Material Markup, Overhead, and Profit

      A cabinetmaker gets a basic lesson in some business fundamentals. June 2, 2009

Question
I was just wondering what a fair markup on material is? I presently use a 10% mark up on all material, lumber, plywood, and hardware.

Forum Responses
(Business and Management Forum)
From contributor Z:
A fair mark up is what "your" customers are willing to pay. It all adds to the final price. If you have little or no trouble getting your price then youíre fine. You should be including all costs associated with your material such as shipping, handling, taxes, and etc. Thatís your true cost to mark up from.



From the original questioner:
I think my question was misunderstood. There has to be a guide line as for as "markup" goes. You can't give the client your cost and I know that every company gets different rates depending on the amount of money they spend with that vender. But you have to consider your time to call in the order, go and get the order or receive the order when it comes in, and I was just wondering is 10% to low, to high, or ok. Just wondering what other shops are doing.


From contributor K:
10-15 is fair on everyday items that are already in your system. You can increase your profit on these by buying larger quantities and selling to each job. One time situations that take time to solve, order, handle, etc. need to be looked at for what they cost you. I would caution against whatever you think you can get approach, as that will eventually bite you. Fairness, honesty, and integrity are still a good foundation for long term success. In the long run, making a living is more sustainable than making a killing.


From contributor W:
There was a thread not too long ago about this. See link below. I think your cost of ordering, handling and storing is close to 10% easily, unless you don't value your time very much. Part of your cost is the time you spend talking to the different vendors and sorting out the right products, chit-chatting with the sales people, returning bad product, etc.


From contributor F:
There is a profit portion of a job and there is an overhead portion of a job. I would consider markup as the profit portion. Profit is policy, cost is fact, you need to recover your costs and then make a fair profit. Do you know the difference between markup and margin? If not you would need to markup 11.11% to get a 10% profit margin or divide by .9.


From the original questioner:
No I don't know the difference. What I do know is what I charge per hour for labor which is $35.00 and the mark up for material is to somewhat pay me for my time drawing the job ordering the material, hardware and finishing supplies. I think I am reasonable and yet I am running one job at a time (I realize the economy is bad right now) but this has been going on for long time. So I thought maybe I was over charging.

Everybody wants something for nothing and just because you run a shop out of your home (oversize two car garage) I think people don't really look at you as a business, and then they want you to give them your price on the material. I think I'm in a very bad and cheap area, all throw the homes I work in are $800,000 plus. I would like to think my work is to par eight years now with not one call back (knock on wood), so the phone should be ringing off the wall.



From contributor J:
First, if you're charging $35 per hour and marking up your materials 10% you're not overcharging no matter where you are. In fact, it sounds low to me even with your low overhead. I charge a per-hour shop rate and for materials. Then I mark up both of those for the percentage of profit I want to make. That can be between 10 and 50% depending on the job, the customer, pain-and-suffering factor etc. I never give them the price for materials, labor, installation and for sure my profit. One bottom line number and that's it. You're right, there are always people who want something for nothing. I run into a lot of people who make $500K per year and treat me like a crook for trying to make $50K.


From contributor W:
First, if you're charging $35 per hour and marking up your materials 10% you're not overcharging no matter where you are. You don't charge nearly enough, and yet you are not busy. Sounds like you need to concentrate on your selling and marketing skills, so you can charge a market rate, which I'm making a wild guess should be about 40% more than you currently invoice.

If you are working on $800k homes, you should be at $65/hour, 30% material markup on bulk/sheet goods, 100% markup on hardware/supplies, clean cut, late model truck.



From contributor A:
The difference between a nice guy and a door mat is that a nice guy is also nice to himself. Which brings us to my second point. Are you a laborer scrabbling for wages or are you selling a product? If you consider yourself a laborer, a reasonable markup for time, risk, and expense of ordering materials is expected.

If you are selling a product, the price of the material is of little matter to the selling cost which is set by the local market. If you are known as the low price guy, there you are, you made your bed, now lay in it. But if you are wanting to become known as a quality orientated shop, you compete with other quality shops. That means charging enough to do great work, take really good care of the customer, and stand behind your product no matter what.

I wasted a few years till I figured out that I couldn't afford to win every job. One out of ten bid wins is a good indication that my pricing is about right. That means you have to spend some effort on marketing to get enough bids in the door.

