A lot of work goes into selling a remodeling project. Assuming we can encourage a homeowner to call us in the first place, we move from consultation to design and estimating, then to selections and options, and sometimes to therapy. Finally, if everything falls into place, we move to craft. Given all of that energy, it’s important to earn a proper return on all of the remodeling projects we sell.
Enter gross profit, the number that enables us to determine profitability by project. Why is that important? Knowing our gross profit is critical in determining how much we need to mark up our direct job costs to arrive at the proper sales price. It’s also the basis for comparing our estimates to our actual performance. And because we can measure gross profit on each project, we can spot trends related to lead carpenters, designers, project managers, and to different project types and sizes.
Gross profit gives us insight into how well we’re performing each month and each quarter, so we aren’t waiting until the end of the year to see if we make money. And when there are problems, we can zero in on them quickly and effectively. In short, knowing our gross profit gives us peace of mind.
Here are some tips for tracking gross profit.
Compare percentages (not dollars). Subtract direct job costs from the sales price, then divide by the sale price to get gross profit percentage. This number is the best way to compare returns across projects of different sizes.
Track estimated vs. actual. This will help you understand why some teams meet or exceed estimated gross profit more consistently than others (see chart, SM LOCATE DIRECTION). It also helps when comparing jobs by size. Our estimated gross profit shrinks as job size grows because of the inherent efficiencies of doing larger projects. By comparing gross profit for various job sizes, we can track performance and determine where our sweet spot lies.
Increase gross profit. One way to do this is by increasing markup, but that’s difficult in this environment. Consequently, we have focused on finding innovative ways to reduce direct job costs. —Bruce Case is president of Case Design/Remodeling. email@example.com.