IntelliBid User Tip: The Question of Margin vs. Markup

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.

t39-markup-vs-margin

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:

  1. BASIC (EXPANDED O&P) Use this template for markups
  2. SHORT Use this template for margins

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!

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