# Gross Margins for commercial Contractors



## Mnorthwest (Jul 7, 2011)

Ok so the CEO is convinced we need to be at a 40% GM. No matter how many jobs I pull in and pump out we never hit that 40%. So here’s my question what kind of GM are you all seeing out there? I am finding that with competition so thick 12 to 15% GM. Any feedback or web site where I can get info at would be much appreciated.


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## Kgmz (Feb 9, 2007)

Depending on what you are doing, you should or could be at a 40% margin.

You do know that Gross Margin is just a mark up of over the cost of goods or materials, and does not include labor, taxes, overhead, profit, etc., etc.


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## BrandConst (May 9, 2011)

Mnorthwest said:


> Ok so the CEO is convinced we need to be at a 40% GM. No matter how many jobs I pull in and pump out we never hit that 40%. So here’s my question what kind of GM are you all seeing out there? I am finding that with competition so thick 12 to 15% GM. Any feedback or web site where I can get info at would be much appreciated.


This post is missing some important information. It really depends on how you cost each project, is supervision costed to the job, admin fee applied to job, fuel applied to job, etc etc. It depends if these items are applied to general ledger or the job.

IMO, 40% GPM is acheivable on commercial insurance losses. But new commercial or commercial renovation......your doing good to hit a 30% GPM. Now if it's residential, a 40% GPM or higher is very acheivable.


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## BrandConst (May 9, 2011)

Kgmz said:


> Depending on what you are doing, you should or could be at a 40% margin.
> 
> You do know that Gross Margin is just a mark up of over the cost of goods or materials, and does not include labor, taxes, overhead, profit, etc., etc.


MNORTHWEST,

Here's an example of a 40% GPM, is this what your referring to?

Contract amount: $100,000 Job Cost: $60,000 Profit: $40,000


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## rblank (Feb 18, 2008)

I'm not sure what you guys are doing over there in the Pacific Northwest, but I'd kill to make even 30% these days. If I make 10% in the commercial world, I consider myself lucky. Maybe I need to move. :blink:


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## BrandConst (May 9, 2011)

rblank said:


> I'm not sure what you guys are doing over there in the Pacific Northwest, but I'd kill to make even 30% these days. If I make 10% in the commercial world, I consider myself lucky. Maybe I need to move. :blink:


Again, it all depends on how a company assigns costs. 10% after supervision is generally the right number for new commercial.


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## Grumpy (Oct 8, 2003)

Here is how I look at it... You're saying gross "margin" but I think most people would call it gross profit. The company should make a %, the salesman makes a %, the manager makes a % and the share holders make a %... in that order. 

The company's % is usually the largest to cover over head and operations expenses. The salesman usually the next largest %. In theory the manager and the share holder come out of the company's cut . 

So the question is, what % is the norm? I think there is no such thing. If I were building sky scrapers I think 40% would be laughably high. I don't know I never built a sky scraper but I bet they cost a few hundred million to build and there is no way you're going to get 40% gross profit. So the % really dos some what depend on the size of the job. If I were doing a 1 day maintenance job, 40% may be too low. 

I prefer to not figure by % but figure by how much I need per day. I know my daily over head and know how much I need to acheive. Charging a % works fine on the normal average job but not so well on anything outside the average. Everyone's average is different thus everyones % should be too.

You say you bring in alot of jobs. What good is alot of jobs if the only one making money is the salesman (you) the suppliers and the installers? The company has to make money too. 

If you're asked to mark up 40%, let's assume you earn 10%? that leaves 30%. Let's assume operations expenses are 15-20%, that leaves around 10%. I think that is very fair. In this scenario, 40% is reasonable. 

Here is another factor to consider. Do you sub out everything or do you have employee installers? I find that the % need not be so high when subbing something out as it should be higher if you use employees. 

So many factors nobody here can really give you an accurate answer. Only someone privy to the balance sheets and profit loss reports can answer that question. That wouldbe your manager and your manager's accountant. Your job is to make the company money and do what your manager says. Therefore if your manager needs 40% you need to charge 40%. Life is ez when you are an employee, just do what you're told.


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## Grumpy (Oct 8, 2003)

This reminds me of a story. A stalesman came to me asking me what we could do a roof for. Asking really how much discount he could offer. He said it's for his uncle. I told him take the regular price and knock off 5%, which he could give without asking. He asked if I could do better, I asked him how much commission he wanted to cut. 

He didn't want to cut anything out of his earnings, why should I cut anything from mine? it's not MY uncle. 