The great thing about the internet is the rise of places where consumers can tell about good and bad experiences. The guys that are selling cheap seldom get a good rating, low price doesn't overcome low quality.

Your costs are your costs, never tell a customer anything because they won't have a clue on what it costs to operate a shop nor the amount of time spent keeping equipment in working order, housekeeping, travel time, marketing, none of the hundreds of tasks that your $35 an hour for production time has to cover.

If you feel this is somehow unfair, then you have a low opinion of both yourself and your work. Be proud, if you hear a little gasp when they see the price, you are right on the line between getting the job and losing it. Hold your ground, let the customer fill in the conversation till they talk themselves into accepting the bid. Then the jobs you actually get will make you money and a reputation for good work.



From contributor B:
First of all, your website shows some beautiful work. You should be more than proud of your woodworking skills. Secondly, as others have said, you are very likely not charging enough to make your business viable. Most of us that have been around for a while started at a pretty low hourly rate by throwing a dart at a board (something like a desired wage) but then realized that hourly rate couldn't sustain a business, regardless of how low the actual overhead is or is perceived to be.

I have a hunch you are spending lots more than 40 hours per week running your business and doing your projects and have not many more dollars in the bank account on Friday than what you started with on Monday. I also have a hunch that you are not billing for every single hour you work at $35/hr. That would mean, assuming a 40 hour week, you would be adding a minimum of $1400 per week to that bank account, plus the reimbursement and whatever profit percentage you added to your material costs.

There are at least four components in determining pricing on a job - labor, overhead, materials, and profit. Although the exact items to include under each of these categories will vary from shop to shop, using the L.O.M.P. formula on every job will help you develop a business, rather than a hobby.

Labor includes the cost of wages, benefits, taxes, insurance, etc. Labor cost is pretty easy to break down to an hourly rate. Materials are your actual cost of materials, taxes, and delivery charges - pretty simple stuff so far.

Here is where it starts to get a bit more complex, and where I see many shop owners fail. Overhead is pretty much everything else. Insurance, rent, vehicle costs, advertising and marketing, dues and licenses, travel and entertainment, education, bookkeeping, sales and administrative time and costs, office machines and software, telephone, heat, electricity, machinery and tools, taxes, depreciation on hard assets, shop supplies not for specific jobs, machinery repairs and maintenance. If you add all those costs together for a specific time period, like a month or a year, then divide them by the working hours in that same period, you will have another factor to add to your hourly labor costs to begin to make up your shop rate. In other words, your shop rate is the sum of your hourly labor and overhead costs. If you are not charging enough to cover your overhead costs in your rate, it comes directly out of your pocket.

As a reality check for a going shop rate, you can do a couple of quick things. Call your local electrician or plumber and ask them what they currently charge for their rate. Realize that these guys probably don't have as sizable investment in tools and equipment as many woodworking shops do, as they primarily work out of their trucks and maybe a storage building with a small office. I have yet to meet a long standing electrician or plumber that doesn't buy materials and supplies at wholesale and sell them at retail. Another one to easily check is a local new car dealer's shop rate. You'll probably find out you are half or less than what they get every day from every customer.

The final factor is your profit. Profit is the reward, over and above your personal wages, that we all strive for by taking the risk to be in business. If you don't add profit, where do the costs for rework or mistakes come from? How about the costs for unexpected additional time on a job? If you don't add a sufficient percentage on top of all the L.O.M. costs, your are relegated to work far more than 40 hours every week forever just to try to stay open at starvation earnings. Maybe you'd be better off selling everything, getting a job, and putting the money in a money market account.

While everyone figures their profits differently, you should start with at least a reasonable margin over and above the total of LOM. 5-10% is way too low to be much of an incentive for me to stay in business. I can do at least that good in money market funds or bank CDís. You'll hear from some that you should charge what the market will bear. Most successful shop owners I know are somewhere north of 20% in their profit figures. There is one very important point that is not to be forgotten. It isn't always low bidder that gets the job. Conversely, the high bidder doesn't always lose the job. I don't know how many times I have bid double or more on a job and still have won it.

In my opinion, I'd rather work on fewer jobs and earn higher profits than to bid so low on a job that all I do is run about as much money into the bank account as I spend on a project. One little time and/or cost hiccup on those kinds of jobs can sink you. There will always be someone who will cut corners to underbid you.



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