Guide for Calculating General Contractor Markup

Calculate your general contractor markup appropriately and errorlessly to scale your business productivity and take your company to new heights.

A general contractor markup is an amount that a contractor charges beyond their direct costs, usually expressed as a percentage.

It is your construction business profit, or the amount left after all the hard and soft costs have been deducted. To secure your company’s future, you should always factor a markup into the job’s cost.

If you charge a lot, you risk losing a job bid, and if you charge too little, you won’t have a profit to keep when paying all of your charges.

Continue reading to understand how to properly calculate markup for construction jobs.

What is Markup?

The percentage you add to your direct costs to account for overhead and profit is known as the contractor markup. Residential contractors’ markup considers all expenses, including materials, labor, insurance, fees, permits, etc. The bigger the markup, the more profits your business generates.

Average Markup for General Contractors?

Most contractors are looking at a 35% margin; thus, a markup of 54%, or 1.54, is required. Subs typically have a gross profit margin of 50%; hence they require a markup of 100% or 2x.

Remember that your markup must include more than just your direct costs when determining the difference between margin and markup. You must also meet your expenses and earn a profit margin.

As a result, you must understand what percentage of income your overhead consumes and what percentage of revenue you wish to maintain as profit.

Several contractors have a net profit of 35%, 25% of which goes to overhead, and 10% is retained by the company. This is known as developing a business model, and it is one of the first things you should do when starting a business.

Markup vs Profit Margin (Make a comparison table)

Markup	Profit Margin
Contractor markup comprises all direct, indirect, fixed, and variable costs incurred while working on a project. It includes administrative expenses, labor, overhead, transportation, and profit. This is how you’ll figure out how much to charge for your services in order to earn the net profit you want.	Profit margin is how you decide how much you’ll make on a specific work, but it’s calculated differently than markup. You deduct your COGS (cost of goods sold) from the total project cost. For instance, if your company declares a profit margin of 30%, it suggests you earned $0.30 for every dollar generated.

How to Calculate Markup as Contractors?

The markup is the gap between what you charge for the service and what it costs to complete it. The formula is as follows:

Markup = Gross Profit [Job Cost ($) + Overhead (%) + Profit (%)]. x 100 [Job Cost]

Contractors often incur three types of direct and indirect costs:

Direct costs– These include labor, materials, and equipment for subcontractors.

Indirect costs– These include payroll, transportation, and insurance.

Overhead– Office expenses, including those for accounting, taxes, and marketing, are referred to as overhead.

Calculate a markup on your direct costs to produce a net profit while also covering your overhead and indirect expenditures. To avoid underestimating a work, identify all indirect costs and overhead and calculate the monthly cost.

Factors Affecting Markups

Markup is calculated using three major factors:

Materials

Contractors must mark up the materials they buy for each job to compensate for the costs of buying, sourcing, warehousing, and transporting the materials to the job site. Markups differ from one contractor to another, in some cases, from one project to another.

Labor

There are no industry standards for labor markups or hourly rates. Labor markups will certainly be higher in areas with high expenses and complex regulations, such as New England and California, than in the Midwest.

With an hourly labor cost, it’s critical to set objectives and benchmarks (both for the employee and the customer) because each hour over the allocated work will reduce revenues. 

However, individuals frequently underestimate the value of labor. The length of a project and the labor rate in a given area might have a significant impact on your bottom line.

Overheads

Overhead expenses include “indirect soft costs” such as general office expenditures, rent, utilities, taxes, accounting fees, advertising, and marketing. Overhead expenses also include all the other recurring costs associated with running your organization that is not directly related to a job.

Determining overhead costs is equally as important as calculating markup on all other expenditures related to your business because it helps you plan and budget and guarantees a profit.

Should You Let Customers Know Your Markup?

Developing confidence and trust in your job requires communication with clients. However, your clients will not want to pay any more than is necessary to meet both your standards and their requirements.

Many contractors avoid providing their markup on estimates and instead show only the total cost.  If you have your clients’ trust, that may be all that is required. Clients might expect more information if you have no prior relationship with them.

In general, markup cannot be negotiated, but there are ways to negotiate some expenses to give your clients the assurance they need to approve the job.

Provide affordable materials

This can be as simple as changing out the siding on the walls, selecting a less costly tile product, or converting from granite worktops to a less costly solid surface material.

Propose a partial DIY

If it’s a remodel, your client might prefer to do some of the work themselves to save money.

Sell your leftover material

When the job is finished, sell any remaining supplies at a discount and send the money to the client.

You might be hesitant to reveal your markup, but if your customer demands, be prepared to explain the direct and indirect costs associated with keeping your business going. 

Everyone recognizes the necessity for a gross profit, and as long as your markup is justified, you won’t have any problems.