Grasp the importance and tactics of properly determining and applying markups in a business setup. Understand the significance of including all costs, the sequence of adding overhead and profit, and the potential impact on accounting analysis.
Key Insights
- The article elaborates on how markups and add-ons should be applied in a business scenario. It underscores the necessity of adding all potential costs prior to any markups, including overhead percent first, then the subtotal, and finally multiplying the overhead subtotal by the profit percent.
- Applying profit in the same manner as accounting analysis is vital. A misalignment between these two can lead to variations in profit, even if the business meets its budget. For instance, a minor deviation like 1.5% can occur.
- An example is provided to illustrate the application of overhead and profit separately on construction costs. Following this method can increase the overall price but aligns with the way accounting might analyze the project based on the estimated budget.
So let's talk a little bit about markups and add-ons and the order that we put them in. Note that when I refer to the term above, provide the cost above markup, as basically means before the markup. So generally speaking, what we're trying to establish is having all of your costs included as a lump sum or as a dollar amount, even if a few of them might be additional add-ons.
%20(1).png)
Learn Construction Estimating
- Nationally accredited
- Create your own portfolio
- Free student software
- Learn at your convenience
- Authorized Autodesk training center
Just make sure that any of these add-ons, any of these potential costs are added prior to any of the markups. Always add overhead percent, then subtotal, then multiply the overhead subtotal by the profit percent. This ensures that you're adding profit to your overhead.
This can make a big difference also, depending on how your accounting analyzes your job costs. If you don't apply your profit the same way that accounting analyzes profit, you could be 1.5% off, even if you made budget. Here's the following example for that.
Construction costs at $100,000. Overhead at a straight 25% is $25,000 for a total of $125,000. Now look at it if we apply the overhead and profit separately.
Construction costs $100,000, overhead 15%, $15,000. You have a subtotal of 115. Then we apply profit at 10%, that's $11,500, and notice that you're $126,500.
A little bit more, it's $1,500 more than just the straight 25%. Now your price did go up, but technically this is how your accounting might analyze the project if you did it based on your actual estimated budget. If your company wants you to do it differently then follow their lead on this, but otherwise make sure that your markup is added on top of your overhead.
If you look at your handout and refer to the markup section, you can see where we actually have the overhead, then the overhead subtotal, and then the profit, which is a percent on the subtotal and overhead. First we had the overhead at 8%, then a subtotal, then we had a profit at 10%. This is different, as we referred to in the example earlier, that 18% is not the same as 8% with 10% applied on top of that cost.