# Underbid, again!



## Electric_Light (Nov 25, 2007)

swing4thenail said:


> if you have fixed costs, it is indeed worthwhile to take jobs that at least cover variable costs and can contribute to covering the fixed


I think its safe to assume there is always fixed cost. Some fixed costs are semi variable. 

If you've got a 7 passenger van, fuel cost is a semi-variable, because if you operate it, it will use fuel. Though there is a measurable difference, one passenger vs seven makes negligible difference in fuel usage. 

If the driver+fuel+vehicle wear is $65 round trip you can bid the service at $10/passenger one way and still get $5 gain. If you can talk every passenger into paying $1 extra for non-refundable return trip package, you'll more than double the profit with negligible added cost to the customer. If they ride it, they get a great deal. If they miss it, they don't lose much. 

The van has to come back home anyways, so the added revenue is pure profit.

If you play with accounting, you could ignore the fact the van has to come home anyways, and split the cost as $32.50 one way, and report the return trip for 7 at "oh no we lost $25.50" and say "ain't no way I'm adding round trip for 10% more, I expect the same fare" but if you look at the overall picture, the difference is you have $5 contribution towards fixed cost vs $12 contribution regardless of how its allocated. 

So, I think the most important thing is the maximum utilization of fixed cost. Even for variable cost, if you purchase in bigger volume, you could get a better discount through your supplier, or even bypass a small supply house. 

It may not come instantaneous, but just having more flow does have its advantage in competitiveness.


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## BradingCon (Dec 17, 2010)

Im confused at how people think that making 3% GROSS margin is making money. I thought we were talking NET PROFIT. His gross margin is what he has left after taking out only direct job costs (labor hours on job and materials used for job.) After that he still has to cover insurance, marketing expenses, administrative expenses and other overhead costs to arrive at net profit. 

So, if he is making a 3% gross profit there is no way he is not losing money.


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