The Importance of Knowing your Mark-Up
and How to Calculate It

According to my experience 4 out 10 business owners know how to calculate their mark-up which is a low percentage. Taking in consideration the importance of what this ratio represents, the markup concept is easy to apply but sometimes misunderstand. Let me explain the concept, and how we should calculate it.

First in order to calculate the mark-up, you need to know your gross profit that is the result of subtracting sales minus construction costs.

For example:

Sales ………………………………………………………………………………    $560,000.00………………….100%
Construction Cost ………………………………………………………….…($448,000.00)…………………  80
Gross Profit……………………………………………………………………… $112,000.00……………………..20%

So to calculate the gross margin, that is the gross profit percentage we divide the gross profit by sales which is, for our example: $112,000/$560,000 equaling 20%.

This means, that your sales after deducting the construction cost left 20% that will cover your, fixed overheads, and your profit. If you spend more than $112,000 (20%) in overhead you do not have a profit. If you spend less than 20% ($112,000) you will have a profit.

The 20%  is going to be the base to calculate your mark-up. It has to be clear that the 20% is not the mark-up.

Now just say that we are bidding a project which the cost to execute is $140,000 and we mistakenly add to it the 20% as the markup to turn out as final bidding price of $168,000.

If our bid is accepted the $168,000 is our sales. Let’s see how the numbers talk:

Sales………………………………………………………………………………………. $168,000.00………………100%
Construction Cost……………………………………………………………….   ( $ 140,000.00)………….83.33%
Gross Profit…………………………………………………………………………………$28,000.00………….16.67%

What happened? We applied the 20%!

Yes we applied the gross margin, not the markup.

So in order to maintain the 20% gross margin, we should apply a markup of 25%.

Applying 25% markup  (gross margin 20%) to our  bidding project which has a cost of $140,000 our final price to bid will be $175,000.00 not $168,000.

Let’s review the number again, but this time applying the correct markup

Sales……………………………………………………………………………………..   $175,000.00……………..100%
Construction Cost      ………………………………………………………………    140,000.00………………80%
Gross profit …………………………………………………………………………………$ 35,000.00……………20%

As we see a gross margin of 20% is equal to a markup of 25%

Applying the markup of 25% we are assure 20% left to cover overheads and profit. If we mistakenly apply a markup of 20% we get only 16.67% to cover overhead and profit, that will mean reduce our profit.

Quite a difference right!

Now I going to show you a trick to how calculate the markup based on your gross margin. You just need to  put the gross margin (20%) as numerator and it difference 80% (Construction Cost) as denominator. So the markup will be 20/80 equal 25 that is express as percentage.

The numerator and denominator must add 100

Another example: If we have a gross margin of 15%, our markup will be 15/85 = 17.65% Remember the addition of numerator and denominator must be 100.

But you will say I’m good because I always apply 30% , or 25% But that is not the point, the point is knowing your minimum markup at the moment that you bid.

Knowing your gross margin you will know your minimum markup, so in the moment to submit a bid you will make an informed decision.

In some project if you considered pertinent you can down a little your markup to win the bid, but you know that in the next project you should  recuperate with a bigger markup. If the competitive market allow it , otherwise you will need to reduce your construction cost, or rise your prices.