Estimating Process Calculating Gross Profit and Developing Your Selling Strategy
In Part I, we discussed how the estimating process begins with a comprehensive understanding of your project's scope of work and a knowledgeable and well-trained estimating following solid processes and procedures that must be implemented in your Estimating Department. In Part II, 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 4 – Calculating Gross Profit
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 by a business by subtracting the cost of goods sold from the net sales revenue for products or services sold. As such, the gross margin of your estimates to determine your sales has to be greater than your companies operating expenses, or you will achieve the goal of a successful business; Profit.
Profit margin gaols are set by a company's management or ownership, then provided to the estimator or estimating team as either a range or minimum percentage to achieve. You may receive this as either gross profit or net profit targets depending on your company's strategy, and you will need to know ways of achieving these goals during the estimating process.
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.
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 that have been deducted from gross profit revenues.
Net income is what is left over at the bottom of the income statement and is referred to as the "bottom line."