Know your overhead, don't guess, and then price for value, not just volume. This is one of the fastest ways to build margin in your business without burning yourself out or chasing more work. Today we're talking about a challenge I see all the time in the field, in strategy sessions, and inside construction companies doing $3, $10, and even $25 million a year.

It's pricing. Not just how to price a job, but how to price it in a way that creates margin. Not just to cover costs, but to actually grow a business, pay yourself well, and to build something that's sustainable.

And I have a confession to make. Early on in business, when I was running my construction company, I was making this simple mathematical mistake and I lost so much money in the process. So I don't want you to go down the same path.

So today, maybe you're already doing things correctly. I want to give you that confidence that you're pricing your jobs based on margin, not just markup. And if you are making this mistake, I want to walk you through how to fix it, because this is one of the quickest ways to boost your bottom line and to put more cash into your pocket.

Because if you're making this mistake, you're going to be bleeding a ton of money, just like I was in the past. And here's the question. I don't know about you, but I felt this way before.

Have you ever finished a job and you thought, we crushed it in the field, but there's barely anything left in the bank? And if so, I could tell you, you're not alone. A lot of contractors feel this way. And this episode is for you.

Here's what I see all the time. You bid the job with a markup that feels right. So you're good there. You get the work, you execute it well. And then you still end up wondering where the heck did all the money go? And it's not because the job went bad. It's because the math wasn't right up front.

Most contractors are pricing to cover costs, but they're not building in what they need for overhead or actual profit. It's not a moral failure. It's a systems issue. And once you see it, you can fix it. And once you fix it, you should be good to go. As long as you can explain this to everybody else on your team. So they don't make this common mistake as well.

So check this out. Here's a simple way to look at it. And I'm going to try to keep things very basic because trying to explain this over audio can be challenging. So here we go. You have overhead as a percentage of revenue. And if you take overhead as a percentage, plus your target net profit percentage, you'll arrive at your required gross margin. So if your overhead is 20% and you want to make 10% profit, you need to deliver 30% gross margin minimum.

But here's where it gets tricky. Markup and margin are not the same thing. Let's say your job costs are $100,000, which includes your material cost, your labor costs, and maybe you have some subs and other direct and indirect costs related to the project. So they add up to a hundred grand.

Then you want to apply a markup to it. So before we talked about your overhead being 20%, and then you want that 10% desired profit. So you're going to mark it up by 30%. Sounds easy, right? So if you take $100,000, and this is what most contractors do, and this is what I did in the past, you take $100,000 times 1.3, .3 is the 30%. And then the one is just marking it up by itself. So 1.3 to get the number, you would arrive at $130,000 as a price to your customer.

Now, I might be a little repetitive here because if you're following along on audio, it's a little bit harder to do. So let me just go over that again. One more time. You have $100,000 in cost and you multiply it by 1.3 to get a 30% markup. This is what most contractors do. That's wrong because here's the thing. It's not a 30% gross margin. It's actually 23.1%. Why? Because margin is calculated on the selling price, not on the cost. So your $30,000 of markup divided by $130,000 of revenue equals 23.1% gross margin.

That's the problem. If your goal is to hit a 30% margin, you need to mark it up by 42.9%, not 30%. So let me give you the math here. This is the better way to do it, to keep things simple. You have $100,000 in cost. Instead of multiplying it by 1 plus your desired profit, so you're multiplying it by 1 plus 0.3 for 30%.

Instead of taking your cost, $100,000, and multiplying it by 1.3, which is 1 plus your desired markup, your overhead and profit, what you do instead is you'll take your $100,000 in costs and you'll divide it by 1 minus your desired markup. Okay. It may seem a little counterintuitive, but I'm going to pull my phone here and do it along with you. $100,000 in costs divided by 1 minus our desired markup, which is 0.3. So I'm going to do 1 minus 0.3. That's 0.7. And that gives me $142,857. All right. So that's the 42.9% markup that I was talking about originally, which you actually need to mark it up by to get to 30%.

Now, you may be listening to this. You're like, what the heck did you just say, Steve? You're driving down the road. You're about to drive off the highway. Do not do that. If you're running along a trail and you just ran into the bushes. Okay.

Let me just back up and just say it one more time. So you, this really sinks in because this took me a while to get, maybe I'm just slow. Maybe you're a lot faster and you're like, I get it. We already do it. We're good. Cool.

