We are a low voltage contractor and provide services in various specialties, from Fire Alarm to Audio/Visual systems and Structured Cabling to Security/CCTV systems. Historically, we have used a Gross Profit % to monitor overall health of the company and it has seemed to be on track over the years. However, we are finding extraordinary issues with this method when trying to set pricing models and evaluating project performance.
We have some projects that are 90% labor and other projects that are 90% material. With the difference in direct labor cost % to overall direct cost, it seems the Gross Profit % is very misleading at the least. If we apply the same Gross Profit % requirement to the various jobs, it seems that we will lose the projects we want to have and win the projects we don't want.
In regards to pricing models, the Gross Margin % continues to present challenges. If we look at a Gross Margin % of direct labor (and burden) without considering anything else, we would be undercharging across the board (by close to $20/hr). If we apply the standard Gross Margin % to direct material, we would be overpricing and in most cases this would push the material price over MSRP....
With this in mind, I have found intriguing discussions online about Man-hour Margin and different productivity metrics that seem to combat the challenges. It seems like this may be a better measure of performance for us. It also appears that a more direct Activity Based Costing model would be appropriate with a heavy emphasis on the direct labor $.
And finally, my questions... Do any of you have similar projects that have dramatic differences in direct labor and material? If so, are you finding that indirect and overhead costs are best tied to the labor dollar or a combination of material and labor or are you using a Gross Margin %? Is this something you monitor monthly, quarterly or annually?
Lastly, I see some will assign different Gross Margin % targets for different departments/service offerings. In my mind, this is the same thing as applying indirect and overhead to the direct labor dollar. Is this an appropriate method?
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Tom Atkinson
Managing Partner
A-Com Technologies
Albuquerque NM
(505) 362-9245
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