Lesson B101.5 · Business Finance 101: Run It Clean
Price from your costs: the pricing floor
4-minute read · No dated figures
Photo: Otto Rascon / Pexels, Pexels License
The short answer
Figure your overhead per productive day, then add the job's share of it to the job's direct costs. That sum is your pricing floor: below it, the job loses money once overhead is counted. Profit goes on top of the floor, at a margin you choose, and margin and markup are different numbers.
Start with overhead per productive day
Overhead is everything the business pays for that isn't tied to one job: insurance, the office and office pay, phones, software, bookkeeping, marketing, the shop, and your own pay for the hours you spend running the business. Add up a year of it.
Productive days are days a crew spends on a paying job. Count them honestly. Rain days, shop days, holidays and estimating days don't count.
Overhead per productive day = yearly overhead ÷ productive days.
Example (made-up numbers, not a price guide). Lena's company has $150,000 of yearly overhead. Its one crew had a 30-week season, 150 workdays, but lost 25 of them to rain, shop work and holidays. That leaves 125 productive days, so overhead is $1,200 per productive day ($150,000 ÷ 125).
If Lena had divided by all 150 workdays, she'd get $1,000 a day. Price every job that way, and the 125 real days recover only $125,000. The year ends $25,000 short.
The pricing floor, then profit
Pricing floor = the job's direct costs + its share of overhead. (B101.4 lists the direct costs.)
Profit goes on top, and you choose how much. The National Pavement Maintenance Contractors Association (NPMCA) publishes no prices and no margin targets. Your costs set the floor. Your market and your service decide how far above it you can price.
Know which number you're using:
| Term | Formula |
|---|---|
| Markup | Profit ÷ cost |
| Margin | Profit ÷ price |
| Price from a markup | Cost × (1 + the markup) |
| Price from a margin | Cost ÷ (1 minus the margin) |
Example, continued. A lot's direct costs come to $3,800, and the crew needs one productive day. The floor is $5,000 ($3,800 + $1,200). If the owner wants profit to be 20% of the price (a math example, not a target), the price is $5,000 ÷ 0.80 = $6,250. That's $1,250 of profit, a 25% markup on the floor. Mark the floor up by 20% instead and you get $6,000, which is only a 16.7% margin.
Small jobs, long drives and saying no
- Small jobs. Every job carries the cost of a trip and its share of the day. If Lena's crew can seal four driveways in a day, each one carries a quarter of the day's overhead, $300, before any sealer goes down. Set a minimum job charge from those costs.
- Long drives. Mobilization grows with distance. Count the drive on every job.
- Rain. Your productive-day count already allows for lost days. A big job that gets rained out halfway still costs a second trip, so plan for it (B101.4).
- Saying no. If a customer won't pay the floor, the job loses money once overhead is counted. Say no, or offer a smaller scope that's still honest work. A small add-on next to a job you're already doing, on a day you'd otherwise lose, can make sense if it covers its direct costs. Make that a decision, not a habit.
The floor is the least you can take, not your price. Your price can sit well above it when you show up when you said, give clear estimates, finish clean and stand behind the work. Business Finance 201: Grow Without Breaking covers building offers around that.
Your Move
Do this week
- Add up last year's overhead, including office pay and your own pay for running the business.
- Count last year's productive days honestly: days a crew spent on a paying job.
- Divide to get your overhead per productive day, in the Pricing floor tool or on paper.
- On your next estimate, list the direct costs, add the overhead share, and write down the floor before you choose a price.
Log it: Pricing floor figured.
Common questions
What's the difference between markup and margin?
Markup is profit as a share of cost. Margin is profit as a share of price. A 25% markup is a 20% margin.
What margin should I aim for?
That's your call; NPMCA doesn't set one. Start from what profit has to pay for: the taxes on it, the reserve, equipment replacement and growth. Then see whether your market will pay it.
Should I match a competitor's price?
Not below your floor. Their price reflects their costs and choices, not yours.
Watch out for
- Counting every workday as productive.
- Treating markup and margin as the same number.
- Leaving your own pay out of overhead, then calling what's left profit.
- Pricing from a per-square-foot number someone posted online.
Free help
- America's SBDC: Find your SBDC for free business consulting
- SCORE: Free business mentoring
Free practice
Lesson check
5 questions on this lesson, one at a time, with the answer and the reason after each. Pass with 4 right, including every must-know question.
This is general education, not tax, legal, investment or insurance advice. Rules change and every situation is different. Check the sources below, and talk to a qualified professional before you act on it.
Sources
- America's SBDC: Find your SBDC
- SCORE: SCORE home page