Tool #11 – Maximize Your Mark-Up!
by Jonathan McGaha | 25 October 2012 12:00 am
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.
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