If you’re a renovation contractor and you don’t know the difference between Markup and Margin, you stand an excellent chance of going out of business. Or working for next to nothing.
Remember, a 43 percent markup only gives you a 30 per cent margin!
If a client asks you for a price, and you mark up all of your costs (including your overheads) by 43 percent, or multiply them by 1.43, you will end up with a 30 percent gross margin.
That 30 percent gross margin contains your overheads and your profit. If your overheads are 20 per cent (they might be 25 per cent!), your final profit on the job will be 10 per cent.
Now imagine that you got Markup and Margin mixed up, and you only marked your work up by 30 percent. That is only a gross margin of 23 percent! If your overheads are 20 percent, you make only 3 percent profit. If your overheads are 25 per cent, you will lose 2 percent on the job. You will have worked hard and lost money!
Confusing Markup and Margin, underestimating your overheads, and quoting jobs at 30 percent or lower markup, will soon have you pumping gas for a living.
To get more business tips like this, keep checking here, or visit Renovantage and consider joining our organization. We can provide you with leads for profitable work, coach you on better business practices, and you can share with and learn from other renovation contractors just like you who don’t want to work hard all their lives for next to no money.
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You left out the calculation for a proper margin so that the contractor is covering overhead and making profit.
Jeannie: In previous articles Mike has talked about “minimum” profit objectives for average renovation construction firms being 8-10 per cent, with his group, Renovantage, believing that 15 per cent is attainable and realistic. And he talks about overheads being as high as 25 per cent. Bottom line according to Mike, the “10 plus 10” cost plus method (take your costs on a job and add 10% for profit and 10% for overheads) is nowhere near enough money. But Mike will reply to you here later.
Hi Jeanie,
Steve’s reply is right on the money. 10 plus 10 is never enough as 10% for overhead is not enough. Overhead includes items such as, cell phone, all your insurance, depreciation or lease costs for all vehicles, machinery, expensive tools and computers. You also might have bookkeeping, accountant, lawyer fees. Don’t forget to include any office rent (even if you work out of your house) office supplies, internet, website expense and on and on.
Make a list of all you spend that does not relate to a specific job, add it up and you will end up with your overhead.
Please explain how you get 30 per cent from a 43 per cent markup…..
Numbers in this calculation have been rounded to make the calculation easier so if you are off by a couple of points you will know why. Here are the calculations.
If your cost for a project is $7000 and you mark up the project by 43%, you will sell it for $10,000 ($7000*1.43 = $10,000). That gives you a gross profit of $3000. Gross Profit = Gross Sales – Cost of goods sold.
Gross Profit Ratio= Gross Profit/ Revenue x 100
Therefore $3000/$10000 = 30%
You can do this the other way around if you know how much gross profit you want to make on the job.