The Proactive Solutions Blog

Margin vs. Markup

Posted by on 07.28.16

Understanding the difference between markup and margin, as used in estimating, is essential to the success of your construction company.  Understanding margin allows you to easily make financial decisions and gauge their impact on your bottom line.  Bankers and accountants commonly speak of margin, not markup.

Gross profit margin (GPM) is the percentage you earn on the selling price of a job; markup is the percentage you can earn on the direct costs of a job. 

Simply put, gross profit margin (GPM) is the percentage of every dollar of income left over after paying all the job costs, such as labor (including employer payroll taxes, workers’ compensation, and general liability related to payroll), materials, and subcontract expense.

If you prepare a bid using the markup method, you will not get to the desired gross margin.

Example:

If a 33% gross profit on a job is desired and the direct job costs are $1,000 then using the following methods, you will achieve different results as follows:

 

Markup Method

     Direct Costs  $1,000

Markup  $1,000 x 33%=  $   330

 

Selling Price  $1,330

 

Selling price  $ 1,330  100% 

Direct costs  $ 1,000  75% 

Gross profit  $   330    25%  

Note: The actual margin of 25% is less than the desired margin of 33% using this method.

 

Margin Method

 

Can be calculated using the Division Method, calculated as follows:

      Actual Cost divided by 1 – gross profit percentages (1.00 - .33= .67)

 

Selling price     $1,000/.67=  $1,493  100% 

Direct costs  $1,000  67%   

Gross profit  $   493  33%

Note: The actual margin of 33% is equal to the desired margin.

Make sure that you compute your desired margin correctly when estimating projects.

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