At first glance, these definitions seem similar. But, after a closer look, their differences become evident. Here's how they are different: let's say you bid a job where the total estimated direct cost (materials, labor and subcontractors) is $10,000. To determine your selling price based on earning a 20% gross profit margin, you divide your direct costs by 80%, which makes the selling price $12,500 ($10,000/.8). Now, to determine your selling price based on a mark-up of 20%, your selling price would be $12,000 ($10,000x1.2). As you can see, a 20% margin and a 20% mark-up are not the same - your mark-up price is $500 less than your margin price. It takes a 1.25 mark-up to achieve your $12,500 selling price. I am a firm believer in margin-based pricing. It is simple to calculate, ties in nicely to your profit and loss statement, and allows you to easily monitor company estimating, productivity and profitability. So, how do you determine your target gross margin? The simplest way is to strive for the contractor average of a 30% to 40% gross margin (the sub-contractor average is 40% to 50%). A more accurate way would be to divide your annual overhead by your annual revenue to determine your overhead as a percentage of sales. Then add your desired profit margin to this figure - typically 5% to 10% - to determine your company's gross margin. I hope I have clarified the difference between margin and mark-up for anyone who has been unsure. But, if you have any questions, please feel free to contact me. I write for the Contractor Power Newsletter on a regular basis and am always looking for interesting and relevant topics. If you have a business-related question you would like me to answer in one of my upcoming articles, please feel free to contact me at info@ParadigmStrategies.com. If you would like to read any of my previously written Contractor Power newsletter articles, you can view them at www.contractorpower.com. About the Author Kevin Lister, founder and president of Paradigm Strategies, the business advising firm to the trades, is a leader in the field of business performance improvement. He possesses nearly 20 years experience in business management and consulting, effectively operating his own ventures and assisting others with realizing business success. With an entrepreneurial spirit and a business owner's point of view, Kevin brings hands-on expertise to helping building contractors, sub-contractors, and suppliers. Kevin has deep knowledge and understanding of the trades, based on fifteen years in the construction industry, a family history of owning trades businesses, and a genuine interest and enjoyment in helping blue collar enterprises. Kevin possesses a Masters of Business Administration (MBA) from Olin Graduate School of Business at Babson College and a Bachelor of Science in marketing from Bentley College. He teaches management, marketing and organizational behavior for the University of Phoenix Online. Kevin is a member of several professional and business organizations, including the Institute of Management Consultants (IMC), the Associated Subcontractors of Massachusetts (ASM), the Builders' Association of Greater Boston (BAGB) and the Boston Chapter of the National Association of the Remodeling Industry (NARI). Kevin has been awarded the Certified Remodeler Associate (CRA) designation from NARI. He has also been named to the board of directors of the Eastern Massachusetts Chapter of NARI.
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