Glossary
Markup
Markup is the amount added to the cost of work to reach the selling price, stated as a percentage of cost.
By IntelCost Team ·
Markup is the amount a contractor adds to the cost of the work to reach the price, stated as a percentage of cost. It covers what the direct costs do not, such as home office overhead and profit, and sometimes contingency.
Markup vs margin
Markup and margin use the same dollars but divide by different numbers:
- Markup = (price - cost) / cost
- Margin = (price - cost) / price
So a 15 percent markup is not a 15 percent margin. To convert:
- Margin = markup / (1 + markup)
- Markup = margin / (1 - margin)
Example
Say the direct cost of a job is $100,000 and you add a 15 percent markup (example values):
- Markup: $100,000 x 0.15 = $15,000
- Price: $100,000 + $15,000 = $115,000
- Margin: $15,000 / $115,000 = 13.0 percent
If your company's target is a 15 percent margin instead:
- Price: $100,000 / (1 - 0.15) = $117,647
- Markup needed: $17,647 / $100,000 = 17.6 percent
Confusing the two leaves about $2,600 off the table on this job. Know which one your company's targets are set in.
Stacked markups
Most bids apply more than one markup, in order. Each one can be taken on the cost alone or on the running subtotal.
Say overhead is 6 percent and profit is 5 percent on a $100,000 cost (example values):
| Method | Math | Price |
|---|---|---|
| Both on cost | $100,000 x (1 + 0.06 + 0.05) | $111,000 |
| Compounding | $100,000 x 1.06 x 1.05 | $111,300 |
Neither is wrong, but the bid summary should say which one it uses, and it should stay the same from job to job. Bond is usually added last, on the full price, because the bond premium is charged on the contract amount.
What markup covers
- Home office overhead: rent, office staff, estimating, accounting and other costs not tied to one job.
- Profit.
- Contingency for risk that cannot be priced line by line.
- Sometimes insurance and bond, if they are not carried as their own lines.
Job-site costs, such as the superintendent and the trailer, belong in general conditions, not in markup. Payroll taxes and insurance on labor belong in labor burden.
Markups on change orders
Many contracts limit the overhead and profit a contractor can add to change order work, often with different limits for self-performed and subcontracted work. Read the contract's change order clause before pricing changes.
In IntelCost's estimating, the bid summary takes sales tax on material, overhead, extra markups such as contingency, profit and bond, each on the running subtotal, ending in the bid total. The guide on how to build a bid summary walks through the full order.