General Contractor Markup: A Complete Guide

Your company’s longevity depends on your general contractor markup. It is the cost you will be charging your customers surplus the cost of your business. 

It is the amount you would gain as profit from service after you are done paying the equipment cost, employees’ wages, hard and soft costs, and other overhead costs.

Remember, you need to be very strategic in your markup and set a fair price. It is because if you charge too high a general contractor’s markup, you will lose the service, and charging too low will set your business on a loss track.

So, how do you decide on markup for general contractor business? Are there some important considerations to decide? It is time to find out! 

What is Markup?

The general definition of markup is the difference between the selling price and the cost price of a service or product. It is mostly expressed in the price quotations as a percentage. It is the premium or additional price charged over the original cost of service, which will be overhead and profit to the service provider.

The residential contractors decide on a markup by considering all costs such as material, employee fees, permits, insurance, equipment, and others. A higher markup tends to give your business a better profit with each service completion. 

Difference between markup and profit margin

Most people believe that profit margin and markup share the same definition, but it is not. Even though they share the same numbers or inputs for calculations, these accounting terms serve a different purpose of providing information. 

A profit margin determines the revenue of a business that it makes after paying the cost of services. A markup is a difference between the retail price of the service minus the cost. 

Today, many general contractor businesses are not booming in profitability because of their confusion on profit margin and markup. They often use it interchangeably to believe it is a gross margin.

Get clarity on the difference between profit margin and markup. It is quite important for most contractors to improve their bidding process and profitability. Both of these calculations are useful for setting the prices of services offered and measuring productivity. 

But, they represent the profits differently for construction jobs or general contractor businesses. And this difference is worth considering. To understand the difference, in brief, you need to go through every single element involved while calculating markup and gross margin. They are:

  • Job cost– It covers the costs incurred for everything that is needed for completing a particular job. Thus, it includes labor costs, equipment costs, capital investments, material costs, insurance premiums, permits, fuel, and all other direct costs. 
  • Overhead costs- These include the business bills, office rent, office equipment costs, and all of the other expenses that are not included within the list of direct costs. 
  • Revenue earned- It is defined as the income that you earn by selling your services and products. It reflects your earnings before the deduction of any costs. 
  • Net profit- It is the amount that is left after deducting overhead costs and job costs from the total costs. 
  • Gross profit- It is the revenue amount that is left after paying off all the expenses for providing the service to customers. You will learn more about it later in the ‘How can contractors calculate markup?’ section. 
  • Markup- The difference between the cost of services and the sales price you have quoted to the customer for the same. Job costs subtracted from the sales price are your contractor charges markup, and the different percentage is stated as the markup percentage. 
  • Profit margin or gross margin- It is considered as the gross profit on the overall service and is the sales price percentage. It is the revenue earned after you have paid the cost of services as a gross overhead and profit percentage.

Hence, the difference between markup and gross profit margin is that the markup is always based on job costs, whereas the gross margin is always based on sales. The gross margin subtracts the sales price from overhead allocation and job costs. 

For instance, you need to keep in mind that the 20% markup is not equivalent to the 20% gross profit margin. To acquire a gross profit margin of 20%, the markup should be stated for job costs at 25%. 

 So, for now, let’s focus on markup for general contractors to help you ensure profitability with your construction business. 

Factors to Calculate Markup

If you want to calculate the general contractor markup for your business, then you must take some factors into consideration to make an informed decision:

1. Overhead expenses

Overhead expenses are more like the indirect or soft costs of the general contractor business. These expenses include office expenses, accounting charges, management fees, advertising costs, website expenses, and others.

The overhead and profit are not directly related to your specific service but are crucial for running the overall business operations.

It becomes important for you to decide on a mark up on overhead expenses to get a proper budget plan to ensure profitability with every service delivery.

The overhead expenses might not intervene in any particular job execution but are spent from your capital that you must recover as company profitability. 

2. Employee cost

The employee markups are decided based on the type of job they are being signed up for. Suppose the project is complex to approach with major safety risks. In that case, the labor rate will eventually be higher.

In that case, the employee markup should also increase to ensure that you don’t have to deduct the same from your net profit.

3. Material and equipment expenses

The materials purchased and needed for each job should be added to the markup consideration as well. You must ensure a profit on the cost of sourcing, storing, purchasing, and delivering the materials.

The same is with the equipment you buy or use for a project. If you are delivering a service where you ought to use heavy machinery or expensive tools, you should consider the cost of purchase and maintenance to the overall mark up percentage.

