# The use of markup in priced work



## john elliott (Oct 23, 2005)

I’m not talking about time and materials here, I am talking about priced work, where the customer is paying an agreed price for the entire job, labor, materials, everything.

So my query is about the mark-up system, and why people bother with it. It seems a very complicated way of arriving at a price for the quotation.

If I understand it correctly, the idea is to have a price for labor, and a price for materials, then mark each of these up by a certain amount and then present the price arrived at to the customer.

But that seems to me to be a bit risky, because if the job called for not much in the way of materials, then less money would be made on that job. Same thing if the materials were inexpensive. On the other hand, if the materials do amount to a lot of money, then the mark-up would be a lot as well, and the quotation might be uncompetitive.

We’ve each got our own way of working, what I do is figure out how much money I want to make per day, then how many days it will take to do the job, then add the cost of the materials, and that’s my price. That way, as long as I am fully booked, I always make the same amount of money each day. If the job calls for something really expensive and fragile, then I would want to cover that risk somehow, and the costs of doing that would be charged to the job.

So what I would like is for someone to explain why the mark-up system is better, or is it just that that people find it works for them, and don’t see any reason to change?


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## Mike's Plumbing (Jul 19, 2010)

I mark up because I buy wholesale and my customer buys retail from me. I also have to handle the product and the markup covers this. Think of how many things you do where the customer doesn't get a bill.

On Monday I had a material drop, it was for restocking my truck and I label it "truck stock" because all time gets billed by me. Once it arrived I had to check the order to make sure the 19 year old warehouse worker didn't botch the order. Then I had to put it in the truck. I also have to deal with the invoice, pay the bill, enter it into quickbooks.......yada yada yada.

If i don't mark it up that means I do it for free. I'm not in business to do it for free and I surly don't need practice which is also free. 

That's how I handle it anyhow.

Mike


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## john elliott (Oct 23, 2005)

I use quite a lot of parts and materials too, and what I do is when I am figuring a bid I've got a spreadsheet that covers most of my standard range, and I can adapt one to suit non standard stuff, but the actual time I spend handling parts just goes into the daily rate, so the customer pays anyway. They don't get it for free.

What bothers me about markup is that if one job uses a lot of parts, and one job doesn't use much then I wouldn't be making so money on the job that didn't use so may parts.


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## Scoma (Mar 9, 2011)

I don't use the "markup" column on Quickbooks Estimates. I do most of my bids as a turnkey total, and I just put my 20% material markup in there before I add it to labor to get a turnkey price. This price is what I enter in the "rate" column. It has worked well for me so far on everything from $150 jobs to $40,000 jobs.


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## Mike's Plumbing (Jul 19, 2010)

One thing that doesn't get talked about very much here is inventory. A while back I bought 4 cases of SS braided DW supplies, enough for a very long time. I had to make that decision based on future material costs, buying in bulk, and rising inflation. I got a great deal because of quantity, I think I paid about $4.00 each. I charge my customers $25.

That may sound high but I also have to tie up my money in inventory. I don't shop at Home Depot but I would guess the price of a 72" braided supply at the store is around $13???? Not sure. Regardless, the HO has to drive and pick it up, stand around and wonder where it is because getting help is impossible. Then drive home.

For an extra $10 I stock it on the truck, I stock everything. The HO has to pay for that and not all of them will. I'm only interested in the ones that do, marketing is how I find them.

Keep in mind that the money I tie up could also be earning me an easy 10% in a dividend paying stock so that has to be considered as well. 

At the end of the year how many contractors say "Wow, I mad a sh## load more money than I though I did"? The price of poker is very high in construction...very high.

Maybe I have it figured out wrong but markup isn't an "extra" thing, it's a requirement to stay in business.

Mike


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## Mike's Plumbing (Jul 19, 2010)

Scoma said:


> I don't use the "markup" column on Quickbooks Estimates. I do most of my bids as a turnkey total, and I just put my 20% material markup in there before I add it to labor to get a turnkey price. This price is what I enter in the "rate" column. It has worked well for me so far on everything from $150 jobs to $40,000 jobs.


The important thing is that it works. At the end of the day our methods might be different but we arrive at the same number.

I tend to go a little overboard on things sometimes but it's a piece of mind for me I guess. It's impossible for me to use a standard markup across the board but I can see where it's possible in general construction.

