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Once a contractor has come up with his estimate of hard costs to complete the job, he will
mark up his costs to determine the bid price. The hard costs the money paid out for labor
and materials is marked up to cover overhead and profit.
Overhead. Overhead includes all the soft costs incurred by being in business that are not
associated with a specific job for example, trucks, tools, and equipment; office expenses,
bookkeeping and accounting; advertising, training, legal, insurance, and other costs of being in
business. If a contractor does not charge enough to cover his overhead, he wont be in business
long.
Profit. The other component of markup is net profit, often referred to simply as profit. Net
profit is amount left for the owner after paying all hard and soft costs to complete the job (gross
profit net profit plus overhead). If the company owner works part-time of the job, his labor cost
while swinging a hammer is treated as a hard cost of that job. If he works in the office and pays
himself a salary, his office pay would be counted as overhead. If the job is profitable, the owners
would earn profits in addition to any wages paid to them by their company.
construction). This is not far from the 10 and 10 sometimes thrown around for 10% overhead
and 10% profit. Custom builders typically work on smaller margins of about 15% to 18% for
overhead and profit on new homes, while remodeling contractors typically charge higher rates
for overhead and profit. When times are tough, some contractors lower their markup (and profit)
in order to attract more work with lower prices.
SINGLE-FAMILY HOME: COST BREAKDOWN
Sales Price
Breakdown
Average
% of total
Finished lot
$76,591
23.3
Construction
222,511
58.9
Construction loan
6,375
1.7
Overhead
20,377
5.4
Marketing
5,297
1.4
Sales Commission
12,815
3.4
Profit
33,658
8.9
377,624
100%
= Margin
The chart below shows how much a contractor has to mark up his hard costs in order to make a
certain margin. Margin, or gross profit, is used to pay for a companys overhead and to provide a
net profit at the end of the year.
MARKUP VS. MARGIN
Markup
15%
13.0%
20%
16.7%
25%
20.0%
30%
23.0%
35
25.9%
40%
28.6%
50%
33.0%
100%
50.0%
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Comments
1.
Contractors take a lot of risk if things go wrong. You know the saying Hope for the Best,
but prepare for the Worst. Twenty percent seems high to some people but that is
reasonable in construction in most States. In retail you can get charged from 200% up to
1500% by the time the product goes from manufacture to showroom floor.
Reply
2.
michael says:
3.
Bert says:
February 18, 2015 at 10:31 am
You need to learn the math associated with the desired markup rather than depend upon a
table like noted above.
The math is rather simple: If you desire a 20% markup (Office Overhead, Soft Cost, and
net profit) you simply subtract the desired 20% from 100% and then divide the Hard Cost
by the difference between the 100% and the 20% (100-20=80).
Assume a $100,000 Hard Cost and a 20% markup. What you must remember is that you
are really looking for a 20% on the FINAL BID. Not a 20% on the Hard Cost.
If you just add 20% to the $100,000 the bid would be $120,000. Now to check if you are
actually meeting your objective of 20% on the contract amount, multiply 20% form the
bid amount of $120,000 and you get $24,000 not $20,000. So you are $4,000 short of the
desired 20% of bid or contract amount. You are actually only 16.67% of the total bid of
$120,000.
Lets redo this: Hard cost of $100,000, desired markup of 20% of actual bid.
100%-20% = .80
Hard cost $100,000/.80=%125,000
Check: Bid/Contract Amount = $125,000 X 20% = 25,000
$25,000/$125,000 = .20 or 20%
The total difference is $5,000. This means that if you marked up the project by just
adding 20% to the hard cost, you will need to hope that you overestimated your hard cost
by $5,000 if you are to actually obtain the $25,000 Markup.
Reply
4.
This was article was so good to read because it really confirmed my own knowingness
on the subject. Regarding the Mistake on Mark-up section, I will be honest, I have been
doing it wrong and had no clue of this. As I have not finished high school as a teenager, I
am not stupid, and think many contractors and professionals share in this idea. I believe
the only reason I have not gone under is beacuse when I finish a bid, I always add
negotiating money on top of everything. But still, most jobs finish tight and I always
wonder, should I have put more money in the bid Did I estimate this wrong? Am I
calculating my mark-up wrong? Or I wonder how my competitor did his mark-up? I
actually worked in a company in Canada once that calculated their mark-up like its
explained in this mark-up but it was never explained to me why they did it. IN reading
this article, I get it! This to me is one of the best sources of information on the internet for
my business.
I guess, the only things that will be immediately noticeable is that if our competition does
not know about how to calculate their profit margin properly, (such as I have been doing,)
then our bids will be the higher most of the time. But I would rather sign on a job
KNOWING im going to make profit than wondering. And yes, most of the time, we
get the jobs because of a great portfolio and reputation price is NOT always the first
consideration.
Thanks,
GN