BENCHMARKING YOUR BUSINESS GPM - Your Best Friend

During the last recession, a Los Angeles-based residential installation contractor bid on Phase 2 of a four-phase project along with three other contractors, including the contractor who did Phase 1.  

We were unsure why the owners were putting Phase 2 out for bid and thought they might be dissatisfied. Consequently, this contractor felt if he won Phase 2, he’d probably get Phases 3 and 4.
 
Prior to this, the contractor bid residential installation jobs with a gross profit margin (GPM) in the mid to high 30-percent range. Two years later, jobs were so scarce and the market so tight that he bid work in the low 20-percent range. He bid this $300,000-plus job at 17 percent to give it his best shot.
 
Of the four bids, he was the second lowest. He’d beaten the original contractor’s bid by $12,000. The owners met and decided to throw out the low bid, making him the low bidder. 

But the owners decided for $12,000 they didn’t want to change horses in midstream. It was then we realized we’d been “shopped.” The owners probably never intended to change contractors. Their intention, we thought, was to keep their contractor honest but at the other bidders’ expense.
 
We bid this project at 17 percent GPM, and still didn’t get the job. The lesson is that things get ugly in a recession, and all the rules change.
The concept of gross profit margin is one of the most important benchmarks for a contractor to understand. It is the best indicator of what is happening in your market. To calculate it, you add the net profit that you put on a job to the general and administrative (G&A) overhead costs bid into the job. Divide the total dollars of GPM on a bid by the total price for the bid. This will give you a GPM percentage.

Gross profit margins reflect the supply and demand curve. Too few contractors chasing a finite amount of work will drive prices (and GPMs) up. In contrast, an over abundance of contractors chasing the same amount of work will drive prices and GPMs down. In a recession, an overabundance of contractors chasing a shrinking amount of work means GPMs plummet 10 to 20 percent. That’s what happened to the contractor in Los Angeles.
 
Calculate the GPM on a number of your jobs and see if you can identify a trend. Compare your results to the benchmarks below. Calculate the GPM on any work that you subcontract out separately as it will distort the results. You may be surprised how consistent the GPM is on the work that you bid.

The author is president of J.R. Huston Enterprises, a Denver, Colo.-based green industry consulting firm. Reach him at  800/451-5588, benchmarking@gie.net or via www.jrhuston.biz.