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The Volatile Issue of Markup
The Revolutionary Rule: Mark up any way you want, as long
as you...bring home the gross profit bacon!
What is our goal when developing a sales price? To earn our targeted
gross profit. Let's look at one remodeler's numbers to learn more
about markup.
Joe is planning for his next business year. He is committed to achieving a net profit of $25,000. He's planning to sell and produce a volume of $300,000 and his overhead runs $65,000. This leaves $210,000 for job costs. Let's explore the different ways that Joe could develop a sales price for the jobs he sells.
1. Across-the-Board Markup
With this method, every dollar of Joe's job cost ($210,000) earns
the same amount of gross profit. This is the most widely used pricing
system in the industry -- simple, easy for planning but not flexible.
Joe needs $90,000 in gross profit.
He uses a 1.43 or 43% markup on all job costs to help him achieve
this goal. $210,000 x 1.43 = $300,300
$300,300 - 210,000 = $ 90,300 in gross profit dollars
To determine the markup you need, simply divide the gross profit
dollars by the job cost dollars. $90,000 ) 210,000 =42.8%.
This equates to a 43% or 1.43 across the board markup.
2. Differential Markup
Labor, material and subs are each marked up with a different percentage.
Usually labor is very heavily burdened with gross profit.
$65,000 Labor X 100% or 2.0 mark up = $130,000
$17,000 Subs X 30% or 1.3 mark up = $93,000
$70,000 Materials X 10% or 1.1 mark up = $77,000
TOTAL $300,000
This system will allow Joe to earn more gross profit on heavy
labor jobs and less on light labor jobs.
3. Labor-based Markup
Joe has three carpenter employees. Each works 2000 labor hours per
year.
This is a total of 6000 labor hours each year. Within this time,
Joe has to earn $90,000 in gross profit. Each hour of labor must
be marked up to carry $15 of overhead. (6000 hours x $15 = $90,000)
For example, if Joe expects a job to take 160 hours to complete
a job that has job costs of $10,000, he would charge the client
a minimum of $12,400. (160 x $15 = $2,400)
4. Schedule-based Markup
Joe's company has 250 working days in the year in which to generate
$90,000 of gross profit. Therefore, each working day must produce
$360 in gross profit (250 x $360 = $90,000)
Joe runs one job at a time. The Harris job will take 4 weeks or
20 working days. (20 x $360 = $7200). This amount, $7,200 will be
added to the job costs for a minimum mark up. For example, if the
Harris job will cost $10,000, the sales price would be $17,200.00
5. Flexible Markup Based on Conditions and
Type of Job
Choose your markup. Make sure it can be monitored at least monthly.
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Official Charity of 2008
Remodelers Advantage Inc.
535 Main Street, Suite 211
Laurel, MD 20707
ofc: 301-490-5620
fax: 301-498-6869
Info@RemodelersAdvantage.com