This website requires certain cookies to work and uses other cookies to help you have the best experience. By visiting this website, certain cookies have already been set, which you may delete and block. By closing this message or continuing to use our site, you agree to the use of cookies. Visit our updated privacy and cookie policy to learn more.
This Website Uses Cookies
By closing this message or continuing to use our site, you agree to our cookie policy. Learn More
This website requires certain cookies to work and uses other cookies to help you have the best experience. By visiting this website, certain cookies have already been set, which you may delete and block. By closing this message or continuing to use our site, you agree to the use of cookies. Visit our updated privacy and cookie policy to learn more.
Plumbing and Mechanical (pmmag) logo
search
cart
facebook twitter linkedin youtube
  • Sign In
  • Create Account
  • Sign Out
  • My Account
Plumbing and Mechanical (pmmag) logo
  • Home
  • Magazine
    • Current Issue
    • Digital Edition
    • Archives
    • Product Focus
    • Truck of the Month
    • Plumber of the Month
    • Tool Tips
    • PM Profile
    • Ad Index
    • Bookstore
  • Market Sectors
    • Plumbing News
    • Mechanical Systems
    • Radiant/Hydronics
    • Solar Thermal/Geothermal
    • Green
    • Bath & Kitchen
    • Fire Protection
    • Water Quality
    • Technology
    • Codes
    • Business Management
  • Columnists
    • John Siegenthaler: Hydronics Workshop
    • Al Levi: Managing your business
    • Dan Holohan: Heating Help
    • Kenny Chapman: Blue Collar Coach
    • Adams Hudson: Marketing Strategies
    • Jim Hamilton: The Bottom Line
    • Ray Wohlfarth: The Boiler Room
    • Nicole Krawcke: Editorial Opinion
    • Julius Ballanco: Plumbing Primer
    • Matt Michel: Service Plumbing Pros
    • Dave Yates: Contractor’s Corner
  • Blog
    • The 7-Power Contractor
    • PM On The Road
  • Radiant & Hydronics
  • Multimedia
    • PM AHR Expo 2019 Videos
    • Photo Gallery
    • PM Network Videos
    • PM YouTube Channel
    • Podcasts
    • Webinars
    • Showrooms
    • eBooks
  • Products
  • More
    • History of Plumbing
    • Industry Calendar
    • Classified Ads
    • Industry Links
    • Radiant Comfort Report
    • Green Plumbing & Heating
    • PVF Outlook
    • PB Outlook
    • Sponsor Insights
    • eNewsletters
    • Subscribe to Plumbing Group eNewsletters
    • Market Research
  • Directories
    • RCR Buyers Guide
    • B.I.G. Book
    • Rep Locator
  • Contact
    • Advertise
Home » "I Want A Breakdown" Revisited
Columnists

"I Want A Breakdown" Revisited

June 1, 2000
Frank Blau
Reprints
No Comments
My November 1996 column, “I Want A Breakdown,” brought an unusual amount of response via mail, telephone and the Internet.

Respondents included not only PHC contractors, but general contractors, architects, CPAs and other entrepreneurs who were not associated with our industry.

The article dealt with how to deal with customers with price complaints who insist on getting a time-and-material breakdown from flat rate companies. My basic advice was to give them what they want. Except make sure it is thorough and complete. Don’t just factor in broad concepts of time and material. Also show how overhead factors into job costs and go into detail about how much overhead goes into your selling prices. It gives you a chance to dispel the butt-crack, money-hungry image portrayed of our industry in TV commercials. A cost breakdown reminds them that they are dealing with a credible company.

What surprised me was the number of respondents from outside our trade. What piqued my interest was how my column got into their hands.

Mysterious Selling Price: In most cases, they called to take issue with the selling price I had calculated for a sample job with a total job cost of $237.79 and a desired net profit of 20 percent. What I again verified in my mind is that ignorance is not an exclusive characteristic of the PHC industry, but that other entrepreneurs experience the same glaring shortcoming. There are thousands out there who don’t understand simple numbers crunching. I spent no less than 50 hours on the phone trying to explain fundamental business math to callers.

For instance, a general contractor from San Francisco got a copy of the article from his plumber. The GC was screwing the plumber when the plumber submitted breakdown bills for extra work. The GC made the common mistake of multiplying job cost by the profit percentage. In other words:

(Wrong arithmetic): $237.79 x .20 = $47.56. This then gets added to $237.79 to derive an incorrect selling price of $285.35. This is the fundamental error made by at least 90 percent of the people who come to my seminars.

Most of the people who called or commented on my November column couldn’t figure out how I got a selling price of $297.24 from the job cost and profit percentages used. One participant in the online Plumbers Discussion List (PDL) even accused me of holding back so that I could generate seminar income. (For further information about the PDL, send an e-mail to: klove001@aol.com.)

Time For A Review: This tells me that it’s time for a review of the basic arithmetic that goes into calculating a selling price. It’s the subject I wrote about in my very first PM column way back in April 1987. Let’s review it using not my simple sample problem of $1,000 in direct labor and material cost and 15 percent desired net profit.

