Gross Margin vs Markup - Which is Right For You?

Owners have a gross margin they've built their budget around. They lock in on that number and stay focused on it year round. They know if they hit it, their bank account will end up the size they wanted.

Just glance at your income statement. The gross margin is laid out for you so nicely. You have a line item for gross profit (or something along those lines) and you have total sales. Divide the gross profit into the total sales and there you have it: gross margin for the year.

Most accounting packages offer a report that shows income and expense line items as a percentage of sales. It's a very useful way of looking at your financial performance and figuring out where your money is going. It can make for a nice rule of thumb for future budgets.

Furthermore, gross margin is a useful number for comparing performance with other contractors at trade shows and networking events. It doesn't reveal your true income. It doesn't reveal your size. It implies your field efficiency.

We frequently get asked "I gross 22% on my jobs. How does that compare to other contractors?" Gross margin is the natural language of the owner - just like markup is the natural language of the estimator.

One Final Piece of Advice For You Regarding Your Estimator
Tracking and analyzing markup success is one of the primary reasons an estimator should ALMOST NEVER hide markups inside his various cost components. An example will clarify.

It is quite common for estimators to markup materials prices by, say, 10%; subcontractors by, say, 5%; and self performed work by, say 35%. Next, the estimator pulls them together into one number and starts adjusting the final number based on intuition and recent history.

Then the owner walks up and asks how much he is going to make on the job? What's our cost? And the estimator replies, "Hold on. I'm not sure. Let me back that out."

No. No. No. No.

The Golden Rule of job selection:

1. Know what the job will cost you to complete.
2. Know the price you can get.
3. Decide whether you want the project.

Estimators must become disciplined at adding up all the costs first; then applying a standard markup; then adjust in accordance with the competition, backlog, and quality of client.

(If you are keeping score at home, the example used markups of 1.1, 1.05, and 1.35. They were NOT gross margins of 10%, 5%, and 35%. MAKE SURE EVERYONG IN YOUR OFFICE KNOWS THE DIFFERENCE.)

Ron Roberts, The Contractor's Business Coach, teaches contractors how to turn their business into a profit spewing machine. To receive Ron's FREE Contractor Best Practices Newsletter visit www.FilthyRichContractor.com.