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
|Gross Margin – Markup/Sale Price (17%)||$400.00|
|Gross Margin (Markup/Sale Price)||20%|
For more information on how to improve your profit, cash flow and business value download our eBook ‘6 Steps To Better Job Management & Profit’