Net cost, mark-ups and margin: setting the right price

"We apply 1.30 and we're done." That reflex is expensive. The sell coefficient is not a magic number inherited from a predecessor: it has to cover identifiable charges, and it can be calculated. Here is how to build it — and, more importantly, how to check afterwards that it did its job.

Net cost: the starting point

Net cost is the direct cost of the work: the material installed and the time spent installing it. Nothing else. Not the site set-up, not the design office, not the van, not the margin.

It is a starting point, never a sell price. Selling at net cost means working at a loss, since every indirect charge remains unfunded. The question is therefore not whether to apply a coefficient, but which one.

What the coefficient must cover

Four layers sit between net cost and sell price.

• Site costs. Set-up and removal, supervision and site management, lifting, access equipment, scaffolding, waste removal, power, security. These depend on the job: an occupied building is nothing like an empty new build.
• Company overheads. Management, design office, accounts, premises, insurance, vehicles, licences, IT. They exist whether the job happens or not, and are spread across total turnover.
• Risk allowance. Technical risk, weather, delays caused by other trades, quantities that drift. On a technical package, trade congestion is not an optional risk.
• Profit. What is left, and without which the business does not invest.

Calculate your coefficient rather than inherit it

The method is straightforward: start from last year's accounts.

If your overheads represent 14% of turnover, your average site costs 9%, and you are targeting 6% profit, then the sell price must cover net cost plus 29% of the sell price. The coefficient to apply to net cost is therefore not 1.29 but 1 / (1 − 0.29) ≈ 1.41.

This distinction is the most widespread error in the trade. A margin percentage expressed on the sell price is not added to the net cost: it is divided into it. Confusing the two loses you a few points on every single job, without you ever understanding why.

One global coefficient, or one per cost type?

Applying a single coefficient to the whole net cost is simple but crude: material and labour do not consume the same charges. Material ties up cash and carries price risk; labour carries supervision, travel and under-activity.

Many firms therefore use two distinct coefficients — one on material, one on labour — then a global sell coefficient applied to the resulting cost. The structure looks like: cost = material × k_mat + hours × rate × k_lab, then sell price = cost × k_sell.

The benefit is twofold: you can tune by package type — a material-heavy package behaves nothing like a labour-heavy one — and you keep a clear view of where the margin comes from.

Gross margin, real margin

Once the price is set, you still need to know what it earns. Two indicators, not to be confused.

• Gross margin = sell price − net cost. It measures what is left to fund overheads and profit. It always looks flattering.
• Resulting margin = sell price − (net cost + costs actually incurred). This is the one that counts, and the only one that tells you whether the job made money.

Express both as a percentage of the sell price, not of the cost — that is the convention, and it avoids nasty surprises. A job at 15% margin on sell price is not the same thing as a job at 15% on cost.

Checks before submitting

An estimate should be verified. A few checks, worth doing every time.

• Is the resulting margin positive once fixed extras are entered? If it is negative, the coefficients do not cover the charges: that is a warning, not a detail.
• Is the labour-to-material ratio consistent with this kind of package? A large gap against comparable jobs deserves an explanation.
• Is the total hour count compatible with the programme and available workforce? A price that is right on paper but undeliverable is not a good price.
• Have zero-value or outlier items been reviewed?

Closing the loop with actuals

The real gain comes from feedback. At the end of the job, compare booked hours with estimated hours, and actual purchases with planned material. Three jobs are often enough to reveal that a given item type is systematically under-priced.

Feeding those gaps back into the price database and the coefficients is what makes a company estimate better after two years. Without it, the same mistakes repeat with remarkable consistency.

In short

The sell coefficient is not a tradition, it is a calculation: it must cover site costs, overheads, risk and profit, and it derives from your own accounts. Watch the trap of a percentage expressed on sell price, which divides rather than adds. And measure the resulting margin, not the gross one — it is the only one that tells the truth about the job.