Markup vs. Margin – The Costly Difference In The Construction Industry
Each month we shine light upon common bookkeeping practices and terms that we feel you should be well-versed on, as a business owner. However, this month’s topic is a little more niche, yet critical to understand because it can mean leaving thousands of dollars on the table. Let’s dive into the nuanced difference between Markup vs. Margin regarding construction costs, bids, and sale prices.
This topic came up because here at Moose Creek Bookkeeping we see a trend of construction contractors scratching their heads regarding markup and margin. Many construction bids are based on industry standards such as price per square foot or are bid low just to get the contract. This can have devastating effects on your bottom line when overhead, surprise costs, and changing sales prices are not taken into account.
Markup
Markup is the additional percentage or amount added to the direct costs of a project. Essentially, it represents the cushion that contractors build into their bids to ensure they can cover all expenses and still generate a profit. These expenses include all overhead; administrative costs, equipment maintenance, insurance, taxes, and other operational expenses that are not directly tied to specific projects. It’s crucial for contractors to carefully calculate their markup to ensure they remain competitive in the market while also covering all their expenses and generating a reasonable profit. Setting the markup too low can lead to financial losses, while setting it too high may result in losing bids to competitors.
Margin
Margin, on the other hand, represents the profit percentage earned on the total project cost after deducting all expenses, including direct costs and overhead. Unlike markup, which is added to the cost, the margin is calculated based on the final project cost and sale price. Margin is a critical metric for evaluating the financial health and performance of construction projects and businesses. A properly calculated markup results in a healthy margin ensuring that contractors not only cover their expenses but also generate sustainable profits to support future growth and operations.
At Moose Creek Bookkeeping we have an extensive background in working with construction businesses. We assist contractors in accurately calculating their markup, monitoring their margins, and maintaining sound financial practices to achieve their goals and thrive in the construction industry. If you’re a construction contractor seeking professional bookkeeping services tailored to your industry-specific needs, don’t hesitate to contact us. We’re here to help you navigate the complexities of construction finances and maximize your profitability. Call any time or schedule a free discovery call with us today.
