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How to Calculate your Mark-up the Right Way!

15 Mar

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

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%

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