Q. Can you explain what costs should be included when estimating a project and what percent I should be using for markup? And should I mark up smaller jobs more than large jobs?
--Paul Kocharhook, Pathway Design & Construction, Seattle, Wash.
The answers to these two questions depend on many variables (most of which are specific to your company's unique situation), but here are some general concepts that I hope will be helpful.
Q1. Can you explain what costs should be included when estimating a project and what percent I should be using for markup?
The basic elements to include when estimating the cost of a particular job include:
- 1. Materials that will be required.
- 2. Subcontractor costs.
- 3. Other costs of getting the job completed (e.g., permits, dumpsters, temporary sanitary facilities, utility connections, rentals, travel reimbursements, etc.)
- 4. Labor costs.
The first three costs (materials, subcontractor costs, and other costs of getting the job done) are fairly straightforward and can be nailed down by obtaining quotes from materials suppliers and subcontractors.
|Tip: Create a "Miscellaneous Materials Costs" checklist for all of the small extra materials costs that tend to surface throughout the life of any job (e.g., saw blades, small specialty tools, miscellaneous hardware items that may have been overlooked in the original orders, materials spoiled during construction that need to be replaced, and so forth).|
The fourth cost, labor, is typically the biggest risk factor as it is more difficult to estimate. Why? Because it requires a high degree of accuracy in two distinct areas:
- The number of hours that will be required to complete the job, and
- Your employees' true cost per work hour.
Reliably predicting how long it will take you and your employees to perform various job tasks will be key to profitability as (assuming that you are working on a fixed-price basis) the cost of labor over-runs will directly reduce your potential profitability. So you'll need to dedicate some in-depth thought to computing how many hours this job will require (and be sure to allow some cushion for slippage!).
You then need to know the true hourly cost of your direct labor employees (and don't forget yourself if you'll be working on the job!). You'll need to determine "fully-burdened labor" costs including hourly rate, payroll taxes, benefits, time off, vehicle/tools/equipment usage, bonuses, training, and other costs. Click on the following link (labor burden) to learn more about how to determine your employees' real cost per production hour.
|Other Job Costs||$750|
|Employee & Owner Labor||$12,500|
Multiply the hours required by each employee X their burdened rate, add in your materials, subcontractor, and other job costs, and you'll know how much the job will potentially cost you to perform. Here's an example:
Now, to compute markup on the entire job:
You should have a gross profit goal in mind for your company. How to go about determining this goal for your company is a topic for another Q&A, but the percentage often used by consultants for remodelers is 30% to 35% (typically enough to cover company overhead and provide a profit).
Assuming that your company goal is 30%, does this mean that you should add 30% ($9,375) to your cost of $31,250 to arrive at your price for the job? Let's see what that would yield in terms of gross profit:
|Plus 30% of cost||$9,375|
|(Less) Cost $31,250||$31,250|
|Gross profit = 23.1%||$9,375|
So the answer is NO! Absolutely not!
I am stressing this point because it's a common error made by construction companies. As you can see by the example above, a markup of 30% only yields a gross profit of 23.1%! To achieve your desired gross profit of 30%, you would need to mark your costs up by 42.9% (i.e., $31,250 x 1.429 = $44,650):
|(Less) Cost (marked up 42.9%)||$31,250|
|Gross profit = 30%||$13,400|
|Gross Profit vs. Markup|
|Mark up represents profit and is computed and expressed as a percentage of cost.
Gross profit represents profit but is computed and expressed as a percentage of gross income.
As you can see by the preceding example, it's extremely important to first determine what gross profit you need to achieve for your company (i.e., what do you need to make before your general company overhead costs such as marketing, administration, etc.). Then you can determine your gross profit goals for each job, and mark up your costs sufficiently to meet your gross profit goals.