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COTNEY CONSULTING GROUP John Kenney

Calculating Gross Profit and Developing Your Selling Strategy Part 3 In Part 1 (Florida Roofing, July 2020), we discussed how the estimating process begins with a comprehensive understanding of your project’s scope of work and a knowledgeable and well-trained estimate following solid processes and procedures that must be implemented into your Estimating Department. In Part 2 (Florida Roofing, August 2020), we covered how to gather your costs, properly mark up your estimate and develop a consistent and dependable review process. In this last section, we will learn how to apply gross profit margins to our estimates properly and develop a sales strategy.

Stage 5 – Calculating Gross Profit

Key Takeaways of Gross and Net Margins in Construction

Gross profit refers to a company’s profits earned after subtracting the costs of goods purchased, labor to install, subcontractors or equipment used and furnishing and installing its services. Net income indicates a company’s profit after all of its operating expenses have been deducted from gross profit revenues and is what is left over at the bottom of the income statement and referred to as the “bottom line” (see Table 1).

Understanding that Gross Profit or Gross Margin is not a markup is key to properly calculating it on your estimates. The gross profit margin is present on the income statement every company prepares as a part of its accounting process. Gross margin is the amount left over after a business subtracts the cost of goods Formulas for Calculating Gross and Net Margins sold from the net sales revenue for products or serGross Margin Dollars vices sold. As such, the gross margin of your estimates ■ (Sell Price) minus (Estimated Cost) equals (Gross to determine your selling price must be greater than Margin Dollars) your companies operating expenses or you will not achieve the goal of a successful business: profit. Sell Price $ 257,000 Profit margin goals are set by a company’s manEstimated Costs $ 175,000 agement or ownership, then provided to an estimator or estimating team as either a range or minimum Gross Margin $ 82,000 percentage to achieve. You may receive this as either gross profit or net profit targets depending on your Gross Margin Percentage company’s strategy and you will need to know ways of ■ Gross Profit Percentage = (Total Revenue – Cost of achieving these goals during the estimating process. Goods Sold)/Total Revenue x 100

Expressing the Margin as a Percentage

It is useful to express the gross or net margin as a percentage. For instance, if you want to compare the margins of two projects of different types, the margin percentage is a more applicable and useful comparison, then the amount of profit.

■ ($257,000 – $175,000) / $257,000 X 100 = 31.90 or 31.90% Net Profit Margin and Percentage ■ Net Margin Dollars = (Gross Profit Dollars – Operating Expense Dollars)

Table 1 – Condensed Financial Statement Example

40

Revenue

$

1,500,000

Gross Margin

$

82,000

Cost of Goods Sold

$

1,000,000

Operating Costs

$

75,000

Gross Profit

$

500,000

Net Profit

$

7,000

Operating Expenses

$

425,000

Net Profit

$

75,000

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