Find the Right Markup Formula

Find the right markup formula

Q:
I attended one of your two-day boot camps last year, and was working on setting up our new overhead and profit mark-up schedule using the variable system you presented for labor, material, subcontract and equipment. I need some help figuring out how I should mark the different work classifications.  As a general contractor since we subcontract all of our work and don’t really have labor crews, just project managers and superintendents. Here’s how our typical job costs break down: 10 percent labor, 15 percent material, 70 percent subcontractors and 5 percent equipment. I know that labor is the most risky and should be marked up more than the other items. But is that more true if you have field crews rather than just supervisors? I’m also concerned that subcontractors may be my most risky category as they tend to raise their prices during the job. Any advice would be helpful.

Mac McHenry, President

MAC Construction

A:
For a pure general contractor without field crews, you can use one blended markup rate for everything to keep it simple. Use an overhead and profit blended markup rate combined for labor (labor markup should be between 20 percent and 40 percent) and material, equipment and subcontracts at whatever the market rate will allow (Example 8 percent) as follows:

The blended markup rate would be $920,000 / $10,000,000 = 9.2 percent markup rate.

Regarding subcontractors being more risky, good subcontracts should represent the same terms as your general contract. Subcontractors can only raise their prices to you if you can raise your prices to your customers as well. Get the same terms in both contracts to eliminate your risk, or go broke!

 
Q:
I’m an Operations Manager and I struggle every day to get the current business owner to get on track to become more successful. I use the saying: you can’t teach an old dog new tricks. I find myself trying to push the old dog uphill and consistently hit the wall.  We’ve been through two consulting firms and I’ve learned I can run this business better.  Any advice would be appreciated. And yes I know I should just go on my own, but that isn’t my short term goal.

Richard Strand

Century Landscape

A:
The three choices you have:

1. Keep on doing your best and hopefully it pays off financially and professionally for you. But don’t delay asking for a big raise and when you will be offered stock ownership.

2. Look for another job where your efforts will be implemented and rewarded.

3. Look for a financial partner to help you start a new company.

Don’t wait until it’s too late. What’s the worst that could happen? You get another job. Good people are hard to find and that won’t take too long. Think positive and make your future become reality sooner than later.

Construction Business Owner, June 2008