The Miscommunication Trap
A contractor wanted to make 15% margins on the job.
So he added 15% to the bid.
They stayed on budget and finished the project ahead of schedule. But when they added it all up they were $20K short on expected profit.
Again.
The math was all there, so they came to us at Munitz & Co. to figure out what on earth was going wrong.
I spotted the mistake right away.
They were confusing Margin and Markup.
Margin vs Markup
Margin is the amount you want to end up with after all the job expenses so you can cover overhead and make a profit. Markup is how much you need to raise the bid in order to get there.
If you want a 15% margin, you need to "mark up" the bid by 17.6%.
A lot of contractors are underbidding every job without even realizing it.
For a $10M contractor, that's $260K in lost profit every year.
How to Calculate Markup
In the following section, I'll share an even easier way to do this. you can skip ahead, but for now I'll break down the math.
If you want to have 15% of the total bid price left over for overhead and profit you need to find the right markup percent. The formula goes like this:
Desired Margin ÷ (1 - Desired Margin) = Markup
Going with 15% gross margins, here's what that looks like:
0.15 ÷ (1 - 0.15) = 0.176
Your markup should be 17.6%.
Say your estimated costs to complete the project are $800,000.
$800,000 x 1.176 = $940,800
Final price should be bid at $940,800.
The Direct Method to Calcualte Total Bid Cost
As promised, here's an even easier way to come up with your final bid number.
Start with your estimated total costs, in our example, $800,000. Then determine your desired margin, in our example the contractor wanted to have 15% left over to cover overhead and make a profit.
Formula: Costs ÷ (1 - Desired Margin) = Total Bid Amount
Example: 800,000 ÷ (1-0.15) = 941,176.47
If you submit a bid for this amount and everything stays within budget you will have about $94K left for overhead and make a nice $47K in profit.
Avoid This Bidding Mistake
Too often I hear from construction owners and CEOs that can't figure out why their bids are so off. Even as they grow bigger and hire seasoned estimators, they're still getting it wrong.
A lot of times it is simple miscommunications like this one. Using the wrong terms or simply having done markup wrong all these years.
As you grow, it becomes harder to be the second set of eyes on every bid your team submits. It is important to have the system and training in place so mistakes stop happening.
