# Do The MathMargin vs. Mark-Up

 With MARGIN, you arelooking for thePercentage of SELLING PRICE                  Selling Price - CostsMARGIN = ________________                        Selling Price With MARK-UP, you are looking for the Percentage of COSTS                   Selling Price - CostsMARK-UP= ________________                             Costs

### Here's the problem --

If you are targeting a 12% overhead MARGIN (\$0.12 of every dollar goes to cover overhead) and a 10% profit MARGIN (\$0.10 of every dollar goes to profit) but are using the MARK-UP calculation to create your estimate, you are going to miss your target.

 Example: A framing package costs \$20,000.  You charge the client 12% of \$20,000, or \$2,400, to cover overhead.You charge the client 10% of \$20,000, or \$2,000, to cover profit.The client is charged \$20,000 + \$2,400 + \$2,000 = \$24,400.*
 Problem: You are not getting a 22% (12%+10%) MARGIN.Your total sale is \$24,400, of which \$20,000 is cost and \$4,400 is MARGIN.To calculate the MARGIN percentage, divide the \$4,400 by the total sale of \$24,400, and you get 18% MARGIN. You have left 4% on the table.
 Result: The correct calculation for MARGIN is Cost/(1-Margin percent).For this example that would be:\$20,000/(1-22%), or \$20,000/78% = \$25,641, or a margin of \$5,641.The amount of money you left on the table is \$5,641 - \$4,400 = \$1,241.That's for a \$20,000 framing package.  If the total direct cost of building the house is \$400,000, and you use the MARK-UP calculation, you've left about \$25,000 in margin on the table.If you build 8 houses a year at that \$400,000 price, you've left \$200,000 on the table.
 Conclusion: This is not a small problem.

*We generally suggest calculating the profit on the cost + overhead + supervision + contingency, but have simplified the calculation for this example.

 To find Selling Price (SP)At a given MARGIN (M)When Cost (C) is knownC/(1-M%) = SP Cost is \$2,500MARGIN Desired is 30%Selling Price is 2,500/(1-.30) = \$3,571 To find Selling Price (SP)At a given MARK-UP (MU)When Cost (C) is known(1 + MU%) x C = SP Cost is \$2,500MARK-UP desired is 30%Selling Price is (1+.30) x 2,500 = \$3,250

MARGIN to MARK-UP  Equivalents

 MARGIN50%40%33%30%25%22%20%18%15%12.5%12.0%10.0%5.0%2.5%0% MARK-UP100%66.7%50%42.8%33%28.2%25%22%17.6%14.3%13.7%11.1%5.26%2.56%0%

### An example --

For example:  a 22% percent MARGIN requires a 28.2% MARK-UP

MARGIN Calculation \$1,000 cost/(1-22% Margin) = \$1,282.05

MARK-UP Calculation \$1,000 cost + (1,000 x 28.2%) = 1,282.00

In my experience, clients are comfortable with the "12% Overhead, 10% Profit" pricing model. But make sure that you are using the Margin calculation to compute the end cost to your client.

If you are using a formula like "cost +22% Overhead and Profit MARK-UP" to build your estimates, it is costing you a lot of money.  You need to change to the MARGIN formula (Cost/(1-22%)) right away.

A great way to do that is to take a look at EstimatorPro, an estimating program that is properly configured to provide the right numbers. You can read what I have to say about EstimatorPro here, or go to the EstimatorPro website here.

Source: Sal Alfano, executive editor at Professional Remodeler