Maximize Your Markup
Construction company owners often ask how much contractors should mark up their work to make a profit. The owners are looking for the magic percentage that will guarantee a profit on every job. But markup is tricky. It’s a function of what you need to cover your fixed overhead costs plus a profit margin combined with what the market will bear. Smart business owners realize all jobs are not equal and markup should vary with every job. When you use the same markup for every bid, you are not maximizing your profit potential or helping your company make more money.
Mark up Smaller Jobs Bigger
First, determine how much total annual markup for overhead you need to cover all of your fixed general and administrative expenses for the year. For example, if your total annual overhead is $500,000 and your total job costs are expected to be $5,000,000, you need an overhead markup of 10 percent to recover your overhead costs. Next, determine how much total annual profit you want to make for the risk you take. If you want to make $250,000 annual pre-tax net profit, your net profit markup must average five percent using the above example. Now you have a minimum markup of 10 percent for overhead and a total profit markup goal of five percent, for a total of 15 percent overhead and profit.
In the above example, the key is to average 15 percent total overhead and profit markup over the year. To maximize your bottom line, consider using a variable markup system. You recognize the fact that smaller jobs often take the same time, energy, overhead, and supervision as bigger jobs do. Therefore, you need to charge more on smaller jobs for overhead and profit to cover the added cost of managing them plus a larger profit margin to get a return on your time and energy. Create a “Variable Markup Chart” similar to the example below for your company to use when marking up jobs of variable sizes. Note: the markup percentages are just examples.
| VARIABLEMARK-UP CHART | |||
| Job Costs | OH + P | Projected | |
| Bid Markup | #Jobs | Total OH + P Markup | |
| $0 to $50,000 | 30% | 20 | $150,000 |
| $50,000 to $100,000 | 20% | 15 | $225.000 |
| $100,001 to $200,000 | 15% | 10 | $225,000 |
| $200,001 to $400,000 | 10% | 5 | $150,000 |
| Total OH & P BidMarkup | 15% Average | 50 | $750,000 |
By having an annual goal of 15 percent total OH + P mark-up to realize your total goal of $750,000, you can make decisions about the number of jobs you need and at what rate you need to mark them up in order to meet your annual goals.
Mark up your markup
Another way to improve your markup strategy is to breakout your overhead and profit markup as separate calculations. When pricing jobs and calculating the cost of change orders, most contractors leave money on the table by only using one total markup rate. When you blend your overhead and profit into one total OH + P markup, like 25 percent, you are not marking up your fixed cost of doing business (your overhead) before you add your profit. See the example below:
| Job Costs | $100,000 |
| OH & P Markup @ 25% | $25,000 |
| Total Bid Price | $125,000 |
| Gross Profit Margin | 20.00% |
Smart profitable business owners understand the power of marking up the entire cost of doing work on a project including overhead first. So, mark up your overhead costs first to boost your bottom line. Using the same total markup for overhead and profit of 25 percent, look at the better way to mark up your jobs:
| Job Costs | $100,000 |
| Overhead Markup @ 15% | $15,000 |
| Sub-Total | $115,000 |
| Profit Markup @ 10% | $11,500 |
| Total Bid Price | $126,500 |
| Gross Profit Margin | 20.94% |
In the second example, you made an additional $1,500 or nearly one percent more gross profit. For every $1,000,000 of total sales volume for the year where you mark up your markup, your bottom line would increase by $9,400. Not bad for a little bit of extra math.