As a general contractor, you make your profit mainly through markups. Therefore, knowing how much to mark up your services is essential to increasing your revenue and maintaining your cash flow.
If calculating markups is a part of your business that you struggle with, you’ve come to the right place. Consider this your general contractor markup guide.
Keep reading to learn the answer to questions such as:
- What is the standard markup for contractors?
- Why do contractors mark up materials?
- How much do general contractors mark up subcontractors?
Let’s jump right in!
What is general contractor markup?
General contractor markup is the amount that a contractor charges above their direct costs.
As a general contractor, this is your profit margin, or in other words, the amount left over after paying all of the costs of the job.
A typical contractor markup is usually calculated by percentage, with the average markup varying from 7% to 20% or more. The exact percentage depends on various factors, which we’ll explore later.
For now, let’s discuss the importance of general contractor markups.
Importance of markup in the construction industry
Markups are important to ensure that your business profits from every job. They’re also key when a job doesn’t go as planned, as you don’t have to pay as much from your own pocket.
A well calculated markup leaves room for error, but isn’t too inflated to take you out of the running for any bids.
In all, markups are essential to the longevity of your business. Let’s take a look at the different types of markups.
Types of markup
The average contractor markup is broken down into several smaller types of markups. The types of general contractor percentage markups include:
- Subcontractor markup percentage: Typically a markup on the laborer’s hourly rate.
- Contractor markup on materials: Contractors must mark up all materials to compensate for the total cost of materials.
- Overhead markups: Soft costs such as administrative costs, office rent, and accounting fees.
Markup vs. profit margin
Thinking markups and profit margins are the same is a common mistake. These two terms serve two distinct purposes.
Your profit margin determines the revenue that your business makes after paying the cost of services. To calculate your profit margin, you subtract the cost of goods sold from the total cost of the project.
Meanwhile, a markup is a difference between the retail price of the service minus the cost. This is all direct and indirect costs, and includes labor, materials, overhead, and profit.
Now that you know what a markup is, let’s take a look at what to consider when calculating your markups.
Factors to consider when determining markup
There are several factors that you need to consider when determining your markup for each job. Some of these factors include:
- Your goal profit margin.
- What the standard markup for contractors with similar businesses is.
- Average contractor markup on labor in your area.
In particular, you should be able to answer, “What is the average markup on construction in my area?” in order to stay competitive yet make a profit.
Here are some other important questions to ask yourself when assessing the factors that determine your markups:
- What is the typical contractor markup on materials in your area?
- What is the average markup on labor for this particular project?
- How much do general contractors mark up subcontractors doing similar jobs?
It’s a good idea to do some research to determine your competition’s general contractor markup on subcontractors. The same goes for finding the answer to questions like, “What percentage do contractors mark up subcontractors?”
Let’s talk about how to calculate markups for your business success.
How to calculate markup
There’s no industry standard for calculating contractor markups. The method your business uses depends on your overhead and other operating processes.
However, there are some basic steps you can follow to help you determine your markup percentage:
- Determine your gross profit. This is equivalent to your revenue minus your COGS (cost of goods sold).
- Divide your gross profit margin by the cost of goods sold. This will give you a decimal point for your markup.
- Take the decimal point markup and multiply it by 100 to get your markup percentage.
Factors that affect markup percentage
While you can simply calculate your markup percentage, there are still a few factors that you must also consider to get as accurate and effective of a markup as possible.
Factors that affect your contractor markup percentage include:
- Your intended profit margin.
- The type of project you’re working on.
- The number of subcontractors you hire.
Let’s take a look at some common mistakes people make when figuring out how much to mark up labor and materials.
Common mistakes to avoid when determining markup
Most business owners end up learning the most from their mistakes. However, it’s still better to try to make as few mistakes as possible, especially when it comes to contractor markup.
To help you spot mistakes before they’re made, here are some common things to look out for when determining markups:
- Make sure that you have a good grasp on what is standard markup for contractors in your industry. For example, if you run a painting business, you shouldn’t base your markup standards on those of drywalling businesses.
- Avoid having your markup as its own line on your invoice. Customers don’t like to pay more than they think is necessary, and they may not understand the markup. This could lead to you having to chase payment. If necessary, explain the markup to your customer beforehand.
- While you want to be competitive, avoid markups that are too low. This leads to you walking a tightrope, and possibly losing money if something goes wrong. On the other hand, an overly high markup scares off many potential customers.
Now let’s look at some tips for calculating markups to maximize your profit.
Tips for maximizing profit with markup
The number one tip for maximizing profit with markup is to have a thorough understanding of your business. You should know your expenses well and make it easy to use them as a baseline for calculating your markup and profit margin.
What’s more, doing research is crucial to figure out how much to mark up materials, as well as how much subcontractors typically make in your area. Preparation is key to maximizing profit.
Here are a few other tips to consider:
- Stay flexible. If the markup you first calculated isn’t working out for you anymore, recalculate it to best benefit your business.
- If your customers are concerned about your markup, offer to minimize expenses by using more affordable materials.
- Make sure that your subcontractors understand your payment terms from the beginning to avoid any future disputes.
Key takeaways
Hopefully, if you’ve ever found yourself creating a quote and asking, “How much should I mark up materials?”, you’ve found the answer in this blog.
There’s no ceiling to how much a general contractor can make, but it’s all dependent on your markup. Contractor markups can be a little tricky to calculate, but once you master the formula that best fits your business, you should notice an increase in your profits.
General contractor markup FAQs
What is the average markup for a general contractor?
Most general contractors use a markup of between 15-20%. However, contractor markups largely depend on the project and average costs in the area.
What is the margin for general contractors?
General contractor profit margins vary greatly and on average range from 8-35%. To determine the profit margin for your business, it’s important to look closely at your overhead costs.
How do I know if I’m pricing my jobs right?
Whether you’re pricing your jobs right mainly comes down to one simple thing: are you making a profit acceptable to your goals?
If the answer is yes, then you’re likely pricing your jobs perfectly. If not, you may need to revisit your markups as they may be too high or too low.
Want to price every job right, every time? Check out this general contractor pricing guide.
Image credit: Ivan Samkov via Pexels
