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Do You Make This Mistake With Your Tender/Quote Numbers?

Do You Make This Mistake With Your Tender/Quote Numbers?

How to Calculate your Mark-up the Right Way!

Costing and pricing is a key issue in tendering and quoting for work and it must be correct and commercially attractive.  A common problem is not understanding the difference between what a mark-up is and gross margin is and ensuring the targeted gross margin is adequate to cover your overhead expenditures so that an acceptable level of bottom-line profit is made for a job.

When pricing a tender or quote people start with quantities and costs for labour and materials.  A  markup is added to the cost. e.g. for a cost base of $2,000 add 20% – equals a sell price of $2,400.

WHERE DOES THIS FALL DOWN?

It falls down in the language and assumptions.  The boss says “the job margin target is 20%” and staff use this figure and slot it into the markup %. When this happens the actual margin then drops to 17% (see our calculated example below)

With actual cost blowouts in job delivery, the margin often ends up less than 10%, sometimes down to low single digit percentages.  You then have to try and cover overheads and end up with a profit for shareholders.

A good approach is to work back-wards from the targeted gross margin to determine what an appropriate mark-up should be. In the example below, a 20% mark-up is actually only equal to a 17% margin. A 20% targeted margin requires a 25% mark-up (i.e. the mark-up needs to be 5% more than the targeted margin). This difference in calculation results in a $100 difference to your profit bottom line and falling 3% short of your bosses’ margin expectation (17% ilo of 20%)!

Now imagine getting this wrong on much bigger jobs or multiple jobs.

Well worth thinking about!

Gross Margin Calculator

Cost $2,000.00
Markup (20%) $400.00
Sale Price $2,400.00
Gross Margin – Markup/Sale Price (17%) $400.00

Markup Calculator

Gross Margin (Markup/Sale Price) 20%
Sale Price $2,500.00
Cost $2,000.00
Mark-Up $500.00
Markup Percent 25%

For more information on how to improve your profit, cash flow and business value download our eBook ‘6 Steps To Better Job Management & Profit’