Mike


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## Mike's Plumbing (Jul 19, 2010)

john elliott said:


> I use quite a lot of parts and materials too, and what I do is when I am figuring a bid I've got a spreadsheet that covers most of my standard range, and I can adapt one to suit non standard stuff, but the actual time I spend handling parts just goes into the daily rate, so the customer pays anyway. They don't get it for free.
> 
> What bothers me about markup is that if one job uses a lot of parts, and one job doesn't use much then I wouldn't be making so money on the job that didn't use so may parts.


Yeah, i see what your saying. I tend to sepperate jobs and do it on an individual basis. But I'm also set-up to do it. As long as you making the money you should and keeping track of jobs (post-mortem) it works. Some people can do it on a napkin.:laughing:

Mike


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## Supahflid (Mar 22, 2011)

I agree with Mike's Plumbing; you are leaving money on the table. Mark-up is just a rate. Your mark-up apparently varies job to job if you are only charging a set fee for your time. I bet you get a pretty good hit ratio on the amount of work you are bidding!


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## Mike's Plumbing (Jul 19, 2010)

john elliott said:


> I use quite a lot of parts and materials too, and what I do is when I am figuring a bid I've got a spreadsheet that covers most of my standard range, and I can adapt one to suit non standard stuff, but the actual time I spend handling parts just goes into the daily rate, so the customer pays anyway. They don't get it for free.
> 
> What bothers me about markup is that if one job uses a lot of parts, and one job doesn't use much then I wouldn't be making so money on the job that didn't use so may parts.



Have you every tried to figure out consumable material based on lineal feet of cabinet? Like screws, brackets, shims, etc etc.

Just wondering. If I was a cabinet guy I think I might try that to see what it works out to.

Mike


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## Mike's Plumbing (Jul 19, 2010)

I have to get my a$$ to work but it's an interesting discussion here. 

Have a good day fellas:thumbsup:

Mike


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## CookeCarpentry (Feb 26, 2009)

There is no saying you have to use a mark-up.

In Mike's business, it makes sense - he keeps inventory, and has to, for a variety of reasons.

Now, I use a mark-up on a lot of materials.

One way around this, would be to estimate the time involved in handling the material, and not marking it up.

You say you make a set amount each day, but when you bid a job, do you include in that estimated time for ordering materials, accepting delivery of said materials, paying for those materials, accounting for it (QB, etc), all BEFORE you estimate how long it will take you to install it?


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## Supahflid (Mar 22, 2011)

john elliott said:


> What bothers me about markup is that if one job uses a lot of parts, and one job doesn't use much then I wouldn't be making so money on the job that didn't use so may parts.


Well, when you get right down to it, if you feel comfortable doing it that way, then don't fix what ain't broke, right? Maybe if you did a side by side comparison of a completed project and see what your profit would have been both ways would be useful to you.


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## john elliott (Oct 23, 2005)

Supahflid said:


> I agree with Mike's Plumbing; you are leaving money on the table.



I can't see that. It implies that the only thing you have to do to get more money is to ask for it. I charge as much as I think the market will bear. If I thought it would bear a bit more, I would ask for it.

How much a customer will pay isn't based on how I do my internal accounting, it's based on what getting me to do the job is worth to them. What I make sure of is that I get enough money for each day I work (when I've got a full order book, which is not all the time  )


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## Supahflid (Mar 22, 2011)

john elliott said:


> I can't see that. It implies that the only thing you have to do to get more money is to ask for it. I charge as much as I think the market will bear. If I thought it would bear a bit more, I would ask for it.
> 
> How much a customer will pay isn't based on how I do my internal accounting, it's based on what getting me to do the job is worth to them. What I make sure of is that I get enough money for each day I work (when I've got a full order book, which is not all the time  )


Yeah mate, I'm down with that. I think we are all saying the same thing, but you won't convince me to change the way I do it! 

However, something I haven't said is that for smaller jobs, we do charge a higher mark-up for just the reason you have mentioned; we would starve to death if we had live off of our mark-up on an hour here or a day there. So, I suppose, we do it sort of like you; there is a minimum that we want make.

