360 Difference: Information Technology Solutions for Builders, Remodelers, & Contractors

How Much Should I Charge?: Pricing Basics for Making Money Doing What You Love
by Ellen Rohr

List Price: $19.99
Amazon Price: $14.19

I think Ellen Rohr's book is the simplest and quickest book to read out there for contractors (and other service based businesses for that matter) that explains how to set a price for their services based on the billable hours a company will generate.

Where Did The Money Go?- Easy Accounting Basics for the Business Owner Who Hates Numbers
by Ellen Rohr

List Price: $19.99
Amazon Price: $14.59

The excellent companion book to Ellen Rohr's How Much Should I Charge. A must for every aspiring contractor as well as many experienced ones too. Finances and financial language explained in colloquial language that makes sense.

Running a Successful Construction Company (For Pros by Pros)
by David Gerstel

Chapter 5 Estimating & Bidding is an excellent overview of the key concepts involved in understanding overhead profit and pricing.

David Gerstel in Chapter 5 of his book The Builders Guide to Running a Successful Construction Company on pgs 167 through 168 describes the method as "Capacity based markup".

While I would love to take credit for coining the phrase Capacity Based Markup I took it from author David Gerstel from his book Running a Successful Construction Company starting on page 166.

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....The uniform percentage method has the great appeal of simplicity. It is adequate for a construction company that does projects of fairly uniform size and type. A uniform percentage markup can work for a builder specializing in moderate-size residential additions or small retail store interiors and never straying far beyond his or her niche. However, you can run into trouble using a uniform percentage if you move away from a narrow range to a much wider range of projects–or if you experience large variations in your total volume of work.

To understand the potential problems, think of your company as a shop with "X" amount of capacity and with all of your overhead costs going to support that capacity. if you are in the early stages of your career and are working as your own project lead as well as general manager of your company, your capacity may be one job at a time. Later you may employ three lead, each of whom runs a job so you have the capacity of three jobs. For practical purposes–and here is the key point–you can generally figure that each lead uses the same amount of your overhead support, regardless of the size of job he or she is running.

As the top sidebar at right suggests, those jobs can vary greatly in terms of the direct costs of building them, yet take roughly the same length of time with the result the small one will soak up as much of your capacity–as much overhead–as the larger one. When that is the case, if you are using uniform percentage markups, the small job is recovering less than the overhead needed to support it. If you have a year packed with such jobs and you are marking up with a percentage derived from a prior year of larger jobs, you may end up falling far short of recovering your overhead, as the figures in the bottom sidebar illustrate.

Capacity Based Markup

Because of the limits of the uniform percentage method, companies doing projects of varying size and experiencing large variations in volume year to year need another method of marking up for overhead. I call this method "capacity based markup." It works like this:

•Figure Capacity
•Figure overhead for the year
•Figure amount of overhead you need to recover weekly per job
•Figure the number of weeks a job will take
•Multiply your weekly overhead figure by the number of weeks to get get the overhead you need to charge on the job

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Understanding, Allocating and Recovering Overhead
(Note: This links to the ASA Contractors Knowledge Network Site rather than the Amazon or BuildersBook Site)
Irv Chasen, author of this kit which includes a videocassette and manual, is retired CEO of his family's 89-year-old contracting business. A 32-page color-coded manual accompanies the 2 hour and 46 minute video presentation, interactively explaining where your company is losing money and what to do about it. Finding out what you don't know about critical overhead costs may surprise you!
Learn about:

• Cost accounting
• Fixed overhead
• Variable overhead
• Budgeting and overhead allocation to field labor
• Job analysis
• Bid strategy

Markup & Profit: A Contractor's Guide
by Michael C. Stone

Despite the problems associated with an Estimated Total Volume Based markup system which the author advocates (see the 360 White Paper Markup: Comparing the Traditional Volume Based Markup vs. the PROOF/Indexed/Labor Allocated method) this is still a good book with a lot of useful worthwhile information in it.