General Contractor Markup Guide
A general contractor's markup depends on the profit margin they are looking to obtain. If you are looking for a 35% margin to cover their overhead expenses and still profit meaning their markup needs to be 54%.
Understand the difference between markup & margin to improve your job costing
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The #1 most common mistake contractors make is confusing markup with margin.
Markup is the amount added to the cost of a product to determine the price you need to charge to cover all costs and make a profit. Markup is best thought of as a multiple of your costs. Ex: 1.5x or “Direct costs X 1.5”.
Margin (also known as gross margin or gross profit) is the revenue remaining after direct costs or cost of goods sold have been paid, but prior to excluding overhead costs. Margin is best thought of as a percentage of revenue. Ex: If cost of goods sold is 65%, then my margin is 35%.
Confusing markup and margin can cause poor pricing and lead to losing money on the job. The Giersch Group has experience helping members of NARI and ASID throughout the Milwaukee metro area gain financial clarity to improve the profitability of their construction industry business.
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Example: Calculating Profit Margin
Here’s how it works. Let’s say at the end of Year 1, ABC Company has $100,000 in revenues. Its cost of goods sold was $65,000, or 65% of revenue, so its gross margin was $35,000, or 35% of revenue. We have a “margin” of 35%.
| ABC Company Year 1 | ||
|---|---|---|
| Revenue | $100,000 | 100% |
| COGS | $65,000 | 65% |
| Gross Profit | $35,000 | 35% |
| Overhead | $25,000 | 25% |
| Net Income | $10,000 | 10% |
| Mark-Up | 1.54 or 54% | |
| Margin | 35% | |
| ABC Company Year 2 | ||
|---|---|---|
| Revenue | $87,500 | 100% |
| COGS | $65,000 | 74% |
| Gross Profit | $22,750 | 26% |
| Overhead | $25,000 | 28% |
| Net Income | $(2,250) | -3% |
| Mark-Up | 1.35 or 35% | |
| Margin | 26% | |
Now the owner of ABC company, let’s call him Ed, does the exact same amount and type of work in Year 2. Ed incorrectly uses margin as the percentage he is going to mark things up and marks up his costs by 1.35x in Year 2.
In Year 2, Ed loses money on the same amount and type of work. He actually has a $12,000 swing from $10,000 of profit to over $2000 of loss. This is because he confused margin for markup and underpriced his jobs.
The table below shows us that to get a margin of 35% you actually have to mark it up 54% -- or 1.54x.
Remember, it's best to think of markup as a multiplier.
Factors to Consider when Determining Markup
- Cost of materials and labor - Materials and labor costs will vary depending on the project, and should be taken into account when determining markup.
- Competition - Researching the markups of other general contractors in your area will give you an idea of what is considered reasonable and competitive.
- Overhead costs - Overhead costs, such as rent, insurance, and utilities, should also be factored into your markup.
- Profitability - It is important to consider the profitability of your business when determining markup. While it may be tempting to increase markup in order to increase profits, it is important to remember that pricing that is too high can turn off potential clients.
All of these factors must be taken into account when setting a markup percentage. It's important to not only cover these expenses, but also to set aside a portion for unexpected costs and contingencies.
How to Calculate Markup
To calculate markup, you will need to know your cost of goods sold (COGS) and your desired profit margin.
COGS is the cost of the materials and labor needed for a project.
Markup percentage = (Selling price - COGS) / COGS * 100
Average General Contractor Markup
Margin vs Markup Chart
| Markup % | Margin % | Markup % | Margin % | |
|---|---|---|---|---|
| 25.00% | 20% | 20% | 16.67% | |
| 33.33% | 25% | 25% | 20.00% | |
| 42.86% | 30% | 30% | 23.08% | |
| 53.85% | 35% | 35% | 25.93% | |
| 66.67% | 40% | 40% | 28.57% | |
| 81.82% | 45% | 45% | 31.03% | |
| 100.00% | 50% | 50% | 33.33% | |
| 122.22% | 55% | 55% | 35.48% | |
| 150.00% | 60% | 60% | 37.50% | |
| 185.71% | 65% | 65% | 39.39% | |
| 233.33% | 70% | 70% | 41.18% |
One way of thinking about the difference between markup and margin is to remember that your markup has to account for more than just your direct costs (COGS). You also have to cover overhead and make a profit. For this reason, you need to understand what percentage of revenue your overhead is eating up, and what percentage of revenue you want to keep as profit.
To keep things easy, here’s a handy markup & margin table for contractors that shows you how much you need to mark things up to achieve your desired profit margin. Most general contractors are looking at about a 35% margin, so they need a markup of 54%, or 1.54. Subs can often get a profit margin of 50%, so they need a markup of 100% or 2x, as shown in the table on the right.
For some contractors, they have 35% gross profit and 25% goes to overhead and 10% is left in the company. This is called creating a business model and it’s one of the first things you should do when you go into business. The Giersch Group can help you understand your margins, the necessary markup, and other ways to improve your pricing and ensure profitability.
Setting Your Own Markup Percentage
To determine your own markup percentage, you must take into account all of the factors above. Start by calculating your costs of doing business and researching industry standards and competitive pricing. From there, you can use this information to set a markup percentage that will allow you to cover your expenses and make a profit.
It's important to keep in mind that markup is not a one-time decision and should be reviewed regularly to ensure that it's still in line with your costs and the market.
General Contractor Markup On Subcontractors
“During the recession, most contractors and subcontractors in the building and remodeling industry suffered cash flow issues, and Wirtz was no exception. The Giersch Group helped me turn my business around at a crucial time and even stepped in to do our accounting when my bookkeeper resigned suddenly.”
--Jim Wirtz, Jim Wirtz's Woodworks
Calculating markup on subcontractor costs can be done by using the following formula:
Markup = (Markup Percentage/100) x Subcontractor Cost
For example, if the subcontractor cost is $10,000 and the markup percentage is 20%, the markup would be $2,000. The selling price would be $12,000.
It's important to note that markup percentages can vary depending on the specific subcontractor and project. Some subcontractors may require a higher markup percentage due to the complexity of their work, while others may require a lower percentage.
Things to Remember:
- Margin and markup are two different things that are directly related, but cannot be used interchangeably.
- Your numbers are your numbers. Once your markup has been determined for profitability, that is the number that should be used for every project. Lowering the price to win the job is how many contractors lose money.
- Know your costs. If you’ve been in business for a while, go back to the financials and get an average for your overhead expenses. Accounting for overhead expenses is critical in calculating the correct markup.
- Overhead cannot be calculated based on job costs. The wrong way to calculate this is on a per-job basis with percentages of the job costs. Rather, it needs to be based on a percentage of total revenue.
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Caitlin Carmody Stables LLC
