Posted by on 07.28.16
Understanding the difference between markup and margin, as used in estimating, is essential to the success of your construction company. Understanding margin allows you to easily make financial decisions and gauge their impact on your bottom line. Bankers and accountants commonly speak of margin, not markup.
Gross profit margin (GPM) is the percentage you earn on the selling price of a job; markup is the percentage you can earn on the direct costs of a job.
Simply put, gross profit margin (GPM) is the percentage of every dollar of income left over after paying all the job costs, such as labor (including employer payroll taxes, workers’ compensation, and general liability related to payroll), materials, and subcontract expense.
If you prepare a bid using the markup method, you will not get to the desired gross margin.
If a 33% gross profit on a job is desired and the direct job costs are $1,000 then using the following methods, you will achieve different results as follows:
Direct Costs $1,000
Markup $1,000 x 33%= $ 330
Selling Price $1,330
Selling price $ 1,330 100%
Direct costs $ 1,000 75%
Gross profit $ 330 25%
Note: The actual margin of 25% is less than the desired margin of 33% using this method.
Can be calculated using the Division Method, calculated as follows:
Actual Cost divided by 1 – gross profit percentages (1.00 - .33= .67)
Selling price $1,000/.67= $1,493 100%
Direct costs $1,000 67%
Gross profit $ 493 33%
Note: The actual margin of 33% is equal to the desired margin.
Make sure that you compute your desired margin correctly when estimating projects.