Do you know your new residential construction sales, replacement sales, or service sales for the past month or the past year? Do you know the overhead in your service department?

How about the overhead in your replacement department, or maybe your residential new construction department, or for that matter all the departments that you do business in? Do you know your average gross margin percentage in all those departments mentioned above? Do you know how much you either made or lost in each of those departments?

Sad to say, but most of the industry - I believe it to be about 90 percent - does not know the answers to any of the above questions. If you answered, "I don't know," or "I can come close," the bad new is you belong in the 90 percent.

Figure 1: Without all the proper information it can be difficult to price out jobs. This chart displays an example of Ligon's simple pricing strategy for contractors. (Click on the chart for an enlarged view.)

I think it is fair to say that without this information most of us aren't running our businesses like businesses. A real business owner can answer all of these questions with a yes.

It seems without all the proper information it would be difficult to price out jobs. If you are in the 90 percent who don't know all the facts, how can you calculate the correct selling price for jobs?

To make things complicated we could discuss high labor content jobs or high material content jobs and then solve the pricing problem using dual overhead factors. If you know those factors, then it is safe to say you are not in the 90 percent.

Assuming taxes are paid at the time of materials purchase, a properly priced job would include the cost of goods, the 35 percent replacement department overhead, and the 10 percent desired net profit before taxes. Solving the pricing puzzle can be as simple as dividing the cost of goods by 0.55.

Once the correct selling price is determined, calculate the percentage for replacement department overhead and then the percentage for desired net profit. Totaling the three figures should verify the previously calculated correct selling price. (See Figure 1.)

The divisor method can also be a good method to use.

Figure 2: For each job contractors price, they must keep in mind the gross margin percentage. Profit is made when the gross margin is larger than the overhead percentage, as seen in Ligon's example here. (Click on the chart for an enlarged view.)