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What’s your best price?

Management | April 1, 2012 | By:

Maybe you have a shot at providing equipment for a major sporting event or a large wedding. The job is complex: some equipment will be from your inventory, some subrented; subcontractor services will be required; temporary labor will be needed; you’ll incur transportation and travel costs. A lot of money is at stake, both yours and your potential client’s. And the client is weighing multiple bids.

So how do you get the job and still make some money? Rental companies large and small utilize all sorts of job-costing methodology. Regardless of your system, here are some things to consider.

First, you have to define your direct job expenses: those expenses specific to the job. These include labor (regular pay, overtime, allowance for payroll taxes), delivery (truck, fuel, third-party shipping, etc.), subrent expenses, third-party contractors, temporary/contract labor, hotel, meal and travel expenses. Obviously, you will have to estimate some of these. The sum of these expenses is the break-even point of the job; at this price, forget about covering overhead or making a profit.

Some companies have the attitude that any dollar over the direct job cost is a dollar to pay bills that they wouldn’t otherwise have. The biggest mistake I see companies make is the failure to go back after the job and tally the actual direct expenses. Knowing where you made mistakes in your cost assumptions is invaluable in costing your next job.

The next category of expenses is direct overhead expenses: operational expenses you incur in support of jobs that may not be specific to a single job. These include employee health and workers’ compensation insurance; warehousing costs; labor for warehouse management, dispatch, etc.; warehouse equipment and supply expenses; and inventory repair, maintenance and cleaning expenses.

Other expenses are administrative overhead: general and administrative expenses necessary to conduct business. These include labor (management, accounting, IT, human resources, safety, sales, etc.); insurance (liability, auto, property, etc.); facility rent; utilities; property taxes; computer/IT expenses; advertising, bad debt/collection expenses; legal, accounting and other professional fees; office supplies; telephone; business licenses and fees; interest, bank and credit card fees; and travel, entertainment and training.

The best way to include direct and administrative overhead expenses into your costing system is to determine what percent of revenue these expenses actually are. For example, most companies have their 2011 financial results by now. If you did $1 million in revenue and your direct overhead expenses were $100,000, then they totaled 10 percent of your revenue. In this example, 10 percent of the anticipated job total billed to the customer would be your direct overhead cost factor.

Some companies treat profit the same way: they may target a profit percentage of 20 percent and build that into their costing model as if it were any other expense.

In addition, some companies include a factor relating to equipment wear and tear or depreciation. Your equipment lasts a finite number of rentals or years. Equipment cost is a valid operating expense; at some point you will need to spend money to replace older, worn out equipment. Some companies use the actual depreciation number as a direct operating expense; others add a factor of 2 to 3 percent of the acquisition cost of the equipment per rental.

The aforementioned job costs are tangible factors. Intangible factors complicate the job-costing model: What is the possibility for future jobs with this client? Will this job gain your company exposure to other potential clients or a new geographic market? Is there the potential for “add-on” type items that weren’t in the initial competitive portion of the bid that can be done profitably without the need for discounting? When will you get paid for the job? (For reduced pricing, you may specify that you are to be paid upfront or on the completion of the job.) What are the jobsite conditions? Is it in an extreme climate, a muddy field, in the sand or near the ocean? Are there time restrictions for setup and takedown? How easily can your crew access the site? Does extreme care need to be taken to avoid damage to expensive landscaping?

You may have the best job-costing model in the world, but it may price you out of the job every time. Consider all tangible and intangible factors before putting your best price forward.

Gary Stansberry, president of The Stansberry Firm LLC, specializing in business sales, fair market business valuations and positioning businesses to increase their value.

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