The point. If the company has reduced earnings so should the salesman.


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## BrandConst (May 9, 2011)

Grumpy said:


> Here is another factor to consider. Do you sub out everything or do you have employee installers? I find that the % need not be so high when subbing something out as it should be higher if you use employees.


I agree but don't quiete get the sub out part. I consider percentage completely opposite. You have much less exposure if your subbing out IMO. It's agreed that employees don't cost as much by the hour or day but there are so many more liabilities when it comes to regular employees.


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## Kgmz (Feb 9, 2007)

...


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## Mnorthwest (Jul 7, 2011)

Yes i understand but how much is to much mark up?


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## Mnorthwest (Jul 7, 2011)

Wow I love the feed back on this site. So just to clear some things up, it does not include admin cost, after admin cost I am expected to have a 22% net. I do understand the costs of doing business and grumpy I am not just an employee... 

 (Your job is to make the company money and do what your manager says. Therefore if your manager needs 40% you need to charge 40%. Life is ez when you are an employee; just do what you're told.) And WOW I hope this is not the attitude you take towards your employees… (Take care of your employees and they will take care of you and your customers which = making money for the company)
I have gone the last two years with out a commission so life isn’t always easy we all make sacrifices on my team… 

Brandconst I am killing on insurance losses but the commercial TI’s there’s so much computation that seeing 40% in next to impossible. We do no residential… 

Rblank we need no more contractors out here we have plenty thanks tho JK lol!

Does anyone know where I can find a book or info on industry standards or trends for GM or net?

Thank you for the feedback Awesome I love it!!


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## BrandConst (May 9, 2011)

Mnorthwest said:


> Wow I love the feed back on this site. So just to clear some things up, it does not include admin cost, after admin cost I am expected to have a 22% net. I do understand the costs of doing business and grumpy I am not just an employee...
> 
> (Your job is to make the company money and do what your manager says. Therefore if your manager needs 40% you need to charge 40%. Life is ez when you are an employee; just do what you're told.) And WOW I hope this is not the attitude you take towards your employees… (Take care of your employees and they will take care of you and your customers which = making money for the company)
> I have gone the last two years with out a commission so life isn’t always easy we all make sacrifices on my team…
> ...


Your going to have to test the market to see where that threshold is at. That being said your going to have to lose some jobs to figure that out.


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## Grumpy (Oct 8, 2003)

Mnorthwest said:


> Wow I love the feed back on this site. So just to clear some things up, it does not include admin cost, after admin cost I am expected to have a 22% net. I do understand the costs of doing business and grumpy I am not just an employee...
> 
> (Your job is to make the company money and do what your manager says. Therefore if your manager needs 40% you need to charge 40%. Life is ez when you are an employee; just do what you're told.) And WOW I hope this is not the attitude you take towards your employees… (Take care of your employees and they will take care of you and your customers which = making money for the company)
> I have gone the last two years with out a commission so life isn’t always easy we all make sacrifices on my team…


Nothing pisses me off more than a sales rep who cries that the price is too high. They want low prices so their job is easier, but they want full commissions too... hmmm. In this scenario is this how I conduct my business? YES. Since I also sell, if I am able to sell at the price I set then there is no excuse for anyone working under me not to also be able to sell at the same prices. I don't ask of anyone anything I can't do myself. 

In short if what I am asking an employee to do is reasonable, and they can't or won't do it, I will find someone who can. 

I can tell you there were some circumstances a few years back that caused my industry an upheaval of what was always done for a long time in terms of pricing. Prices were going up in an unprecedented rate and contractors were lowering their profit margins to the point of putting themselves out of business. I am no genius, but I know what we need to charge to stay afloat. I was charging that and asking my sales reps to do the same. All I was getting from them was wining and complaints. I did everything in my power to show them we were not the highest. I even solicited quotes on my own house and brought copies of the competitors proposals showing that we were actually in the middle... Still they refused to listen. Good bye. I don't need to spend $12k a year on advertising per sales rep for coomplaints. That $12k can go in my pocket if you're not gonna sell. 


So if you are "not just an employee" then you are a co-owner in the company? If you are a co owner in the company than I would expect you'd get monthly financial reports and/or have access to the company account. An accountant would be the only one who could realy accurately tell you what you need to be charging % to cover your overhead and earn a profit. 

How do you know 40% is impossible? Have you tried? Do yout hink sales is being the lowest bidder? It's not, it's convincing the customer to pay more because you're worth it. I'm seldom ever the lowest bidder on any job I do, and that includes commercial. 

