I spoke to a young lady last week who told me her husband is using a variable markup, also called using multiple markups, on his jobs. He marks up labor 3 or 3.5 times cost, and materials 1.5 times cost. He then adds 10% to any subcontractor quotes and doesn’t markup rental equipment or tools, or his time.
Gang, this is a recipe for disaster. How do you keep track of it all? How do you know your markup is enough? Using a variable markup will bite you sooner or later. I get at least one call a week from someone using a variable markup who can’t figure out why they’re losing money. They obviously aren’t charging enough for their work, but which markup is too low?
Using an inflated markup on one portion of your job costs essentially dumps your entire overhead onto that item. This is most often done against labor. The theory is that labor is always the biggest cost on any job, and that makes it the best item to carry all the overhead.
Charging all your overhead to labor is not the safest way to recover your overhead. Not by a mile. If you believe it is, tell me – what happens to your overhead when somebody fails to show up for work? Overhead is a 24 hour a day, 7 day a week, 52 week a year monster. When somebody doesn’t work and you can’t bill for that time, it is gone.
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Let’s start at the beginning. First rule is to have a good estimating sheet (or make life simple and use a computerized estimating program). Estimate all costs on every job, no short cuts. Anything over $300 gets a written quote from a sub, a supplier or a second check from someone that knows what they are doing.
Next, total all the costs for the job. Then apply one markup to that total job cost figure. It is the simplest and most effective way to price out your jobs, and it keeps you out of financial trouble. Isn’t that what you want?
The knowledge and experience Michael Stone gained in his 60+ years in construction has helped thousands of contractors improve their businesses and their lives. He is the author of the books Markup & Profit Revisited, Profitable Sales, and Estimating Construction Profitably, and is available for one-on-one consultations.