Now you have the confidence to move forward. Just make sure your team understands the same exact math. You have $100,000 in costs. Most contractors multiply it by 1 itself, plus their desired markup, which is 0.3. That is wrong. Do not take your cost times 1.3. That is incorrect. And you'll get a 23.1% gross margin, not the 30% gross margin you're trying to get to because you're marking up your cost, not the final price that you're going to give to the customer.

So to do that math, remember you have to take $100,000 in cost and divide it by, not multiply, divide it by 1 minus your desired profit. Like I said, you're like, Steve, I'm not that slow. You're the slow one. Okay. Maybe I'm the slow one, but I could tell you a lot of contractors out there are making this mistake. And it's just a simple math mistake with their pricing.

And sometimes the owner gets it. So you may be like, I got this, but then your estimator may not be marking up things correctly. And you don't find it until later on. And it could be a huge discrepancy because think about it. If you're doing multiplication the wrong way, instead of division the right way, that's about a 7% spread that I just showed you in this example, bid out a million dollars of work. That's 70 grand of profit that's leaking in your business.

At the end of the day, it's simple math, but if no one ever broke it down for you, it's so easy to miss. This isn't about being greedy. It's about building a business that actually works for you, your team and your future.

Because when pricing is wrong, it creates a ripple effect everywhere. You feel pressure to take on more jobs to cover your overhead. Cash gets tight. Even when crews are running hard, the owner take home never quite gets to where it should be. Like you're the last one getting paid. Right? I've been there before too.

And that's why the topic of pricing is so critical. In fact, it's one of the eight levers of cashflow. And I put together this free cashflow blueprint at coltivar.com. I'll provide the link in the show notes. So you can go there, you can download it for free. And it walks you through exactly the breakdown of cashflow. And then the eight levers. I also provide a free checklist and a plan for you to get your business in order. So make sure you check that out. It's totally free. It's at coltivar.com.

If you've never really sat down and calculated your gross margin target, if your markup is based on feel instead of facts or whatever your friend down the road said, they're marking up their jobs at this guide will help you.

Now let's talk about the elephant in the room, because what you may be thinking, cause I hear this all the time is, but I can't charge that much more in my market. I'm already getting pushback from my customers. I'm already losing jobs to my competitors. Trust me. I hear this all the time and I get it, but here's what I'll say to that.

If you're reliable, clean, consistent, and solve real problems, you're worth more. You're not just selling hours or materials. You're selling trust, outcomes, peace of mind. So stop trying to win every job on price. Start trying to win the right jobs at the right margin. That shift from cost-based pricing to value-based pricing changes everything.

I was talking with my brother just the other day for lunch, and he treated me to lunch for my birthday. And we're talking about when we used to run this landscape company together. And now he has a very successful design build company here in Denver. And we're just shooting the breeze, talking about the past reminiscing a little bit. And I said, what do you think was one of our biggest mistakes looking back now that you have your own company and it's successful? And he said, we should have charged more. And I completely agree with him, but we didn't.

And that's why I'm so passionate about this topic because pricing changes everything in your business. But I didn't have the tools. I didn't have the resources that are available today. I didn't understand the power of brand. I didn't leverage our expertise and the value that we're delivering more than I should have. And that's why I'm so adamant about this topic.

So many businesses, when we go in there and we fix them, one of the first things we do is we look at their pricing. We look at their approach to estimating. We look at their offer. We look at their website. We look at everything related to pricing first, because that's the number one lever.

So let's zoom out. Let's say you're doing $5 million a year in revenue. If you improve your average gross margin by just 10%, that's $500,000 in extra gross profit. No cruise, no extra overhead, just smarter pricing and no more mistakes with the math. Scale that to $10 million. And now you have a seven figure swing without adding chaos to the business.

So here's the takeaway. Know your overhead, set a real net profit target back in the right gross margin by doing the math. Remember, division over multiplication. Use the right markup to get there. Don't guess. And then price for value, not just volume. This is one of the fastest ways to build margin in your business without burning yourself out or chasing more work.

And if you want the full framework, including the markup ladders, the margin math, and the other seven levers that drive free cashflow, like I said, be sure to grab the free cashflow blueprint. It's in the link in the show notes. It's simple, it's free, and it's built for contractors like you.

All right. Thanks for listening. And I'll catch you on the next episode. Take care. Cheers.