Markup and Gross Profit

Profit versus markup

Markup

  • the factor applied to a estimated project costs to determine contract price

Example - Markup

With project cost - materials, labor etc. - estimated to 200000 and required markup set to 25% - the contract (or bidding) price will be

200000 ((25% + 100%) / 100%)

= 200000 1.25

= 250000

Gross Profit

  • gross profit is calculated by subtracting the cost of sales - materials, labor, etc - from contract price

Example - Gross Profit

The percentage gross profit in the example above can be calculated as

100% (250000 - 200000) / 250000 = 20%

Note the difference from markup!

Example  - Project and Company Overhead

  • Project overhead - costs to run a job, project manager, transport, etc
  • Company overhead - costs to run the company, managers, secretaries, bookkeepers, etc

If project overhead is 10% and company overhead is 10% - 20% should be added to all estimates to achieve contract price.

The markup factor can be calculated as

100% / (100% - 20%) = 1.25

With a project cost of 200000 the contract (or bidding) cost can be calculated to

200000 1.25 = 250000 

Related Topics

  • Economics - Engineering economics - cash flow diagrams, present value, discount rates, internal rates of return - IRR, income taxes, inflation

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