What is a reasonable profit?

[Elmud]

Relating to business, I can only speak relative to construction related manufacturing. When estimating a service or product that you provide, there are four things to consider.

First, there are materials. This to me is the easy part. There are a certain amount of materials required to manufacture a product or to fulfill any service. You simply figure out how much materials are required, figure out the cost, and you have an exact amount of what the materials cost on a particular project.

Secondly, there is labor. This is not so easy. Labor is based on the amount of productivity accomplished in a certain amount of time. You estimate this time, and what it costs, on any particular project. The labor factor entails not only the hourly rate, but also things like workmans compensation insurance, the social security factor and health insurance of that is provided partially by the employer. So, if a man hour is say, $15.00 per hour, the actual cost may double. Depending on what percentage the workmans comp is, and other costs that are related to labor. Its not easy to establish a hard number for labor. Through time and experience you should have a good idea on how much time it takes to complete a job.

Thirdly, there is overhead. The cost of doing business. Utilities. Equiptment maintainance. Per diem costs if the job is out of town. Maybe if you have a good idea on the estimate of your labor, in regard to the time it takes to do a job, you can apply a percentage to the labor factor which will cover the cost of overhead. It is simply the amount of money that will be spent that is separate from materials and labor in completeing a project.

Fourthly, there is profit. What is a reasonable profit? What is it based on? Surely any business should be solvent, and there should be a surplus of funds to cover for any downtime. But, how much? Personally, I always considered that twenty percent was reasonable. You are already including your labor into the mix, so you are making a living. What are the reasons for profit, and what would you say is reasonable? And why?

[Alan McDougall]

Originally Posted by Elmud

Relating to business, I can only speak relative to construction related manufacturing. When estimating a service or product that you provide, there are four things to consider.

First, there are materials. This to me is the easy part. There are a certain amount of materials required to manufacture a product or to fulfill any service. You simply figure out how much materials are required, figure out the cost, and you have an exact amount of what the materials cost on a particular project.

Secondly, there is labor. This is not so easy. Labor is based on the amount of productivity accomplished in a certain amount of time. You estimate this time, and what it costs, on any particular project. The labor factor entails not only the hourly rate, but also things like workmans compensation insurance, the social security factor and health insurance of that is provided partially by the employer. So, if a man hour is say, $15.00 per hour, the actual cost may double. Depending on what percentage the workmans comp is, and other costs that are related to labor. Its not easy to establish a hard number for labor. Through time and experience you should have a good idea on how much time it takes to complete a job.

Thirdly, there is overhead. The cost of doing business. Utilities. Equiptment maintainance. Per diem costs if the job is out of town. Maybe if you have a good idea on the estimate of your labor, in regard to the time it takes to do a job, you can apply a percentage to the labor factor which will cover the cost of overhead. It is simply the amount of money that will be spent that is separate from materials and labor in completeing a project.

Fourthly, there is profit. What is a reasonable profit? What is it based on? Surely any business should be solvent, and there should be a surplus of funds to cover for any downtime. But, how much? Personally, I always considered that twenty percent was reasonable. You are already including your labor into the mix, so you are making a living. What are the reasons for profit, and what would you say is reasonable? And why?

As a Mechanical/Industrial Engineer during my working life I had to deal with the challenges you mentioned in your thread.

For any job you have to quote , so careful planning is needed, time, resources such as spares, tools labor and especially time,.

I made much use of the critical path method of preplanning a project and of course monitoring its progress from start to finish ,shuffle this to allow for that ect

You must set a labor rate for each category of workers before commencing a project. If you don't you could end up with cash flow problems

I was a planning engineer of power station boiler and turbine routine maintenance overhauls.

We build the whole project with all the factors mentioned by you, simulated on a computer critical path computer program and messed around with it virtually before commencing the huge job.

Only then six months before the project or so, did we create a budget and kept to it like clue.

Once you have a good budget you can set your profit margin and give your quote Twenty percent seems reasonable to me but then I do not reside where you do

If you re a large contractor then you should think about employing a planning engineer if you are small you can still do it yourselves , go and purchase a critical path program, now just one inexpensive CD and play around until you come up with the best fit

Profit is usually based on supply and demand, if you are the only one that can satisfy the customer in your region you can set your margin a little higher, but what is a moral profit is debatable

[xris]

It is difficult but market forces usually decide for you.It always amazes me how one craftsman can demand so much more than others.Why one drives a pickup truck and the other a Workman's limo.
It comes down to ethics again,can you charge that bit more? should you?
We are seeing so many craftsmen loosing their employment, market forces are driving down labour costs by competition.
Rainy days are here again...

[Khethil]

What I've seen done a lot is a flat 20% markup (e.g., Labor Costs + 20%, Material Costs + 20%, etc). So what you'd end up with is a flat markup based on your expended resources.

