Do you understand the difference between markup and margin?
If you are not clear on the difference, you're not alone.
In fact, even the licensing authorities and the industry associations do not have a clear understanding of the difference. They constantly refer to builders margin when they are clearly talking about markup!
No wonder builders are confused. If the supposed 'industry' don't know what they are talking about, what chance do builders have when they seek help?
Worse still, these associations and authorities freely hand out their incorrect advice to consumers, making it near impossible for builders to collect what they are owed from their contracts.
So let's ignore what these guys are saying and focus on the facts.
The Difference Between Builders Markup and Builders Margin
Builders margin is the amount of gross profit in a contract as a percentage of the selling price. So basically that means that if you have a job that is costing you $400,000 to build and you add say $100,000 profit, that becomes a $500,000 contract. The profit on that contract ($100,000) is 20% of the selling price ($500,000).
Builders markup is the percentage added to the cost of sales ($400,000). So in this example we added 25% ($100,000). Therefore, the builders markup was 25% and the builders margin was 20%.
So where's the problem?
Well, there are two problems, and they are both pretty major.
The Two Big Problems That Cost Builders Money
Firstly, if you have a contract that allows for 25% builders margin on variations, provisional sums and prime cost items, but you only markup those items by 25%, you are losing $80 profit on EVERY $1,000 of variations. That's 8% net margin on EVERY transaction, which in business terms is HUGE!
The second problem is more sinister. Most building companies' financial reports make no sense month-to-month. One month they are up, the next they are down. (There is a reason for this and it is easily overcome, but I'm not going to go into it here.) But because the financial reports make no sense, the builder tends to do a quick 'mental calculation'... just claimed $100k on that $500k job, 25% of $100k is $25,000, that's my gross profit... er ... NO!!!
25% was the builders markup, not the margin! Now we have a builder that thinks they made $25k but really they only have $20k, and that's a real problem when the imaginary $5k gets spent!
Our research shows that around 65% of builders do not understand the difference between these two commonly used terms.
What's scary is the amount of 'experts' outside the industry who also don't know the difference and who are giving builders bad advice.
The Associations and Licensing Authorities do not know what they are talking about.
Don't listen to them!
Learn How To Price Your Jobs Based On A Net Margin
This is your money. If you are pricing up a job, click here to discover how you can establish the markup you need to apply to a job in order to return a desired margin.
If you're interested in learning more on how our members are calculating contract prices for jobs based on a NET margin, click on the link below so that you never lose money on a project again!