# Mark-up and Margin

Mark-up and margin are two terms often confused with each other. Mark-up is an inventory term, sometimes only used when discussing costs and is a function of costs; margin is a profit and loss statement term and is a function of sales.

## Residential Construction: Average Net Profit After Taxes Equals 9.4%

The residential construction industry’s average net profit after taxes equals 9.4% during 2019. The top four companies in the United States built and sold 151,366 homes with an average sales price of \$376,703. Each home netted after income taxes \$35,464 of profit. This equates to an average net profit of 9.4% in the residential construction industry.

## Markup on Materials – Setting the Proper Rate

There is no preset national standard for markup on materials. The Internal Revenue Service’s Construction Industry Audit Technique Guide (May 2009) states that from the Means Contractor’s Pricing Guide include a standard 10% markup on material for profit. However, profit is only one portion of total markup; therefore, markup on materials starts at a minimum 10%. In some cases markup on materials can exceed 100%. This article provides guidance to the contractor, estimator or project manager with setting the markup rates on materials.

## Mark-Up with Construction

To grasp this concept the reader must first understand some history associated with mark-up. Next, a modern approach is adopted which requires an understanding of hard and soft costs. Once the two types of construction costs are incorporated, the contractor will learn how to read and interpret a basic profit and loss statement. With this knowledge and given the various margins for the respective type of contractor they then can calculate the mark-up needed to achieve financial success. It all begins with a little historical perspective.

## Definition of Contribution Margin

Contribution margin is a core business concept and is often used in cost accounting to identify the amount of financial contribution a sold product provides to the company.  Simply put, contribution margin is the sales price less the direct costs (sometimes referred to as variable costs).

## What is ‘Cost of Goods Sold’?

Simply put, ‘cost of goods sold’ equals the direct costs of materials, human resources, and equipment needed to produce the item sold. However, this can be confusing because there are many marginal cost items that affect the real cost of producing and selling the item.

## What is the Difference between Markup and Margin?

It is amazing how one simple formula can be so confusing to the average business owner. The formula is markup. It is defined as the dollar amount or percentage of the cost of the item added to the item to equal its sales price. Many entrepreneurs especially those in retail confuse this simple formula with margin.

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