Your profit margins are not your customers' business.  We sent a major customer packing because he insisted on seeing our books to make sure we weren't making too much from him.

All this machinery making modern music can still be open-hearted.

Duly noted, Tick.  Maybe he was trying to see if you lived up to your handle....My point is just to see how we copmare to the engineering community in general.

It used to be that people were happy making 4-6% on a job and therefore bid 10% over their costs, in order to cover those unforeseen expenses.  Now a business isn't considered successful unless they post profits of 12-14% and are therefore quoting bids at a 20% profit.  At least, those are the numbers I hear in my industry.  I'm not directly related to the accounting aspect of it, nor am I going to tell you what industry I'm in.  I have to keep some privacy.

--Scott

For some pleasure reading, the Round Table recommends FAQ731-376

In the custom automation business you generally shoot for 30% Gross Margin which ends up giving you about 5% profit margin at the end of a job.  So many cusom automation outfits shoot too low.  That's why you see them dropping like flies.

As for showing the customer your margins; never.  If they don't like your price then you can negotiate on that.  As the Tick said they have no business knowing how much you make.

Sean Dotson, PE
Inventor Tutorials & More
www.sdotson.com

I find the position of TheTick and SeanDotson interesting.

The company I work for now (may be different for small companies or individuals) does everything on a fully aduitable basis.  That means we see our vendors costs and they are allowed a set percentage for overhead and then another set percentage for profit.

If I decide to try going it alone in the next couple of years I would take the same approach as TheTick and SeanDotson and not reveal my margin.

On the reverse side, I wouldn't dare ask a supplier what his margins are (I have gotten some to reveal during unguarded conversation).  It's none of my business.  Either I like the price or I don't.

All this machinery making modern music can still be open-hearted.

The profit margin is generally higher for more specialized services (say 20%) and lower for more commodity services (say 5%).  This is the general case.  For each of these, there his a huge variation from company to company.  Companies with excellent project management skills will typically achieve higher profit margins.

Your profit, regardless of the field you're in, should excede the return you can achieve by investing your money in the stock, bond, or "whatever" market, if you
are not beating, by a comfortable amount, what you could make by investing your money and sitting on the beach, and cashing the checks, then you are working for either: the fun of it, or, nothing, period. The only factor that I can think of that modifies my little theory is, the prospect of greater (much greater) profits in the future at a reduced return today. Today, I think 15 to 20 percent is reasonable, depending on quantity, although many companies are working at 10 to 12 percent in the economy of late.

regards,
JTMcC

The answer to your questions depends on which business you are in. I'm assuming you are a consulting engineer PorkChopBaby. You can expect about 5% over the long run. 10% in this business is considered great.

Management consultants get about 30%, lawyers do about the same, and contractors do about 2% these days. One reason for engineering profit margins being as low as they are is that its a low risk business. There is practically no capital investment involved, and its relatively easy to shed cost if you are in a downturn. The only time that you really do better than the construction industry standard of 5% is if you offer some niche service that pays a lot. Management consultants and lawyers do better basically because they are professionals at getting money out of people - if you want force someone to pay you for something, you go to a lawyer.

As JTMcC points out, the return should be better than what you can get on the stock market. The thing about consulting services is that there is practically no capital investment - the business of consulting operates purely on a cash flow basis, so the concept of return on investment is less relevant.

My firm's books are rigorously audited by our clients which are mostly state departments of transportation. Our profit margin is fixed, the overhead quantities for things like health insurance and office space are also fixed, and staff salaries are fixed. Its pretty ridiculous really.

ludvic, I'm curious about the 2% and 5% you mention in construction. Where do you get those numbers? Myself and other contractors I personally know plug in anywhere from 12% to 20%, depending on several factors. I read this year that heavy and highway contractors were using 12% to 14%, way down from the last few years. I'm not doubting your numbers, I'm just wondering what type of construction and where you come up with them.

regards,
JTMcC.

