Markup for a

Construction Business
Remodeling/New Home Construction/
Specialty/Commercial
By Michael Stone

markup
Markup for a Construction Business

D
o you know the number one reason construction businesses
fail? They don’t charge enough for the work or service they
provide. It makes sense to charge a price high enough to
cover your job costs, pay your overhead and make a profit,
but not everyone knows how to determine that price.

The easiest way is by using a markup – a factor that,

“
I can hear the cries of anguish
from many of you, even as I write.
‘Nobody can charge that much,
multiplied by the job costs estimated for each job,
produces a sales price sufficient to cover your job
costs, pay your overhead and make a profit. The
markup factor for your business will be different

”
you’ll never get the work.’ than the markup factor for someone else’s business
because your business has different overhead
expenses and profit needs than another business.

Is there a quick and simple method to help you determine your

markup factor?
Yes. Let’s take a look.

› Markup for a Remodeling Company

Let’s say you’ve done the research for your company and concluded that
with no employees or subcontractors, you can expect to sell, build and get
paid for a volume of $150,000 in your first year (or next year). Now, maybe
that’s too low – that’s okay. This is an example only; use your own numbers
because the math is the same. It’s the process of determining your markup
that we’re covering here.

Let’s assume you want to make a minimum net profit of at least 8 percent.
Most remodeling contractors would be happy to make 8 percent (many
would be happy with any profit at all). And after calculating your overhead
(all non-job related expenses such as advertising, office expenses owner’s
salary, fuel for vehicles, etc.), you project your overhead will be $41,250 for
the first year, or 27.5 percent of your volume.

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Markup for a Construction Business

So this is what you are projecting for your company’s first year:
Dollar volume built $150,000
Overhead expenses (27.5%) $41,250
Net profit (8.0%) $12,000

Here’s how you’ll compute your markup:

Add overhead expenses and net profit:
$41,250 Overhead
$12,000 Profit
$53,250 Total Overhead and Profit (O&P)

Subtract O&P from the projected dollar volume, and that will tell us the
total job costs:
$150,000 Projected Volume
- $53,250 Total O&P
$96,750 Total Job Costs

Your projected job costs for your first year in business are $96,750. In other
words, that’s the amount you expect to spend the first year to build the
jobs you’ve projected you’ll sell. With those projections, use this formula to
compute your markup:
Total Projected Volume ÷ Job Costs = Markup
$150,000 ÷ $96,750 = 1.55

Your markup factor is 1.55.

How do you use it? To arrive at the correct sales price for each job that you
do, first estimate the actual job costs for that particular job. Then multiply
the estimated job costs by your markup of 1.55. The result is a sales
price that will allow you to pay all of your job costs, all of your overhead
expenses and make your projected 8 percent profit. It’s that simple.

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Markup for a Construction Business

A quick check using the following formula will tell you if you’re
using the right markup.

Markup x Job Costs = Total Volume Built

1.55 x $96,750 = $149,963

That’s close enough to the $150,000 projected dollar volume to show that
this markup is correct.

I can hear the cries of anguish from many of you, even as I write.
“Nobody can charge that much, you’ll never get the work.”

If that thought is going through your head, you’re going to have a tough
time surviving in this business. This is a hypothetical problem for a
hypothetical company, but what would you cut to lower your markup? You
might say that you could cut the overhead expenses. If so, you’ll probably
start with your salary first. The truth is that the 27.5 percent overhead
figure we calculated is a lot closer to reality than the arbitrary 10, 15 or 20
percent that too many contractors think is correct.

So if you are going to incur the overhead, and if you want to make a
profit, how else will you do it if you don’t charge that price? The math is
correct. And an 8% profit is more than reasonable for the time, effort and
risk that will go into the jobs your company will build.

Trust your math! If the math dictates a 1.55 markup but you choose to
cut your sales price, you’ll still have to pay your expenses. They won’t
just go away.

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Markup for a Construction Business

› Markup for New Home Construction

With new home construction, it’s easier to project our job costs than it is to
project our dollar volume. So, with a different set of figures, we’ll calculate
our markup with a different formula.

Let’s say you’ve estimated your overhead to be $87,750. You’ve decided to

build four homes this year. You will build two at a cost of $115,000 each
(no land expense) and two at a cost of $138,000 each. Your goal is to make
a $55,000 net profit. What should our markup be to arrive at the sales
price for these homes?

Take the figures you projected and add them together to get the
total volume built:

Job Costs $506,000 ($115,000 x 2) + ($138,000 x 2)

Overhead Expenses (13.5%) $87,750
Profit (8.0%) $55,000
Total Volume $648,750

Total Volume built ÷ Job Costs = Markup

$648,750 ÷ $506,000 = 1.2821 (round to 1.29)

Check your figures by using our formula:

Markup x Job Costs = Total Volume Built
1.29 x $506,000 = $652,740

Looking at the numbers brings us to some very interesting points.

First, as your total dollar volume built increases, your percentage of

overhead expenses is proportionally smaller. The dollar amount increases,
but the percentage of overhead to total volume decreases. When the
total dollar volume built was $150,000 for our remodeling company,
the overhead was 27.5 percent of that amount. With a total volume of
$648,750, our overhead is 13.5 percent of our total dollar volume built.
And, as you can see, your markup also goes down proportionally as well.

