Construction projects can be unpredictable. A miscalculation on materials, on how long a job can take, or simply a rounding error can lead to incorrect budgeting. This is something to expect and, as previously mentioned, can be unpredictable.

What happens here is the understanding that profit can be volatile and most often will not be perfect - these would be the variable costs. Fixed costs, on the other hand, should be measurable and should stay constant.

Understanding the fixed costs and variable costs that come within a job is vital to understanding your break-even point.

Ensuring you are calculating the Markup of a job and the Profit Margin desired for a job accurately can be the difference in both how much money you leave on the table when quoting a job and how much money you lose when quoting a job.

Next steps is calculating where your break-even point lies. Understanding the point where you will have made enough to cover all your costs is where you break-even. Building from this point is profit and operating anywhere under this is at a loss. 

The importance of performing a break-even analysis is quite broad. Evaluating risks is one reason. As you expand your company, you make large purchases, such as a new truck or potentially hiring a new sales representative. Getting your break-even analysis right, will give you an idea of what growth needs to happen in your sales to afford these expenditures successfully.

There are many ways to stay ahead of the curve and continue growth. Break-even analysis ensures an organization covers all the necessary costs and avoids a loss. On the other hand, it gives you a better idea of what is necessary to reach your desired profit.

If you read the previous blog, we breakdown what a Markup and Profit Margin Percentage looks like on a job. What we want to focus on today is on the formula used when you know your target markup. If you know that your target mark up percentage is 30% for example, then calculating this will be different than the previous blog. If you your job cost is $1000 and your target mark up for the job is 30% than the following will be used to calculate your job cost: $1000 x (1 + 30%) = $1300. We understand this is an easy one that you construction owners know off the top of your head, but the importance is the calculation.