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Derrick was still puzzled, but scrambled through some papers on his credenza. Finally, he produced an org chart, at least a version of it, with several scribbled notations.
“Will this do?” he asked.
I shook my head. “It’s a start.”
“So, what are you looking for?”
“Derrick, you offer a price to your customers for your services?”
“Well, they tell us what they want, or need, then we have to take it through our estimating department. It’s not that simple, takes a day or so to produce a price based on a set of specifications.”
“And in that estimate, have you marked up or included some specific amount that should be profit on the job? Either gross profit or net profit?”
“Of course. We want to build in 10 percent for overhead and 10 percent for profit in addition to the direct costs. At least that’s the theory,” he stated flatly, rolling his eyes.
“No, it’s not just theory. Your livelihood, your business success is tied to those numbers. This is not a game.” -TF
Question to think about. Where in your system, do you specifically determine how much profit (gross or net) should be made, either on a project or within a time frame?
This is one of my favorite subjects!
Why do people continue to look at cost plus overhead and profit as a way to calculate price? The market determines the price of all products and services. If you quote a competitive price for the product or services offered, you will get the business, if not, you won’t.
I suggest that you have a really good handle on your costs and requirements for contribution to overhead and profit BUT let that determine whether or not you take the business, participate in the market segment, etc. The value of your offering may provide a 50% margin rather than the 20% “minimum” you add to each estimate. Why leave 30% on the table by formula?????