What's fair? Gosh, I dunno - in my perfect world things wouldn't cost anything. If I make shoes, I'd do so and whoever needed them would get a pair. The breadmaker would make bread, but might be wearing a pair of shoes I made. The cable guy would just do his cable jobs (with a tummy full of bead from the bread maker and wearing a pair of my shoes) and on down the line.

No, I know this isn't realistic - but a cool idea I think nonetheless.

[Elmud]

Originally Posted by Khethil

What I've seen done a lot is a flat 20% markup (e.g., Labor Costs + 20%, Material Costs + 20%, etc). So what you'd end up with is a flat markup based on your expended resources.

What's fair? Gosh, I dunno - in my perfect world things wouldn't cost anything. If I make shoes, I'd do so and whoever needed them would get a pair. The breadmaker would make bread, but might be wearing a pair of shoes I made. The cable guy would just do his cable jobs (with a tummy full of bead from the bread maker and wearing a pair of my shoes) and on down the line.

No, I know this isn't realistic - but a cool idea I think nonetheless.

I like the idea of a barter system too K. Not realistic in this day and age but, I always admired that way of exchange.

[Mr. Fight the Power]

First off, profit isn't really a "reasonable" thing. At least there isn't some reasonable flat rate of profit. Sure there may be reasonable calculations according to market data, but ultimately financial and economic calculations are dependent upon factors that are subjective and not reasonable. The consumer determines how much he is willing to pay, even though he must make reasonable calculations, largely because of values and desires that simply cannot be calculated reasonably. We don't eat, at least we usually don't eat because we reason that we should eat. We are just hungry.

Likewise, the supplier of products deals with certain opportunity costs, what he will have to give up to provide the products, which may be weighed reasonably against the gains of providing the products, but ultimately will be measured in "utiles" that are unreasonable.

Finally, the most important economic consideration, and it is the factor upon which capitalism hinges, is the level of risk aversion. It is simply impossible for us to be reasonable about risk aversion. We may be 100% positive of just how much risk we are taking part in, but no amount of calculation informs whether we want to take on that risk.

Ultimately, profit is what the supplier needs to expect in order to offset the risk he is taking on by the supplying the product, and there is simply no objective reasonable way to calculate this. Its intuitive.

Originally Posted by Elmud

I like the idea of a barter system too K. Not realistic in this day and age but, I always admired that way of exchange.

I think that the barter system is entirely possible today, or at least something very similar, if it weren't for legal tender laws forcing us to use bad money.

[validity]

The question of what happens to the profit is built into my idea of what is reasonable. A billion dollar profit spent on community projects, is in I my books a reasonable profit. A billion dollar profit in the pockets of a few well off executives, when it could be spent on community projects, not so reasonable.

[Didymos Thomas]

I think that Validity is going in the right direction. MFtP, I see where you are coming from, but I think the initial question also contains some ethical concerns.

So, not only should we consider what the profit is used for, but also by what means the profit is achieved. What is the nature of the product, and so forth. Profit from dangerous toys is not reasonable profit, for example.

We might look at this as being bound up in the concept of "Right Livelihood"
Noble Eightfold Path - Wikipedia, the free encyclopedia

[Mr. Fight the Power]

Originally Posted by validity

The question of what happens to the profit is built into my idea of what is reasonable. A billion dollar profit spent on community projects, is in I my books a reasonable profit. A billion dollar profit in the pockets of a few well off executives, when it could be spent on community projects, not so reasonable.

Please explain why

---------- Post added at 11:52 PM ---------- Previous post was at 11:42 PM ----------

Originally Posted by Didymos Thomas

I think that Validity is going in the right direction. MFtP, I see where you are coming from, but I think the initial question also contains some ethical concerns.

So, not only should we consider what the profit is used for, but also by what means the profit is achieved. What is the nature of the product, and so forth. Profit from dangerous toys is not reasonable profit, for example.

We might look at this as being bound up in the concept of "Right Livelihood"
Noble Eightfold Path - Wikipedia, the free encyclopedia

I am certainly approaching it from an economic point of view rather than an ethical point of view, and I will freely admit that some profit is unethical, profit from fraud, coercion, and violence, for example.

I think everyone on here from both ends of the spectrum can agree that certain banks are profiting in unfair, and, even though I hate to use the term in this context, unreasonable ways.

But I just want to defend the idea of profit in general, as it is a necessary factor in bringing products to market when and where they are needed. People often blast large profits, but they almost always fail to account for the risk involved in entrepreneurial effort.

Of course, we American's have devised a brilliant system where private profit is combined with public risk and little of what I have said really applies.

[Elmud]

Ethics aside, has anyone ever heard the phrase, "a lot of a little, is better than a little of a lot." ? This use to be a practical business principle. A practical philosophy. Does that philosophy still apply?