Keep drinking your shandy and I'll stick with the proper lagers!:whistling


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## Mike's Plumbing (Jul 19, 2010)

john elliott said:


> I can't see that. It implies that the only thing you have to do to get more money is to ask for it. I charge as much as I think the market will bear. If I thought it would bear a bit more, I would ask for it.
> 
> How much a customer will pay isn't based on how I do my internal accounting, it's based on what getting me to do the job is worth to them. What I make sure of is that I get enough money for each day I work (when I've got a full order book, which is not all the time  )


Leaving money on the table maybe isn't the right term. Just remember that what the market will bare has nothing to do with the price of poker. The ultimate goal is to fully understand what the cost of business is. The markup isn't looked at as profit, never get in the habit of thinking this way. Markup is a guarantee that you wont lose money. The real money maker is in the labor......or at least it should be.

If a business doesn't markup they are dangerously close to crossing into the red.

That's why on new construction I don't markup materials much, I don't have to. When I bid a new home (rare these days) I can guess material within a few fittings. It's easy.

On a remodel I don't know what's behind the walls, I have to guess. Many times I look at the markup as a buffer over and beyond what I think it's gonna be.

What the market will bare is largely a marketing issue and has nothing to do with cost. Often times we confuse "what the market will bare" with poor marketing and poor customers. The solution is to change the market......hence increasing what the market will bare. I know a GC who does low profit remodels and he hardly makes money. I also know a GC who charges extremely high prices....his "what the market will bare" is vastly different than the other guys "what the market will bare". The difference is in marketing.

Costs are costs, once you have a handle on it then market the living hell out of your business.:thumbsup:

Mike


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## Mike's Plumbing (Jul 19, 2010)

Just remember; If you don't markup materials....and you are wrong with the materials then you start dipping into the labor. That doesn't make any sense.:thumbsup:

Mike


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## Supahflid (Mar 22, 2011)

Mike's Plumbing said:


> Leaving money on the table maybe isn't the right term. Just remember that what the market will bare has nothing to do with the price of poker. The ultimate goal is to fully understand what the cost of business is. The markup isn't looked at as profit, never get in the habit of thinking this way. Markup is a guarantee that you wont lose money. The real money maker is in the labor......or at least it should be.
> 
> If a business doesn't markup they are dangerously close to crossing into the red.
> 
> ...



I agree that overhead is a reflection of costs for my business and they may be different than my competitors'. And they are not negotiable.


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## Mike's Plumbing (Jul 19, 2010)

Supahflid said:


> I agree that overhead is a reflection of costs for my business and they may be different than my competitors'. And they are not negotiable.


Exactly, in fact I would say it's really poor business practice to negotiate anything on markup because that's not the primary driver of profit. It's risky.

The only thing that's negotiable IMO is labor. And even that really isn't negotiable. If your efficient, you understand costs, and yo have a firm grip on labor negotiating is a losing battle. You would be better off to stand firm and throw marketing into high gear. 

Once you know where you stand as a company THEN, and only then, can you market a product or service. 

Mike


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## john elliott (Oct 23, 2005)

Mike's Plumbing said:


> Leaving money on the table maybe isn't the right term. Just remember that what the market will bare has nothing to do with the price of poker. The ultimate goal is to fully understand what the cost of business is. The markup isn't looked at as profit, never get in the habit of thinking this way. Markup is a guarantee that you wont lose money. The real money maker is in the labor......or at least it should be.
> 
> If a business doesn't markup they are dangerously close to crossing into the red.



I'm guessing now, but based on your profile that when you bill a job you bill the labor separately to the parts? If that is the case, then I can understand marking up the parts.

But in my case, the customer doesn't pay for the drawer runners separately to the labor, he or she pays an overall price based on what I think they will pay.

For instance, let's say I think they will pay $20K for a set of cabinets. Now, based on my knowledge of what the materials will cost, subtracted from that $20K might leave me with $15K. Now I can divide that $15K by the number of days it will take me to make them. Let's suppose I've decided I need $1,000 a day to pay my wages plus all the other expenses. If I can make those cabinets in 15 days then I'm ok to qoute $20K for the job. If I can make them in 12 days then I know I can drop to $17K on the quote if I need to, to get the sale. But if I think I can get $20K then that is what the quote is going to be.

