Are Cost Increases Killing Your Profits?

Wage Costs Analysis

Wages per hour
Annual Salary
(inc superannuation)
Annual working hours
(time on job)
Cost per working hour
Hourly cost
(allowing for 30% downtime**)

Labour Costs Are Rising

Every day, material prices go up, and with skilled tradespeople in short supply, keeping a lid on wages is more challenging than ever. How do we make sure that our profits keep pace with cost increases? Looking at how we price our jobs gives us the insight to understand the challenge. Square metre rates are the most common way sign-makers price their materials in quotes. Square metre calculations are easy to understand and easy to calculate. You list all the materials you use in the business and calculate a square or lineal metre rate. The rate includes the cost of factory work, such as laminating, trimming, and printing, and your profit. You charge for extra artwork, factory, and installation work at a factory rate that includes the cost of the overheads. You might have worked these back to some price lists for standard-sized signs to make it easy for the team to quote.

The Weakness of Fixed Price Methods

The trouble with these fixed-price methods is that they are difficult to adjust and don’t allow for waste. Consider an industry benchmark - a printed and laminated aluminium composite panel sheet (ACP). Breaking down the job, we have material costs for the composite panel, vinyl, laminate, digital printing inks and some labour time. Each of these costs can increase at different rates - do you recalculate your price each time one cost changes, or keep our price the same and hope it works out OK? Taking a more detailed look at the pricing for our composite panel sheet; we know the costs of those materials using list prices from well-known suppliers. A printed sheet of ACP costs $143 to manufacture or $50 per square metre. But what about the cost of labour? The table above shows the actual labour cost per hour when we factor in superannuation, downtime due to holidays, personal leave and public holidays. A tradesperson earning $35.00 per hour now costs $52.00 per hour they spend on the job. Even the most efficient tradesperson is not always working on paid jobs - toolbox meetings, maintenance and other work that can’t be directly billed for means that 70% productivity is a goal. Including these non-billable hours, our labour cost rises to $68.00 per hour. Our sheet of ACP now costs $177 per sheet to make or 61.00 per sqm. With a 7% price increase and a 5% wage increase, this cost increases to $189 per sheet.

“Lorem ipsum dolor sit amet, consectetur adipiscing elit. Nullam purus nunc, aliquam quis accumsan non, molestie eu nibh. Nulla finibus, lacus a laoreet tinci

Calculate Labour Costs

These numbers show that the actual labour cost is much higher than we imagine. If you charge $80-100 per hour, your time estimates and staff management must be accurate, or you risk losing money. Together these cost increases have a minor effect on the total cost of the panel. Depending on your current price, we need to increase the price by 2% and 5% to make the same profit. If we don’t pass these costs, the effect on our bottom-line profit is more dramatic. If you start with a 15% net profit figure, it drops by 24% to 11% net profit on sales. In conclusion, while printing is highly profitable, you must pass on cost increases. Square metre rates are easy to work with, but I wonder if many people take the time to check their rates whenever there is a cost price increase. We hope our fellow sign makers pass on their prices, too, or we compete against people flying blind.t the prices they do. They may be using automation to do the same work with half the effort, and catching up will be almost impossible.

There is another way to price jobs: to calculate the actual cost of each material and process used. All good software estimating systems should automatically calculate the material and labour costs in a way that is as simple as a square metre rate calculation. You can still price to the market but be confident that your actual job profit targets are maintained.