By Sue Hirst, Director – CFO On-Call
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 getting simple mathematics wrong.
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.
In our calculated example below you can see that the effect on the dollars is 20% extra gross profit by getting it right i.e. $500 instead of $400. Now imagine getting this wrong on much bigger jobs or lots of them.
Well worth thinking about!
Gross Margin Calculator
|Gross Margin – Markup/Sale Price (17%)||$400.00|
|Gross Margin (Markup/Sale Price)||20%|