Mark-ups and Gross Profit Margins

Overview: As a business and sales consultant that has worked in the home building and remodeling industry since 1983, I’ve attended a lot of national seminars from some of the most successful home builders and remodelors and they all have some common success traits. But the one that is consistently present is the mark-up formulas they use. Assuming you know the difference between mark-ups and gross margins, here is what I have found and continue to recommend to my clients.

For the small builder, since he or she cannot get the buying power of the big builder, he needs to shoot at no less than 1.25 (or a 25% mark-up) to achieve a 20% gross margin. Most home builders I run into that are working for wages mark-up only 10%, or at the most, 15%. Then, by the time they pay for all their overhead (even though it is no where near what the big builder has), they end up working for wages. They cannot grow and expand with this kind of mark-up and when one bad job comes along, they could be forced into bankruptcy because they do not have any cash reserves. The name of the game with big and small builders is to hit somewhere around the 10% net profit mark before taxes.

Large builders can mark-up 34% or more to get a 25% gross margin. And in large custom homes where there is no real bidding involved, these margins can be higher. It is the choice of the builder (large and small) to do this, and, so long as the customer gets what they were promised at the price they were promised, everything is ethical and legal. That’s the hardest part to sell to builders who are working for wages.

Remodelors need sharply higher mark-ups (and thereby higher gross profit margins) because their business is not as easy to price and work within for many reasons. Most successful remodelors I’ve talked to over the years mark-up no less than 1.54 (or a 54% mark-up) to get a 35% gross margin and the really good ones go 1.67 (or a 67% mark-up) to get a 40% gross margin. In some cases, on smaller jobs, I’ve seen 2.0 (or a 100% mark-up). This might also happen on individual items within a project.

“Is this fair to the customer?” … I was once asked in a Home Builders Association seminar I was putting on. “Absolutely,”… I answered… “because you do not want to get 100% of the jobs you bid or even 50% of them unless you are getting great margins. To have the income and profits to grow your business and hire and keep the best employees (and subs, etc.), you must charge higher prices to get better margins. I’ve worked with hundreds of different types of companies in all types of industries over the years and the consistent winners always have more mark-up and gross margins than their competitors. This allows them to put money back into their companies to make them an even sharper competitor. But if they just take the extra funds and squander them, instead of reinvesting them, they will eventually fail. It’s just a matter of time.”

The goal in any business, large or small, is to be profitable and build wealth. You are hopefully in it for the long haul. Therefore, you must have the courage to charge properly for your products and services and be prepared to not get all the jobs you quote. Begin a bite size at a time, not all at once. If you are an excellent builder, remodelor or business, you will be doing very well, profits wise, within a year.
Mark-Up/Gross Margin—Guideline Sheet

Gross Profit Margin Desired Multiplier Add To Cost Of Item

Theoretically a true GPM of 100% is Not Possible

90% ..........10.0.......... 900%
80% ..........5.0 ...........400%
75% ..........4.0 ...........300%
67% ..........3.0 ..........200%
64% ..........2.75......... 175%
60% ..........2.5........... 150%
55% ..........2.25.......... 125%
50% ..........2.0........... 100%
47.5%........ 1.91.......... 91%
45% .......... 1.85.......... 85%
42.5% ........ 1.75......... 75%
40% ............1.67......... 67%
37.5% ..........1.60........ 60%
35% ............1.54......... 54%
32.5% ........ 1.48......... 48%
30% .............1.43........ 43%
27.5% ..........1.38........ 38%
25% .............1.34........ 34%
22.5% ..........1.29........ 29%
20% .............1.25........ 25%
17.5% ...........1.21........ 21%
15% ..............1.18........ 18%
12.5% ...........1.14........ 14%
10% .............1.11......... 11%
7.5% ...........1.085....... 8.5%
5% ..............1.06.......... 6%

The figures in the quick reference above are rounded in most cases for ease of use only.
Actual Formula: Final sales price divided into the mark-up dollar amount from your total costs = the actual Gross Profit Margin desired (i.e. cost total $100.00 and sales price is $181.81 or a mark-up of $81.81 = $81.81 divided by $181.81 = .44999% GPM or 45% rounded up).
The easiest way to achieve a desired GPM is to follow this Divisor formula: (1) Subtract the desired or required GPM from 1.00, which is $100 converted to 1.00, and this can work with any cost figure. (e.g. I desire to have a GPM of 45%) (2) 1.00 - .45 = .55 Divisor (3) Now, Divide your direct costs of $100 by .55 and you get a sales price needed of $181.81 to obtain your desired Gross Profit Margin of 45%.