4. Industry prices

You must run research on your competitors across the general contractor industry. You must know how your competitor business owner is pricing the services and offerings. Determine the average contractor pricing of all the products across various industries. 

You must keep in mind that the customers are also aware of the average prices that the other companies are charging them. So, if they find your own mark up has increased the price of the service over others, they will reject it and go to your competitors.

Therefore, prefer to decide on a markup percentage that revolves around the existing average in the industry. 

5. Volume of sales

The services with a higher demand or sales volume can have a lower markup percentage and still make a good profit. It is a strategic decision as lower markups on trending services will attract more customers to avail your brand over others. 

6. Gross profit margin

You must know the gross margin of your business to calculate the mark up. Gross profit is the additional revenue you have after paying the service operation cost.

7. Cost of goods sold (COGS)

The cost of goods sold is defined as the amount you pay for buying or the products and keeping up with the business operations. The markup needs to be high enough to cover up the cost of goods sold:

  • Insurance
  • Building rent
  • Employee compensation
  • Freight costs
  • Business supplies
  • Raw materials
  • Equipment cost
  • Storage expenses
  • Shipping costs
  • Production equipment

How Most Contractors Can Calculate Markup?

There is no industry standard for deciding on markup. Every business spends differently on its overhead expenses and has different profit demands. 

The general contractor businesses determine different work volumes to have a unique and justified mark up. Apart from the factors stated above, the markup will also depend on the number of employees, the location of the business, and the company structure.

Irrespective of whether you are offering specialty works, remodeling works, or constructing new homes, your mark up is not calculated on your services but on the direct or real costs needed for executing them.

The general contractors can follow some basic steps to calculate their markup percentage with the use of gross profit. The steps are as follows:

Step 1: Determine the gross profit

As stated earlier, you will need to calculate the gross profit to figure out the markup. The formula for finding the gross profit is: 

Revenue- Cost of goods sold = Gross Profit

Revenue is the income that you will be earning after selling off the services before deducting any other direct costs

For instance, if a service helps you earn $5000 in a month where the hard and soft costs are around $2000. The gross profit according to the above formula will be $3000. 

Step 2: Equate the gross profit and cost of goods sold

When you have the gross profit in hand, divide it with the cost of goods sold. It will eventually give you the markup. The formula in precise is:

Gross profit / Cost of service or contract price = Markup

Now, multiply the markup by 100, and you will have the markup percentage in hand.

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FAQs

Profit margin states the profitability of your business services and products. It is the revenue percentage that remains after deducing the product or business costs. It is one of the most widely preferred financial ratios. It is the starting point of measuring the profit over the income statement. Gross profit is the start, followed by operating profit, and ends with net profit.
The markups of a construction business vary from one contractor to another. It also varies depending on the project. The typical general contractor markup with respect to materials cost will mostly be between 7% to 10%. But some general contractors also markup their job costs by up to 20%.
The average hourly rate of the general contractors ranges from $25/hour to $85/hour, depending on the service complexity and quality. On hourly rates, the general contractors mostly charge around 10% to 20% over the actual project cost of the construction jobs.
The minimum profit for the contractors should be around 8% to 10% on average. But, 15% is considered an ideal profit percentage or contract charge for the contractors. So, if you are running a general contractor business, make sure you aim at acquiring such profit figures to grow your business profitably.

FieldCamp Makes Business Management Easy For General Contractors

Knowing the contractor markup is just one phase of implementing profitability for your general contractor business. The second and most important element of running such a business is to have proper contractor service management software

When a customer requests a price quote for construction or remodeling projects, you will definitely be quick on your contractor markup calculations and pre-set estimates to get it ready. After that, FieldCamp will help you send that price estimate to the customer digitally within a matter of seconds through their given contact details. 

FieldCamp is a scheduling software where you can organize all of the job requests easily. You can send them the estimates, wait for their revert and then assign employees for the job. Check if the service has commenced for the client or not, right from the FieldCamp portal. 

When you are done delivering the services, create the invoice right away with just a few clicks. Send the soft copy of the invoice to the customers through an SMS link or through email. You can also train your employees to create an invoice over their employee portal and share it with clients. 

FieldCamp allows you to store the customer details over the software to make them accessible for repeat businesses. Consider our of FieldCamp and let us improve your business management experience with complete digitization. 

Author Bio
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Gaurang Bhatt

Gaurang Bhatt is a techie in himself with an ability to solve problems technically and present solutions in the form of a product. He is one of the pioneers to curate FieldCamp with his 15+ years of knowledge and expertise in providing solutions to home service industries. Gaurang aims to overcome challenges faced by service business owners through software solutions and blogs.

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