Markup and Gross Profit

Profit vs. markup

Markup

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

Example - Markup

If a project cost - materials. labor, etc - is estimated to $200,000 and the markup wanted is 25%, the contract price can be estimated as

$200,000 (25% + 100%)/100%

= $200,000 1.25

= $250,000

Gross Profit

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

Example - Gross Profit

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

100% ($250,000 - $200,000) / $250,000 = 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 $200.000 the contract cost can be calculated as

$200.000 1.25 = $250.000 

Related Topics

  • Economics - Engineering economic concepts - cash flow diagrams, discount rate, internal rate of return - IRR, income taxes, inflation

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