But supposing I decide to add markup to my materials, let's say 30%. That means my materials have gone up to $6,500. So the pay for my time is going to have to drop by $1500 to stay within the quotation.

So what I'm saying is, why bother with the markup, it hasn't benefited me. If I thought I could get another $1500 just by asking for it, I would have anyway.


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## Sar-Con (Jun 23, 2010)

Regarding your original post, whether you're adding a % to labour and materials, or adding a per diem amount to your costs, you're still marking up the project to cover your overhead and make some profit.

IMO, the % works very well when you have a consistent revenue and overhead costs from year to year.

I would think that the per diem approach is usefull on small, one off jobs, or the for the guy who is just starting out an doesn't know yet what % his overheads are in relation to his revenue.


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## katoman (Apr 26, 2009)

john elliott said:


> I think this is one of those situations where we each see the other's point of view, but disagree with it.


John, I don't necessarily disagree with it. Just not the way I do it.

As long as you're making money, no worries. :thumbup: As I origionaly said, thanks for another perspective.


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## Supahflid (Mar 22, 2011)

john elliott said:


> I think this is one of those situations where we each see the other's point of view, but disagree with it.



Look, whether you like it or not, or agree with it or not, you ARE marking up your product; you can call it a fee or "the minimum I need to make everyday", but that is a mark-up. Whether you like it or not, or agree with it or not, there is a cost associated with your time. Like I said in an earlier post, why don't you look at a post mortem and see where all of your costs lie. And I don't mean, "Well, it took me four days to build the cabinets and I used about XX many screws." I mean think about the time you spent estimating the project. What about your vehicle? What about the fuel? What about oil changes? What about the cell phone or land line you use? How do you exactly account for all of that?

If you are comfortable with throwing some money at a project and if you "think" you can just charge more or less, then by all means do so, but I think you aren't calculating all of your costs and you would be surprised if you really analyzed it.


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## J L (Nov 16, 2009)

John, this is a different take on bidding. I don't believe anyone can say whether it's right or wrong. It works for you and that's all that matters. 

As a GC, it would be difficult to bid a "per day" price. There are days when no actual progress is made on jobsites and we're waiting for inspections. Also, I run multiple jobs at the same time and some require more of my time and others less. 

What I do know are what my costs are to keep the doors open for the year. I also have a good idea of how much work we're capable of performing in a year based on prior years sales. With those two numbers I can create a formula to markup an estimate (we don't mark up material/labor differently) once I have my project costs established. I also know that based on my projected sales for the year that if i do more in sales (at the same markup) than my budgeted sales number that I will make a nice profit.

I do see what you're saying about markup on the different materials. For instance, if we build a pressure treated deck for a client versus if we build a composite deck, using the same markup, we're going to make a lot more on the composite as it costs more. My take on it is this: the PT deck is my base price - it's already got labor and sufficient markup to keep my doors open. The composite deck takes very close to the same amount of time to build/install, but the materials are more. So should I keep the same labor/overhead price from the PT deck and just add the upcharge for the materials? No. My risk has increased substantially by providing a more expensive product. If something happens, let's say I accidentally spill a gallon of oil based paint on the composite deck. Will it cost me more to replace those boards? Absolutely. And for that I believe I should be compensated.

It's good for you to be able to know your competitors pricing. Here I don't have that luxury as every job I bid I'm bidding against someone new and pricing is all over the board. That means I can't gauge my bid based off of my competition. I think you have a different situation than some on here and the way you do things works for you so keep at it, but I don't believe it would work for me. Is your way wrong? No, just different. And if it's putting money in your pocket, keep it up.


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## tommytwo (Mar 4, 2009)

This whole conversation reminds me of these threads:
http://www.contractortalk.com/f16/gross-volume-markup-loaded-labor-rate-71428/
http://www.contractortalk.com/f11/capacity-based-mark-up-vs-volume-based-mark-up-55433/

Each of us just has to find what works best for ourselves.


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## CJA (Jan 26, 2011)

think of it as credit card interest..... You buy something on your card an they charge you a precentage on that purchase. You purchase material upfront for your customer, you're charging a purcentange for your risk of the upfront purchase. Yeah, they could have gone and got it cheaper themselves, bu they didn't. And, they were free and clear of the charge until you bill them; giving them more time to come up with the money....


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