There are two methods you can use to calculate overhead and profit when putting an estimate together: the markup method and the margin method. Estimators who are aware of both methods often consider it a matter of preference, but in reality only the margin method is correct 100% of the time – the markup method typically results in lost profits if not used correctly.
We hear, all too often, that many estimators prefer the markup method because it’s simple. For example, If a job costs $100,000 to complete and you need to add 10% for overhead, that’s a $10,000 markup, right? The markup method is simple to calculate and easy to understand, but the result of its simplicity can have a negative impact on your bottom line.
Markup bases its total on your costs. Margin, on the other hand, bases its total on the sell price including overhead. A 10% markup on a $100,000 job results in a bid total of $110,000. Calculating margin on a $100,000 job, on the other hand, results in a bid total of $111,111.11, of which 10% is overhead. The concept of calculating your margin can be daunting, because the calculation is more complex than the simple markup method, but don’t worry – IntelliBid will take care of that for you!
For example, and we’ll keep it simple, if you mark up your products or services 30% — your gross profit margin on this product or service is actually 23.1%. Below is an example to demonstrate the difference.
Your cost for your product or service is $100
You mark it up 30% — so your mark-up (or gross profit $) is $30
Your selling price (cost + markup) is $130
Your gross profit is $30 – note the mark-up and gross profit dollars are the same
But your gross profit margin (GP $ / selling price) is 23.1%
Use this calculator to assist you in determining your Profit and Margins and see the differences for yourself.
ConEst IntelliBid ships with many Bid templates and a few are specifically designed for Margin or Markup calculations. Two of the most used Bid Templates are:
Ultimately, your overhead and profit percentages will be determined by your accountant. Make sure you know whether those percentages represent a markup or a margin. Applying your accountant’s numbers to the right calculation will result in increased profits on every job!