How To Calculate The True Break-Even Point For Every Project Before You Quote A Price
The Association of Professional Builders
Improving the residential construction industry for both builders and consumers.
A common mistake that is made by builders when pricing a larger than normal project is to reduce the margin percentage after looking at the gross profit as a dollar figure.
The thinking behind this is that a larger amount of revenue will lead to a larger gross profit, which translates to more net profit.
As a result, it can become tempting to reduce the gross margin percentage being applied to larger projects either in an attempt to ensure the job is won or out of a sense of guilt after seeing the dollar amount of gross profit.
However, what tends to get overlooked is the increased amount of fixed expenses that must be applied to larger jobs.?
This is because of the extended timeline of a larger project which reduces the number of projects that can be completed by the building company in a 12-month period. Also, the project complexity on larger jobs impacts the number of concurrent projects that can be run at any one time.
So by applying the same amount for fixed expenses to a larger project means the gross profit is reduced which results in a significant reduction in the net profit for the business.
It’s the same problem when a builder is expected to apply ‘mates rates’ to a project for a family member or even a member of staff.
The builder may feel like they are doing the build for nothing, but the reality is that they are actually running the project at a loss and effectively subsidising the build out of their own pocket!