Instead, let’s use the numbers from my November column that sparked all the inquiries. To refresh your memory, the numbers were:

For those that calculated an incorrect selling price of $285.35, keep the following facts in mind from now until you cash in your chips:

1. Selling Price always equals 100 percent. Here lies the fundamental root of all mistakes. When you figure profit as a percentage of Direct Cost ($237.79 x .20), you are cheating yourself out of the higher price to which you are entitled.

2. Direct Cost usually includes the following: Material, Permits, Labor. Individually and collectively, the dollar amounts are a percentage of the Selling Price.

3. Gross Margin is the difference between Direct Cost and Selling Price.

4. Overhead (or Indirect Costs) consist of everything that is not a direct cost. This includes everything from utility bills to advertising expense to administrative salaries, etc. Individually and collectively, these dollar amounts also are a percentage of the Selling Price.

5. Net Profit is the number of dollars left after subtracting Overhead dollars from Gross Margin dollars.

Mathematical Language: Again, remember that Selling Price equals 100 percent. Job Cost ($237.79) represents a certain percentage of the Selling Price, i.e., the percentage not represented by Net Profit.

Net Profit, in our November example, we figured as 20 percent. That’s 20 percent of the Selling Price, not of Direct Cost. So if Net Profit is 20 percent of the Selling Price, Direct Cost must be 80 percent. So ...

A. $237.79 (Job Cost) = 80 percent of X (Selling Price) B. $237.79 = .80X (a simple algebraic formula) C. $237.79/(divided by) .80 = $297.24 Selling Price.

Selling Price $297.24 100% Total Job Cost $237.79 80% Net Profit $59.45 20%

Yes, there are markup tables you can use as a shortcut. For instance, in this case a markup multiple of .25 (25 percent) multiplied by the Direct Cost of $237.79 will give you $59.45, which when added to the Direct Cost achieves the correct Selling Price of $297.24.

There’s nothing wrong with using markup tables or any other shortcuts, as long as you understand the fundamental mathematical principles involved. Two keys to remember:

1. Selling Price always equals 100 percent.

2. To find Selling Price when you know Direct Cost, you must divide the Direct Cost by a decimal fraction, not multiply by a fraction.

3. That fraction will be what’s left after you subtract the Net Profit percentage, expressed as a decimal fraction (.20), from the 100 percent (1.0) representing Selling Price.

Stop cheating yourself.

pm-subscribe

Recent Articles by Frank Blau

FAREWELL COLUMN!
Gone Hunting And Fishing
Frank Blau

The Four Legs Of Financial Security
Frank Blau

Open Letter To Progressive Service Contractors
Frank Blau

Reasons Why Contractors Go Out Of Business

Snipers Hide Out On The Road To Success

Frank Blau can be reached at Frank J. Blau Jr. & Associates, 12221 W. Fairview, Milwaukee, WI 53226. 1-800-FLAT RATE. Fax: 414/258-3307. Web site: www.blauplumbing.com

Related Articles

'I Want A Breakdown!' Revisited

'I Want A Breakdown!'

Why I Am A Union Contractor

Why I Don't Like Commissions, Either

You must login or register in order to post a comment.

Report Abusive Comment

Subscribe For Free!
  • Print & Digital Edition Subscriptions
  • eNewsletters
  • Online Registration
  • Subscription Customer Service

More Videos

Popular Stories

Space-saving

Preventing scale damage in tankless water heaters

The Glitch.jpg

The Glitch and Fix: Keep the cost down

Pre-fabricated snow melting

Radiant: More than just a luxury home building option

Siggy_single coil

Single coil solution

exhaust line

Dave Yates: Dominoes

PM-Rectorseal-Quiz-360x184


PM-COTY 2019

Events

December 30, 2030

Webinar Sponsorship Information

For webinar sponsorship information, visit www.bnpevents.com/webinars or email webinars@bnpmedia.com.

View All Submit An Event

Products

2020 National Plumbing & HVAC Estimator

2020 National Plumbing & HVAC Estimator

See More Products

PM_Top20Products360

Plumbing and Mechanical

Plumbing & Mechanical December 2019

2019 December

Check out the December 2019 edition of Plumbing & Mechanical: 2020 B.I.G. Book, John Siegenthaler on geothermal water-to-water heat pump system design and installation, maximizing efficiency on small-diameter piping projects and much more!
View More Create Account
  • Resources
    • Reprints
    • List Rental
    • Contact Us
    • AEC Store
    • Blogs
    • Radiant & Hydronics
    • Industry Links
    • Market Research
    • Custom Content & Marketing Services
    • Privacy Policy
  • Want More
    • Connect
    • Survey And Sample
  • Plumbing Group
    • PM Engineer
    • Supply House Times
  • Advertise
    • Advertise
    • Plan for 2020!

Copyright ©2019. All Rights Reserved BNP Media.

Design, CMS, Hosting & Web Development :: ePublishing