor (again, 50-60% is good and higher is better). Labor costs need to be tracked in their own cost account. Labor revenues need to be tracked in their own income account. If the resulting GM on Labor is not at least 50%, you need to increase the per-project allocation.
Try This at Home Next time you price a project, total up the Equipment prices and – once you’ve verified getting the GM desired for Equipment (see last week’s Coffee) – multiply the total by 50% to get your Labor allocation, and by 16.67% to get your Parts allocation. DONE!
The resulting quote will be 60% Equipment dollars, 30% Labor dollars, and 10% Parts dollars. It may not be the perfect “mix %” for your company, but it can be fine-tuned over time.
Don’t be fooled by other guessing methods like proposal software tools; face it, it is not an exact science. However, you do your project pricing, we recommend you always double-check the % of Equipment vs the % of Labor vs the % of Parts that are priced in – before you present the proposal to a client. Because if you don’t fine-tune to a more appropriate (and profitable) mix now, you’ll never make that money back.
Don’t wet your finger. Measure the mix!