Profit vs. 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
- 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