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Construction Programs & Results Inc

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Calculating Your Markup

by Michael Stone

Calculating Markup for your Construction Business #MarkupAndProfit #CalculatingMarkupWhen I teach a class or webinar, sometimes I wonder if those listening understand what I'm trying to say. After reading some of the questions that came in during last week's webinar on calculating your markup, I realized I missed the mark. Here are a few of the questions:

  • I have no employees, what is my markup?
  • What is my minimum markup?
  • Does your markup formula work in Canada?
  • I am an interior designer, should my markup be 1.50 or do I add a margin for profit?
  • I am a roofer, is my markup for a specialty or a remodeling contractor?

Let me say first that all these questions are covered in some depth in the Markup and Profit, Revisited book. However, we went at a fairly good clip in the presentation, so I want to address more on the topic of markup here.

Markup is the factor that you apply to the estimated job costs of a project to arrive at your sales price. If your markup is calculated correctly, then you'll have enough money in the sales price to cover all your job costs, all overhead expenses, and make a reasonable 8% net profit.

If your markup isn't calculated correctly, or if you use someone else's markup and it's wrong for your business, you might not have enough money to cover your overhead expenses and make a reasonable net profit.

Your markup should be calculated at least once a year. Throughout the year, it needs to be reviewed and revised at least quarterly, especially if your overhead expenses have changed or your sales are coming in significantly above or below what you projected. We walked through how to calculate markup in the webinar, and it's covered in the book. If you don't like working the math, we have a Windows-based software program that will do the calculation for you.

You need to calculate your own markup from your own company numbers. There is no industry standard for markup; there can't be, since there isn't any industry standard for overhead. Every business has different overhead and profit needs and is building a different volume of work, so each business has its own markup.

Your markup is not based on how many people you employ, what city, county, parish, state, province or country you work in, or your company structure. It isn't based on whether you're doing specialty work, or remodeling, or if you build new homes. Your markup is based on the financial numbers of your company.

That said, there are general differences between specialty and remodeling contractors. For example, specialty contractors tend to have smaller average jobs than remodeling contractors. Their annual overhead expenses are often lower because they spend less on advertising and they generally don't pay sales commissions.

For that reason, I believe there are minimum markups for remodeling, specialty work, and new home construction. I'll give you those minimum numbers, but every company is unique and has its own overhead and profit needs, so it's important to calculate your own markup. Your markup is peculiar to your company.

The chart below shows the normal ranges seen for the different types of work. The first number is the minimum markup and the second is generally the highest markup you can use before you start getting push back on your sales price from potential clients. That doesn't mean that you can't use a higher markup than shown if you know how to sell and it's what your business needs. We have a number of coaching clients who use a markup much higher than what's shown in this chart.

Specialty work (one or two trades)  1.35 - 1.50
Remodeling (or commercial) work 1.50 - 1.70
New home construction 1.26 - 1.40

So, why do I tell you to calculate your own markup, and then tell you there is a minimum markup you should be using? Because I've been doing this for a long time. We've looked at thousands of companies and our experience has been that if you charge less than the minimum listed above, you might not be around for long.

If you're using a lower markup, let me ask a few questions. Do you have any debt, including a line of credit? Are you having cash flow problems? Is it ever difficult to pay all your bills at the end of each month? If you answered yes to any of those questions, you aren't charging enough for your work. Get your markup where it needs to be and you'll answer NO to each of those questions. Now you have a chance of making some money.

What should your markup be? I can't and won't tell you that. You need to calculate your own markup factor based on your own company's numbers and your financial needs. But I will tell you that if you calculate a markup factor lower than the minimum listed above, check and recheck before you use it, because there's a good chance you missed something.

A common mistake when calculating markup is believing that the net profit of the business is the owner's salary. It isn't. The purpose of net profit is to have funds you can reinvest in your company as needed. You need to aim for a minimum 8% net profit, and also include owners salary in your overhead projections. Your salary provides for you and your family. Your net profit provides for your business.

A related and pertinent question that was asked during the webinar was, "How do you get over a guilty feeling that your markup is too high?"

If that's your worry, your focus is on the price. You shouldn't be selling price, you should be selling quality, value, and service.

Consider: How many years have you spent learning how to do the work you do? How much time have you spent studying how to run your business? How many times have you built a job and lost money for whatever reason? How many times have you hired an employee or sub who was paid more money than they earned?

Those experiences are part of the price you've paid to provide the service you offer. Why would you give that knowledge, experience, and hard work away?

I doubt your doctor, dentist, grocer, or insurance agent feel guilty about their price. They know what they've been through to be able to provide the service they provide. If you're charging what's needed to pay all your job costs, cover your overhead, and make a reasonable profit, it's the right price.

Quit fussing about price and go tell your clients how good you really are. Good clients will pay for a well-done job that's finished on schedule and kept clean. Remember, they can't get most of your so-called competition to even return a phone call. You're worth every penny.

 

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