Q. 2 Should I mark up smaller jobs more than larger jobs?
The general rule of thumb answer is “Yes” but there are a variety of factors to consider:
It can depend on how you view your smaller jobs.
- If you use them as a stepping stone to larger jobs, then you might want keep them at your standard markup in order to encourage an increase in smaller jobs.
- If you want to discourage smaller jobs due to risk-factors or personal preference, then you may want to mark them up enough to either minimize the number of small-job clients, or so that you feel good about taking them on due to the higher profitability.
The answer can also depend on your “mix” of jobs, …If you have 1 large job per year, and 50 small ones the answer would be different than if you had 10 large jobs per year and 5 small jobs.
- From a straight numbers standpoint, every job is going to have some background cost elements that are very similar, regardless of job size. For instance, whether the job sells for $5,000 or $105,000, you will need to meet with the customer to discuss needs, obtain permits, order materials, etc. If you’re doing a great job of detailed estimating, you’ll build these extra job costs into the estimate, and theoretically you wouldn’t need a higher markup.
- But if you aren’t currently estimating for all of these background costs, then you would want to build in a higher percentage for smaller jobs.
There are other administrative costs that reside in your company overhead area (e.g., sales time and design (if not included in direct job costs), estimating, contract preparation, timesheet and payroll administration, answering phones, preparing and entering purchase orders, entering and paying bills, invoicing, problem-resolution, etc.) that tend to not fluctuate in direct relationship to the size of the job. E.g., You may determine that background administrative costs on the $5,000 job are $120 (2.4%), and on the $105,000 job are $1050 (1%). Results such as these would support adding a higher percentage to small jobs and reducing your required percentage on larger jobs just a bit.
So as you can see, this becomes a balancing act between pricing your larger jobs and smaller ones.
Technique You might want to consider adding a flat rate to small jobs to pick up the difference in admin costs. Using the example shown above, you could determine the difference as a percent of income (in this case, 2.4% – 1% = 1.4%) then add this to the price of the job (1.4% x $5.000 = $70). Whether you choose to subtract the 1.4% off of larger jobs (in this example the reduction in price on the larger job would be $1,470) is up to you,… You would likely want to do some “what if” projections based on your current level of large jobs vs. small jobs before making any major changes to your pricing model. |
–Diane Gilson (dcg@infoplusacct.com), created the accounting firm of Info Plus(+) Accounting® in 1994 with the intent of providing current and future-oriented management accounting services to small and medium-sized businesses. Since the firm’s inception, Diane has worked exclusively in QuickBooks® – a powerful, flexible, multi-functional software accounting system currently used by 70-85% of small to medium-sized businesses in the United States. She is a Certified QuickBooks® Advanced Professional Advisor and Certified QuickBooks Enterprise ProAdvisor (through Intuit), and a Certified QuickBooks® consultant (through the Sleeter Group Consultants Network).