Nowadays, setting markup is like sailing, says Joanne Hall, of Villa Builders, in Arnold, Md. “You have to trim, jibe, tack, reef the main, and sometimes just turn the damn engine on. I don’t think you should ever believe you can just set your sail and forget it. Not anymore.”
The first step in establishing a markup is to pinpoint your overhead costs and net profit goals. In better times, I pushed remodelers to aim for a net of 8% to 10%, above the owner’s salary, to allow for cost overruns. These days, I advise shooting for a 5% to 7% net, but I applaud anyone who strives to go higher.
Say you realistically anticipate $1.2 million in volume for the year. You know that your overhead (including pay) will be $324,000, or 27%. You want a net of $72,000, or 6%. Add the two to get the gross profit you need: $396,000 (33%).
To convert that gross profit into the markup you need, subtract your gross profit percentage from 1 and then divide 1 by the answer (1 – 0.33 = 0.67; 1 ÷ 0.67 = 1.49). Thus, your markup should be 0.49. If the plumber charges you $1,000, in other words, you charge the client $1,490.
Gross Profit Variables
Gross profits of between 30% and 40% tend to be industry benchmarks for remodeling. Yours may need to be higher or lower. The larger your average job size, the lower your overhead per volume dollar, and vice versa. I’ve seen overhead ranging from 12% (for companies with extremely big jobs) to 40% for companies with smaller jobs or very high marketing and sales expenses.
Your average job size shouldn’t affect your net profit goals, however. Remember that no matter how lean you get, others in your marketplace will undercut you. Why? Because they don’t know their costs and overhead. To try to match them on price is a sure road to ruin.
Many Roads to Marking Up
It doesn’t matter how you mark up as long as you bring home the bacon. The simplest and most common method is to apply the same markup across the board. But also consider these two alternatives:
Gross profit per hour, based on carpentry hours. This method works only if your carpenters are employees rather than subcontractors.
Multiply your number of field personnel by their actual working time. Assuming you run the $1.2 million company above, let’s say you have six field personnel who work 1,700 hours a year, or 10,200 hours. Divide your gross profit dollars ($396,000) by those hours, and you will get $38.82. Price jobs by adding this amount — your gross profit per hour — to your burdened average hourly cost of a field person.
By marking up only labor, this method may make you less expensive for jobs that are light on carpentry, and more expensive for jobs that are heavy on carpentry. It also commits you to actually use all 10,200 hours to reach your annual goal. Underestimate labor, and you are in trouble.
Gross profit per week. This method works whether you use employee crews or you use subcontractors, but it requires accurate scheduling.
Divide your needed annual gross profit by the number of weeks your crews work. As you price jobs, calculate the gross profit they will produce by the week. The difference will indicate if you should raise or lower prices.
You’ll definitely get a new perspective. I know one remodeler who realized he couldn’t make any money doing bathrooms.
The relative complexity of these two methods is a key reason for the popularity of across-the-board markups. I recommend that you price at least two ways. Use your best judgment for the job and always — always — watch your profit-and-loss and work-in-progress reports like a hawk.
—Linda Case is founder of Remodelers Advantage, a national company that gives remodelers the tools to achieve consistent profitability and success through one-on-one consulting, the Roundtables peer program, and an online learning community, Advantage Associates. 301.490.5620; firstname.lastname@example.org; www.remodelersadvantage.com.