Why work for nothing? I'm assuming you earn a salary. The point though is why work for practice? Why take on a job on low margin, take on a liability, and at the end of the job only the suppliers and installers make any money? If you aren't going to make any more, isn't it better not to work?


By the way your manager is telling you that if you want a commission, you need to charge more money. He said "we need 40%." You said "I haven't earned a commission in years." 



Last comment, if honestly and truly 40% is just too much, your manager/partner/whoever and you need to sit down and see what can be cut. Smaller office? Lose the warehouse? Sell some surplus vehicles and/or equipment? Fire some un-necessary office staff? Lose a few phone lines? Fewer office parties our outings? cut non-performing advertising? etc... the list goes on and on of "fat" that can be cut but not knowing your situation I can't answer.

The goal at the end of the day is to make money and if you're not making money you must either charge more or must cut expenses. OR the last variable is increase volume which means sell more without charging anything less than you already are.


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## Grumpy (Oct 8, 2003)

BrandConst said:


> I agree but don't quiete get the sub out part. I consider percentage completely opposite. You have much less exposure if your subbing out IMO. It's agreed that employees don't cost as much by the hour or day but there are so many more liabilities when it comes to regular employees.


Brand, I think we agree with each other. To cleanup some of your confusion... If I were subbing everything out and the sub was providing labor and material and I were only providing supervision, I may only markup maybe 20%. Now keep in mind this would vary on the size of the job etc... 

If I were using employees on the same job and I were providing all tools, vehicles, equipment etc... In theory a few things will happen. My labor wage output should be less than if I were using a sub since the sub has his own overhead and profit etc... The job would require more supervision since these guys are now mine to supervise and I take on more risk and more liability. Using a risk reward ratio, plus that fact that the overall wages are less, it only makes sense that I could and SHOULD charge more % on the same job.


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## JHC (Jun 4, 2010)

I am in the wrong market. 40% ?!


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## Kgmz (Feb 9, 2007)

From what I was going to post in my earlier edited post.

I think there are a few that are confused about what this 40% is.

So do a web search for Gross Margin, Gross Profit, Net Profit, Cost of Goods Sold, etc.

This 40% Gross Margin is not all Profit!!

Out of this 40% is your labor burden, taxes, overhead, profit, etc. as I posted above.

Now as Grumpy mentioned if you sub out most or all of the work then the labor burden is transferred to the subs, so your Gross margin is less normally but not always.

Now what is the most your gross margin can be, it is whatever the market will bear. If you cannot make it at market rates, then you need to cut costs elsewhere or just not do any business.

Our company is a little different from most Generals, in that most of the time we do almost all the work in house and only sub out a couple of things. Also we do a project from bare dirt to finish, from sewer and water mains to inside plumbing and electrical. So starting a job we may mobilize a million dollars of equipment and trucks to the site. This equipment has to be paid for, and this is why regularly our gross margin is well above 40%.


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## KennMacMoragh (Sep 16, 2008)

I think we would have to see one of your write ups to know how you are calculating out your GM. As people in here are saying, the method you use to come up with that percentage is subjective. And the number you use for that percentage is subjective as well. Does your company have accurate records of their annual expenses? Can you fit that number in to the revenues generated on each job? Maybe that's what your CEO is doing and he's finding they are not making enough to cover the expenses. 

The method I use is different, I use Elms software to figure in markup costs. I'll assign a different markup to each task. Sometimes I find it doesn't work adding markup to material. Such as if I am buying drywall which is cheap, then tacking on a percentage markup just doesn't work, so I figure it into labor instead. Then Elms will calculate the total margin for me based off the markups I use. But I don't think anyone can give you a good answer unless you can tell us how you are calculating out that percentage.

I find if I do some of the work myself, I can still make good money at even an 8% margin. My goal is to get it around 20 to 25% so I can have just employees do the work as I focus on administrative. If you are figuring margin the same way I am doing it, then you are going to have a hard time being competitive at 40%. Your marketing and sales skills will have to be top of the line. Try and price a few jobs at 40% and see what happens.


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## Grumpy (Oct 8, 2003)

Kgmz said:


> From what I was going to post in my earlier edited post.
> 
> I think there are a few that are confused about what this 40% is.
> 
> ...


I agree but disagree, because I apply my labor burden directly to the man hour. Instead of saying I pay this man $20 an hour then later markup 40%, well that won't cut it since my WC is more than 40%. So instead I markup my labor for burden first, and mark up again later for overhead and profit.


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