How to estimate profit margin on a job before you quote it

Add up everything the job will cost you, including a fair share of your running costs, then divide by one minus the margin you want. If a job will cost you 1,040 and you want a 20% margin, the price is 1,040 ÷ 0.8 = 1,300. The steps below show where the 1,040 comes from. The numbers work in any currency.

Step 1: labour, at what it costs you

Estimate the hours, including travel and clean-up, and multiply by what an hour of labour costs you, not what you charge for it. That cost is the wage plus everything that comes with it: payroll tax, insurance, leave, pension or superannuation contributions. Example: 6 hours at a cost of 55 an hour is 330.

Step 2: materials and other direct costs

List the parts and materials at what you pay for them, and add anything else the job alone causes: disposal fees, equipment hire, parking, permits. Example: materials 420, disposal 50. Direct costs so far: 330 + 420 + 50 = 800.

Step 3: a share of your overheads

The van, insurance, software, phone and office do not belong to any one job, but every job has to help pay for them. Divide a year’s overheads by the hours you expect to bill in a year. Example: 60,000 of overheads over 1,500 billable hours is 40 an hour, so this 6-hour job carries 240. Total cost: 800 + 240 = 1,040.

Step 4: price for the margin you want

Margin is profit as a share of the price. To hit a target margin, divide the cost by one minus the margin: 1,040 ÷ (1 − 0.20) = 1,300. Check it the other way: 1,300 − 1,040 = 260 profit, and 260 ÷ 1,300 = 20%.

A common mistake is to add 20% to the cost instead: 1,040 × 1.2 = 1,248, which is a 20% markup but only a 16.7% margin. The markup vs margin post explains the difference.

Step 5: sense-check the quote

• Is the hourly rate this implies (1,300 ÷ 6 hours ≈ 217) in line with what the market pays for this work?
• What happens to the margin if the job runs two hours over? Re-run the numbers with the extra time.
• Is there a part with a long lead time or a volatile price? Quote it with a validity date.

After the job: compare

An estimate only gets better if you compare it with what happened. Record the hours and parts against the job as you go, then look at the real margin when it is finished. The job profit calculator does the sum, the margin calculator and markup calculator convert between the two, and work orders keep time and parts on the job.