I am not sure if this the right forum for this questions, but I noted a past thread related to profit margin.
I am currently negotiating machine rates with our prime contractor and find myself at odds about an acceptable percentage for profit, risk and overhead.
Our industry works a little different then most in that, we sign long term agreements with certain contractors and guarantee a certain volume of work. The contractor is paid a unit rate ($/m3), that is derived by multiplying a machine rate ($/hr) to an estimated historical or industry average production rate (m3/hr). The machine rates are based on a scheduled time (i.e. rate = (owning cost + operating costs/annual hours of use). An estimated overhead percentage (say 10%) and a profit/risk percentage (say 10%) are applied to the final negotiated unit rate. In my contractor's opinion the profit/risk value is low.
My comment to him was, how much risk do you actually incur when you are guaranteed a certain volume of work at a rate that reflects a your minimum required annual hours of use (i.e. If the contractor needs $X/hr to pay for his machine at say 2000 hours of annual use. The contractor has enough guaranteed work to easily make his 2000 hrs).
My question is 1) How do profit and risk calculations compare in other industries? I know of some construction companies that would die for a contract that guarantees a volume of work over some time period. I also realize in some sectors the risk factor is high, lots of uncertainty. 2) Is a 10% profit reasonable when the risk level is low, would a value closer to 3-5 % be more reflective of a similar industry, say construction?
I am currently negotiating machine rates with our prime contractor and find myself at odds about an acceptable percentage for profit, risk and overhead.
Our industry works a little different then most in that, we sign long term agreements with certain contractors and guarantee a certain volume of work. The contractor is paid a unit rate ($/m3), that is derived by multiplying a machine rate ($/hr) to an estimated historical or industry average production rate (m3/hr). The machine rates are based on a scheduled time (i.e. rate = (owning cost + operating costs/annual hours of use). An estimated overhead percentage (say 10%) and a profit/risk percentage (say 10%) are applied to the final negotiated unit rate. In my contractor's opinion the profit/risk value is low.
My comment to him was, how much risk do you actually incur when you are guaranteed a certain volume of work at a rate that reflects a your minimum required annual hours of use (i.e. If the contractor needs $X/hr to pay for his machine at say 2000 hours of annual use. The contractor has enough guaranteed work to easily make his 2000 hrs).
My question is 1) How do profit and risk calculations compare in other industries? I know of some construction companies that would die for a contract that guarantees a volume of work over some time period. I also realize in some sectors the risk factor is high, lots of uncertainty. 2) Is a 10% profit reasonable when the risk level is low, would a value closer to 3-5 % be more reflective of a similar industry, say construction?
