Okay, I know this is an "old" thread.....but none of the answers really got to the meat of the question. The problem seems to be related to confusion over "margin" "markup" "gross margin" "operating margin" "net margin" etc. Also, the fact that the contracting business (let's assume someone operating as a GC for a minute) is very different than a typical business where a banker might say "10% is good and we don't look at anything less than 6%". The GENERAL contracting biz is very different.
So, to assume we're talking about a general, I'd like to get some input as to the different layers of margins, considering that TOTAL revenue is the TOTAL amount of money directed to the project. The vast vast vast majority of that is simply doled out to the subs. But, it's still considered revenue to the GC (and both the general and sub get to pay TAX on it...yea!). Let's assume a general contractor
who builds ________ (it doesn't matter). A the end of the year, let's say they did 10 projects with a total cost of $4milllion each, for total "revenue" of $40 million.
1) Gross Margin (deduct direct project expenses)
: Of that $40 million how much would you guys (a range maybe) require to be kept by your firm as GROSS profit (the profit on top of the total expense dedicated to the projects themselves, such as permits, fencing, materials, subs, insurance, etc...but BEFORE administrative costs, overhead, partner salaries, etc. are taken out)?
2) Operating Margin (now deduct admin & overhead)
: Now that ___% - ___% has been earmarked as a reasonable GROSS profit range, let's take out all the other costs required to run the business (BUT IGNORE OWNER'S/PARTNER'S SALARIES as that is the NET/NET profit). So, if GROSS profit was $2 million on the $40million worth of projects, now we take out all other expenses such as overhead, advertising, t&e, insurance, administrative staff......etc., etc. How much do you guys typically see here?
3) NET Margin:
Finally, now that all the direct project expenses and
administrative/overhead expenses, taxes etc. have been taken out, there should be (maybe)
some $$ left over at the end. This would be the net profit of the firm, that can be paid out to owners/partners or retained for growth (of course some of this has already been paid out to the owners/partners as their salary, all along....but pretend it hasn't).
So we have:
* Gross Revenue of $40 million
* Direct Project Related Expenses (subs, materials, permits, insurance, bonding, fencing,.....etc.) ______
* Overhead and Administrative Expenses (general insurance, phones, power, advertising, t&e, vehicles, admin staff wages and benefits, local business taxes paid, etc.) ______?
* NET NET Profit avail. to owners/partners or retained in firm. _____?
I guess what I'm wondering is, for a GC, how much margin is built in on the actual job....and then how much some of you guys are looking at in terms of net to the pocket at the end of the year, as a % of total business. Right now, we're looking at people submitting suicide bids all over the place, with maybe only $200K worth of planned (which may not even come to pass) gross profit on $3.5 million projects. After taking the admin out of that, and assuming Murphy never shows up.....our firm would be lucky to get to keep $125-$150K (after taking all the risk) on the $3.5 million total project.