Tuesday, December 6, 2011

The Truth About Markup

If you're using a markup rate that you found or heard of, you are probably leaving precious hard-earned money on the table!

The truth is, many contractors have no clue on what their markup should be. They either use a guess, or some "number" they read or heard about.

Markup is derived from carefully calculating your costs and the amount of money you want to earn as profit at the end of the business year.

Costs must include all your field expenses and your overhead amounts. In your overhead, you MUST have a reasonable salary for yourself. If you haven't ever included it, then you are shortchanging yourself.

If you never realized this before, realize it now. Overhead is a 'burden.' It doesn't make a profit and should be lean and mean, but still does the job of administering your field operations.

Working for the draw

Too many contractors work for a draw. What I mean is this. If you have any money left over after paying all of your bills whatever is left is your salary. This is the wrong approach!

What you need to do is include a reasonable salary for yourself in your overhead amount. This is commonly called "Owners Salary." If you often work out in the field, taking the spot of a hired worker, then you would cover your salary in the estimate to do the work for the amount of time you would be working on the project. The difference of time when you are working in your office doing estimating or administrative duties, would be covered in your reasonable salary in overhead.

If you are not including your own reasonable salary somewhere, field or overhead, your markup is shortchanging you!

Making a Profit

As a business owner you have an obligation to make a profit. Profit is not a dirty thing. You need profit to grow your business, market your services, carry you through difficult times, and take care of your customers.

What is the right profit amount? I hear this often from contractors. Years ago, many in the industry thought making 10 or 12% was a good thing. I suspect that if you can make more, go for it. As long as you make it legally and morally correct there is nothing stating how much you can make. The truth is, right now we are in a difficult economic time for some, therefor, making whatever you can is probably the best answer.

This is an important subject that as a business owner you must get a proper handle on. This is a business skill you must learn and master.

The bottom-line is ... your markup must cover your expenses, provide you a reasonable salary and make you a profit.

If you would like an invaluable resource, check out my book on markup. It has sold over 10,000 copies and will easily guide you through the process. It is also a down loadable product that will pay for itself quickly. Click on "How to Calculate Your Money-Making Markup!"

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