Understanding the concept of markup in project estimation is crucial as it fundamentally represents the projected profit of the project. This article delves into the intricacies of markup, its impact on profit, and how strategic project evaluation can potentially optimize profitability.
Key Insights
- Markup in project estimation is the estimated profit, calculated as the estimated amount minus the hard cost, which includes overhead, with any over or underestimated costs typically reflected in the profit.
- Regular and strategic comparison of the actual cost to construct a project to the initial estimated cost can help identify potential areas of improvement and enable more accurate future estimates.
- Proper costing and evaluation of all projects, regardless of whether they made a lot of money or little, allows for more accurate data to be fed back into your estimating tools, resulting in more precise future project estimates.
Note: These materials offer prospective students a preview of how our classes are structured. Students enrolled in this course will receive access to the full set of materials, including video lectures, project-based assignments, and instructor feedback.
Now that we reviewed overhead, let's talk about markup. Markup is the estimated amount less the hard cost, including overhead, and is essentially the estimated profit of the project. Any over or underestimated costs are typically reflected in the profit.
Why do you need profit on a project? That's the reason why we're in business. Otherwise, it's an employment agency. You can look at it from that aspect.
Each project overall should make a profit in order for the company to grow, to expand, and to have enough financial resources to pursue more projects moving forward. So let's repeat that again. Any over or underestimated costs are typically reflected in the profit.
If you come in under your estimated budget to complete the project, there's more money in the profit. Obviously, if it takes more money to complete the project, it comes out of the profit as well. A best practice for any estimator is to compare the actual cost to construct the project to the initial estimated cost.
Now, you might be wondering why you would need that information. If the project comes in over budget, we're gonna try and evaluate the project to see how it was built and why it costs so much to build, and it could be part of managing the project during construction, or it could actually be the estimate itself. If there wasn't enough money in the estimate, then the estimates should be prepared with more money in them accordingly for similar projects.
%20(1).png)
Learn Construction Estimating
- Nationally accredited
- Create your own portfolio
- Free student software
- Learn at your convenience
- Authorized Autodesk training center
So the reason why I say compare the actual costs, you'll need to review this with your project managers and possibly even the accounting department to make sure that the right monies were spent or what they were spent on. This would typically take place at the end of the project, although on bigger projects, you don't wanna find this out at the very end. So larger projects will typically have job cost meetings on a weekly basis, and they'll look at the actual cost of construction in place versus what was spent.
Even though it's the estimator's job to come up with estimated cost to build a project, it's important to evaluate what the actual costs are. An estimator typically can't do this on his own. He has to inquire with project management and accounting.
And if actual costs are allocated appropriately throughout the entire project, you can do a full or fair comparison of what it costs, for example, to put the roof structure on a building compared to the estimated costs. It's not uncommon for companies that make a very good profit on a job to just overlook it and say, yes, we did great, and they move forward on to the next. But when money is lost, typically they dig it apart, they break it up and find out where the money was lost.
Well, let me tell you right now that it's just as important to find out why you made more money on the project. You might actually be bidding your projects with too much money in them, and therefore you got to ask yourself how many projects perhaps could you have gotten if your numbers were a little bit lower. So keep that in mind, evaluate your projects, whether or not you made a lot of money or a little money or lost money for that matter.
I'll give you an example. Working on a project, one of our estimators got a great price on concrete. He liked it so much that he actually put it into our database.
Therefore, that price got utilized on several projects moving forward. Since we weren't doing a very good job with job costing, because our projects were making a lot of money, it seemed okay, and so therefore, if there was any issue with the unit costs, it didn't get noticed. Until one day, we had a project that had a lot of concrete on it, and that unit price was utilized, and the project came in upside down, meaning that we were way under budget for the required amount of concrete.
The reason why it wasn't noticed sooner is all the other projects had a very small amount of concrete for the foundations. So keep in mind that if you do a good job costing of your project, whether it made money or lost money on any minute detail of the project, you'll learn a lot of things and help apply the appropriate cost back into your database or spreadsheet, whatever you may use for estimating to identify what these true unit costs should be on future projects moving forward.