1 minute read

Costing and pricing is a key issue in tendering and quoting for work and it must be correct and commercially attractive.  A common problem with how to calculate markup price 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!

How to Calculate your Mark-up

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%
By Sue Hirst Co-Founder CFO On-Call

Sue was managing an accounting practice when she co-founded the business in 1991. She has expertise in financial management, product and service development and human resource management.

Sue is passionate about explaining accounting concepts in clear English so business owners can make sense of their own numbers.