JTMcC, 12% to 20% sounds like what contractors use for overhead + profit, which is frequently confused with straight up profit. Overhead includes head office, jobs which they lost money on etc. Are you sure is wasn't O+P that you read about? Insofar as I'm aware, no highway contractor of any size has made 20% profit since the 1950's with the interstate highway construction. Check out the financials of Bechtel or even Halliburton (the vice president's favorite). They generally have financial statements on their websites.

Often contactors make so little net profit margin because they sub contract so much of what they do. If they have a $10 million building project, they will only complete $1 million of it themselves. Many of their subs will make 10% profit on their chunk of it though.

But if you take on a billion dollar contract, outsource 90% of the work, and make 10 million on your part of it, have you made 10% or 1%?

Beats me!

If it was one guy on the phone, and a big insurance premium, he's done well either way.

Cheers

Greg Locock

ludvik,

I still want to know where you got those numbers. We have been in business over 10 years, no theory here, before that I bid work for similar, but larger, contractors. I have a substantial grasp of the difference between overhead and profit, my 16 year old daughter knows that one, so you do insult my intellegence somewhat. 20% to 25% was the norm in the mid 90's, some are struggling along at 12% these days. I'm stuck on 15%, no matter what.
Bechtel, who I've worked for in the past, manages a lot more projects than it actually builds these days, thats just my observation. No one in their right mind would take the risk, agrivation and heartache : ) for 5%, my opinion only.
For 5%, you can sell the cranes, trucks, tools, welding machines, office trailers, the real office, the yard, lay off everyboby, invest your money and not work a single hour , just cash the checks : ).

regards,
JTMcC, slugging it out for a worthwhile return.

A good businessman will base his price on his cost and the risk associated with the job.  The only exception is when a company needs to buy a job to keep their key employees or if they want to gain experience moving into a new area of design.  

Consequently, it is best to stay away from high risk low yield adventures in life.

CRG

Well, I don't deal with large construction proects, but I have a quote that, in a way, guides my quoting process for product designs and machinery.

I wish I knew the source but here it is:

* Ok, say you are an eye glass salesman and the customer asks you how much it is going to cost to get his new glasses.  You look him straight in the eye and say "It will be $200".  If he dosen't blink you quickly follow up with "for the lenses" and if he still does not blink you say "Each". *

Now I am not saying take them for all they got, but what they are willing to pay and what it costs you are two different things.  And your profit margin is not their business (unless it's a gov. contract then the books are open to the auditors...)

L8r
Wayne

Wayne,

I was once told by that if they are easy, do them twice.

CRG

JTMcC,

Sorry for being slow getting back but I was on vacation. Also sorry didn't recognize the amount of expertise you have in the field of the economics of construction. You obviously know what you are talking about.

So I've been digging around for some hard data on exactly what construction firms earn, and have come up with the following from Flour and Jacob's respective SEC filings:

Flour net earings for 2002 were $163mil on revenue of about $10bil which is 1.6%. Jacobs earned $110mil on $4.55bil which is 2.4%. These are after tax numbers, so the pre tax earnings of these firms is probably about 2.5% and 3.7% respectively.

Also, these earnings are aggregrate for all projects, and not for a single one. Obviously they don't make money from everything they do.

I noted that you are in the petrochemical field. Is that a more profitable line of work that say bridges?

ludvik,

Thanks for the reply, I didn't mean to come off as an "expert", but I do have experience in the field.
A couple of observations.
Looking at 2002 numbers might be missleading as the last three years have been a slaughtering field for much of the construction market.
Those numbers are very likely determined after corperate bonus' are handed out, business trips to the Riviera and Bahamas are made, and summer cottages in Mexico are paid for :)

JTMcC.

ANDREW9

Everything is hard for a small company -- quantity pricing,
software, patenting, space, administration etc. costs are often prohibitivelly high.


 

<nbucska@pcperipherals.com>