Markup in Construction – Fundamental Understanding
Minimum Bottom Line Profit Should Average 9.4%!
For Trades & Subcontractors, at Least 11%
After Income Taxes Are Paid!
When I was 18, I had a job as a framer’s helper. Mostly I lugged lumber to the house under construction and did a lot of nailing with my 22 ounce hammer. There were no nail guns. The sales price for that simple ‘A’ frame house was $34,000. In those days, that was expensive. I remember well wondering how much the contractor made building that house. I looked at costs simply as land, lumber and labor. For sure, it was complicated in those days, the contractor had less costs than modern day construction. One good example is the port-a-john, in those days I sought out the woods; today temporary facilities are required by code everywhere. Since doing accounting work for multiple different contractors, I’ve learned that every home has a lot of other costs that are not directly related to the project itself. With all these additional costs, how much does a contractor mark up the costs to get a profit that is fair and keeps him in business.
To help you understand this, this article will explain the fundamentals of markup and its application to construction. Most of you will be shocked at the mistakes you are making. Once you understand the fundamentals, successive articles will go into more depth on some of the major cost groups to help you more fully understand markup and how to end up with a profit that is fair and keeps you building more homes.
To understand the fundamentals of markup in construction, the reader must first understand the business principle of markup. Next, I will distinguish hard costs and soft costs as they are used with construction. Finally, I will tie it altogether for the contractor and if I do this right, you should have an ‘AH HAH!’ moment at the end.
Markup in Construction – What is Markup?
Markup has a very simple definition, it is the amount added onto costs to create a sales price.