Contractor markup is the sum of a contractors’ overhead and profit. This number or percentage (as shown in most contractors’ costs list) that gets added to a job’s direct costs. The markup that a contractor sets for jobs can either make or break their business. It’s an important figure that shouldn’t be taken lightly by either contractor or customer.
As an example, if a jobs direct costs (materials needed, employees wages, etc..) come up to a total of $10,000 then a contractor can add a markup of 25% (15% for overhead and 10% for profit) for a total job cost of $12,500.
What Goes Into Contractor Markup?
Contractor markup is the combination of overhead and profit. Contractor overhead would include things like advertising, insurance, accounting, licenses, taxes, supervision (especially if there are subcontractors involved), etc.. Profit, on the other hand, is money a contractor actually gets to keep for themselves, or more than often goes back to the business.
What Is The Average Contractor Markup?
The average contractor markup can anywhere between 20%-35%. The average contractor mark up varies depending on where you live and what type of contracting job is being done. Each contractor will have their own markup and ways of calculating mark up, so even two contractors in the same place, and industry might have completely different mark ups.
How Should Contractor Markup Be Determined?
Each contractor has their own way of establishing what mark up to set for their contracts. Some may have different business models that might play a role.
There are certain formulas that are often used to determine a contractor’s markup which involves calculating total employee salary costs, materials cost, etc. In the following section well go over how to calculate markup so you can have an idea of a system or as a customer a general idea on how it gets calculated.
How To Calculate Markup
For contractors that are trying to figure out how to calculate markup here is a general way of doing it based on your fixed overhead expenses, variable overhead expenses and profit percentage.
Fixed Overhead Expenses | Annual Cost | % of Annual Sales (out of 1,000,000 for simplicity) |
|---|---|---|
Employee Salaries | 40,000$ | 4% |
Your Salary | 50,000$ | 5% |
Rent | 10,000$ | 1% |
Insurance (Business & Health) | 15,000$ | 1.5% |
Legal Fees | 2000$ | 0.2% |
Accounting Fees | 1500$ | 0.15% |
Taxes | 15,000$ | 1.5% |
Advertising | 3500$ | 0.35% |
Total | 137,000$ | 13.7% |
Variable Overhead Expenses | Annual Cost | % of Annual Sales (out of 1,000,000 |
|---|---|---|
Supervision Costs | 50,000$ | 5% |
Tools & Equipment | 10,000$ | 1% |
Vehicles (Maintenance) | 10,000$ | 1% |
Total | 70,000$ | 7% |
With this we can see an estimated fixed overhead costs of 137,000$ making up 13.7% of your total annual sales and an estimated variable overhead costs of 70,000$ making up 7% of your total annual sales.
Assuming your making more sales as the year goes by you can estimate a higher increase in sales for next year, let's say to 1,300,000$.
On those estimated sales you want to make a profit of 10%.
So do the following calculations:
To figure out percentage of new variable overhead costs: 1,300,000 x 7% = 91,000$
Figure out the profit of your estimated sales cost:
1,300,000 x 10% = 130,000$
Add fixed overhead costs (137,000$) + variable overhead costs (91,000$) + profit (130,000$) = 358,000$.
1,300,000 - 352,000 = 942,000$
1,300,000 / 942,000 = 1.38 or in other words in this case you would need a contractor markup of nearly 38% to reach your goals.
How Can Contractor Markup Be Negotiated?
For the most part, contractor markup can’t directly be negotiated with a contractor but you can definitely negotiate the price in a way where it’s beneficial to both parties. Some ways to negotiate price is by considering the materials being used for the job.
Contractor mark up is a very important figure since it can determine whether a business is successful or not. While you might be able to find a contractor that charges a smaller markup, when you’re dealing with the biggest investment of your life (your home) it’s not always a good idea to go with the lowest price possible.
