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Margin VS Markup – what’s the difference and why do you care?
This is murky territory, it’s where your accountant comes in to play and can probably give you a better explanation than I can, however as it is to do with terminology and using it correctly.
I think it is worth understanding the difference!
Both of these terms live in the accountancy world, but it seems most builders get confused between the two.
Now at the end of the day, I couldn’t care less what you call your margin, it could be the ‘fun factor’ or ‘the holiday fund’.
At the end of the day, it is there for a reason, and that is to cover the profit you want to make and your percentage overheads.
Not sure? Ask your accountant. The formula to calculate them is their total divided by your turnover.
If your salary comes out of your profit, what does it need to be to keep the kids fed? Make sure you consider tax etc here too…. Again, a conversation to have with your accountant.
Pop the two things together, and you have the overall minimum margin you want to achieve.
Of course, all jobs differ, you may be able to charge more margin on some, and less on others if you are trying to be competitive.
Some jobs have more scope for variations, some less. This scenario is just as important for charge up too as you should be stating the percentage margin you are applying to your invoices.
Generally in a construction contract, the number added to cover the above is called your MARGIN.
If, as an example, you are looking to achieve a 10% margin on your jobs, then you calculate it by taking the total cost and dividing it by 0.9.
I can pretty much guarantee at the moment most of you are using the calculation of 10% and multiplying by 1.1. That is a different thing called MARKUP. Let’s have a quick look at the difference….
Here’s a visual showing the difference between the two
The blue box is the $ value we come to when all the labour and materials and subcontractor pricing has been included, the red box is what it looks like with a 50% MARKUP.
When you look at the green lines however this shows only a 33% MARGIN, which may or may not have been the intention.
Coming back to the ‘why should you care’ bit.
If you have a contract with a client that says you can charge a 10% MARGIN on all variations, as an example, and you are using the MARKUP calculation rather than the MARGIN calculation, you are leaving money on the table.
And if you have come up with your MARGIN percentage based on what your overheads and profit need to be, then you are losing a chunk of money that you were expecting to come in.