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Markup for a Construction Business

Now, here’s some advice. If your business is going to do both new home
construction and remodeling, you must keep separate books, one for new
homes and one for remodeling. This is mandatory. If

“
you lump everything into one set of books, you’ll never
There are two reasons be able to figure out where to assign expenses. And if
specialty contractors may have you can’t figure out where the expense should go, you

”
lower overhead expenses. won’t be able to compute an accurate markup for the
different types of job. This is one of the main reasons
that I don’t recommend trying to do both remodeling
and new construction work at the same time. Contractors are notorious for not
keeping accurate books – few, if any, will take the time or expense to keep two
separate sets of books. But it’s really critical that you do.

› Specialty Contractors
Some of you may be surprised to learn that the percentage for overhead
expenses in the specialty building trades normally won’t fluctuate more
than plus or minus four percent from the overhead of a general contractor.
There’s a commonly held belief that specialty contracting is somehow
“different,” and so the overhead numbers must also be different; for most
people that means much, much lower. Not true.

If you’re a specialty contractor, take the time to develop a list of your

overhead expenses. It’s a good exercise that should also give you more
confidence in establishing a sales price for your work.

There are two reasons specialty contractors may have lower overhead expenses:

First, specialty contractors normally don’t have the sales and advertising
expense that general contractors have. That’s assuming, of course, that they’ve
done a good job of letting the general contractors who can use their services
know that they’re in business. If they’ve done that, then word-of-mouth
advertising resulting from their work will get them referrals and repeat work
from general contractors on a regular basis. That’s also assuming that the
specialty contractor chooses to work primarily with general contractors, as
opposed to soliciting and doing work for the general public.

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Markup for a Construction Business

Working only for general contractors and reducing their advertising allows
specialty contractors to lower their overhead expense by 6 to 12 percent.
But if they do some or all of their work for the public, they’ll have the
same advertising expense as a general contractor.

Second, specialty contractors may have lower overhead because they do a

smaller volume of business (or their job size is smaller, however you want
to put it). Their overall cost of doing business is less, in terms of dollar
volume and percentage of expense. Some specialty contractors have an
average job size of only $550 to $1,200.

With smaller job size and lower overhead, specialty contractors normally
have a markup that’s lower than remodeling contractors doing the same
volume of work, but higher than contractors doing new home construction
or commercial work.

As a specialty contractor, once you have your overhead costs “nailed down,”
you can develop your markup using the same calculation as a remodeling
contractor and use that markup to determine the sales price of your jobs.

› Commercial Work
Contrary to what most commercial contractors will tell you, you should
use the same approach in establishing your sales price for commercial work
as for remodeling, new home construction or specialty work. The math
doesn’t change. Commercial work normally has a much higher dollar
volume in any given year than other areas of construction, so your markup
is often lower than residential construction.

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Markup for a Construction Business

› Make It Happen
Doing the math and making sure all the numbers are where they
should be isn’t enough. You must also make it all happen. That’s the
difference between those who make it in this
business, and those who don’t. Less than one

“ They don’t know if your

price is too high or not. If they
did, they wouldn’t have called
contractor in 10 will take the time to both develop
these numbers and then use them. That’s because
of the biggest myth in construction – the belief
that you must be “competitive.”

”
you in the first place.
You do not have to be COMPETITIVE, but that is
certainly an option. What you have to be, what you
must be, is PROFITABLE. If you are not profitable, you and your business
are going to go away. Period. End of conversation.

Now, in construction, being competitive is code for having the lowest price.
There is a belief that no one will want you to remodel their kitchen, build
their home, repair their electrical service or construct their office building
unless you have the lowest price. That belief ignores the fact that in today’s
market, there are a lot of little things that matter more than price.

Some of those little things are returning phone calls, dressing properly,
keeping your hair trimmed and shoes shined, arriving for your appointments
on time, and providing solid answers to the customer’s questions.

Big things matter too. They include following through on what you say,
starting and finishing jobs on time, communicating clearly and frequently
with your customer and keeping jobs clean from start to finish.

Your customers rank price seventh or eighth in their list of considerations

when they select the company that will do their remodeling work, new
home, or specialty service work. That has been shown by a number
of different studies, including one by the National Association of
Home Builders.

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Markup for a Construction Business

So, the next time you start worrying about your price being too high
or that you must be competitive, remember it is in your head, not your
customers’. They don’t know if your price is too high or not. If they did,
they wouldn’t have called you in the first place. They would have done the
job themselves. Polish up your sales skills, stay on top of the intangibles
and forget about being price competitive. Let the other guy be competitive
and go broke. Set your markup where it should be, focus your attention
and efforts on being profitable and do the intangibles needed to make you
and your company successful.

Michael Stone, author of two construction business management books, Markup and
Profit; A Contractor’s Guide and Profitable Sales, A Contractor’s Guide has
more than four decades of experience in the building and remodeling industry. He provides
Coaching and Consulting services for construction companies throughout the U.S., as well as
products and other services to assist contractors with their business management needs. He can
be reached by e-mail at michael@markupandprofit.com, by phone at 1-888-944-0044, on
the Web at www.markupandprofit.com or at his new web site, www.myconstructionbiz.com.

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