Tool #11 – Maximize Your Mark-Up!
George Hedley,
Posted
10/26/2012
I often get asked how much contractors should mark-up their work
to make a profit. Construction company owners are looking for the
magic percentage that'll guarantee a profit on every job. But
mark-up 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 mark-up should vary with every job. When you use the same
mark-up for every bid, you are not maximizing your profit potential
or helping your company make more money.
Mark-up Smaller Bigger!
First determine how much total annual mark-up 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 mark-up 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 mark-up must average 5 percent using
the above example. Now you have a minimum mark-up of 10 percent for
overhead and a total profit mark-up goal of 5 percent for a total
of 15 percent.
In the above example, the key is to average 15 percent total
overhead and profit mark-up over the year. To maximize your
bottom-line, consider using a variable mark-up 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. I recommend you create a
"Variable Mark-Up Chart" similar to the example below for your
company to use when marking up jobs of variable sizes. (NOTE: Do
not use these mark-up percentages-they are just examples!)
By having an annual goal of 15 percent total markup and to
realize your total goal of $750,000, you can make decisions about
the number of jobs and at what rate you need to mark them up to
meet your annual goals.
Mark-up your Mark-up!
Another way to improve your mark-up strategy is to breakout your
overhead and profit mark-up 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 mark-up rate. When
you blend your overhead and profit into one total mark-up like 25
percent, you're not marking up your fixed cost of doing business
(your overhead) before you add your profit. See the example
below:
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 mark-up for overhead and profit
of 25 percent, look at the better way to mark-up your jobs:
In the second example, you made an additional $1,500 or nearly 1
percent more gross profit. For every $1,000,000 of total sales
volume for the year where you mark-up your mark-up, your
bottom-line would increase by $9,400. Not bad for a little bit of
extra math.
George Hedley is a licensed professional
business coach, popular professional speaker and author of "Get
Your Business to Work!" available at his online bookstore. He works
with contractors to build profitable growing companies. To request
your free copy of "Profit 101 For Contractors," sign up for his
free monthly e-newsletter, hire Hedley to speak, be part of his
ongoing BIZCOACH program, or take a class at Hardhat BIZSCHOOL
online university, visit www.hardhatpresentations.com or email
gh@hardhatpresentations.com.