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The Mistake of Markup
The Mistake of Markup
The Mistake of Markup
If a builder wants to make a 20% margin (also called gross profit) to cover overhead and
profit, he has to mark up his hard costs by 25%. This little twist of math manages to
confuse many people and has probably lead to the bankruptcy of more than a few small
contractors who thought they could mark up their jobs by 20% for a 20% gross profit. The
math, shown below is simple. To achieve a 20% margin (for overhead and profit), you need
to mark up your costs by 25% (see box below).
SAMPLE JOB MARKUP
Job Costs $10,000+ 25% markup: 2,500
Total price: 12,500
Markup Price = Margin: 2,500 12,500 =
20%
The chart below shows how much a contractor has to mark up his hard costs in order to
make a certain margin. Margin, or gross profit, is used to pay for a companys overhead and
to provide a net profit at the end of the year.
Markup
15%
13.0%
20%
16.7%
25%
30%
20.0%
23.0%
35
25.9%
40%
28.6%
50%
100%
33.0%
50.0%