---
title: Comparing Contractor Markups Can Be Pointless and Very Risky
description: Comparing or copying markups or margins is pointless and very risky without knowing how they were determined. Let me explain and clarify.
image: https://www.shawnmccadden.com/hs-fs/file-381429715-jpg/images/Throw_the_dice-wr.jpg
---

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# The Design Builder's Blog

## [Comparing Contractor Markups Can Be Pointless and Very Risky](https://www.shawnmccadden.com/the-design-builders-blog/comparing-contractor-markups-can-be-pointless-and-very-risky)

Posted by [Shawn McCadden](https://www.shawnmccadden.com/the-design-builders-blog/author/shawn-mccadden) on Sun, Jun 21,2015 @ 07:00 AM

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## **Comparing Contractor Markups Can Be Pointless and Very Risky **

![What contractor markup to use](https://www.shawnmccadden.com/hs-fs/file-381429715-jpg/images/Throw_the_dice-wr.jpg?width=123&name=Throw_the_dice-wr.jpg "What contractor markup to use")Many remodelers determine their pricing structure by copying what other businesses do rather than figure out what markup their business actually needs to use. **Comparing or copying markups or margins is pointless and very risky without knowing how they were determined.   **The decision about what costs or expenses go above or below the gross profit line can be different at different remodeling companies.   **Therefore the markup each company will need to use to cover overhead costs and planned net profit will be different.** Let me explain and clarify.

** **

### **![Sample Contractor Profit and Loss](https://www.shawnmccadden.com/hs-fs/hubfs/PL_Layout_with_the_Line-wr.jpg?width=263&name=PL_Layout_with_the_Line-wr.jpg "Sample Contractor Profit and Loss")First, here are the terms you need to know**

**Above the line =** direct project costs (materials, labor -including burdens, subs and equipment costs)

**Below the line =** overhead related expenses

**Indirect costs =** overhead expenses plus net profit added together

** **

### **Here is the simple mathematical formula for determining your markup**

The businesses’ total indirect costs divided by the expected direct costs for an anticipated volume of work **equals the required markup %** to add to estimated direct costs.

**This assumes profit is a required expense of doing business**!

** **

### **Let’s do an example: **

**The setup:  
**Assuming a remodeler is running a $900,000.00 a year business with the following above and below the line expenses:   
$300,000.00 (Of indirect cost: overhead + net profit) ÷ $600,000.00 (Of direct cost: materials, labor and subs) = 50% markup

**Proving the math works:  
**So, $600,000.00 of estimate direct job costs marked up by 50% = $900,000.00 (Provides a sell price that includes $300,000.00 of gross profit to cover the indirect costs of overhead and net profit)

**Therefore:**  
One contractor can put something like vehicle expenses or worker’s compensation insurance related to field staff above the line.   Another might put the same items below the line. **These two contractors may get to the same exact selling price but will be using different markups to get there.**

** **

### **Other important considerations to be aware of**

**![How contractors decide what markup to use](https://www.shawnmccadden.com/hs-fs/file-275732046-jpg/images/Roulette_Wheel-wr.jpg?width=122&name=Roulette_Wheel-wr.jpg "How contractors decide what markup to use")It also important to know that fewer than 20% of remodelers actually know the true costs of being in business.**  That means that 80% or more are using what has been referred to as the **WAG** or **“Wild Ass Guess” method **when it comes to deciding what markup they use to price the projects they sell. I call that **[“Contractor Roulette”](https://www.shawnmccadden.com/the-design-builders-blog/bid/94671/10-Sign-s-You-re-Playing-The-Game-of-Contractor-Roulette)**

If that isn’t shocking enough for you keep in mind that **about 9 out of 10 remodelers go out of business within ten years. ** Your chances of copying a successful remodeler’s markup are therefore about one out of ten. **And the odds of copying the wrong markup get even greater** if you don't know how, or even if, that remodeler actually calculated his required markup or did the WAG.

 

### **So here’s the bottom line regarding markup**

You need to do the math or you won't know whether you are buying or selling jobs! **Your ultimate success hinges on knowing the true costs of being in business and how to profitably price the work you sell.**

 

### **![Contractor markups](https://www.shawnmccadden.com/hs-fs/hubfs/Closed_signWR.jpg?width=140&name=Closed_signWR.jpg "Contractor markups")So, what about you and your business?**

**The choice is yours.** You can get the help you need to figure out what you need to charge for your work so you can be successful. Or, **you can continue using the Wild Ass Guess Method** and go to bed every night wondering if and **when you will join the 90% who go out of business.**

 

### **Other related articles:**

**[Self Quiz To See If A Properly Setup Financial System Can Help You:](https://www.shawnmccadden.com/the-design-builders-blog/bid/85077/Self-Quiz-To-See-If-A-Properly-Setup-Financial-System-Can-Help-You)**

**[10 Causes of Construction Business Owner Financial Anxiety](https://www.shawnmccadden.com/the-design-builders-blog/bid/104100/10-Causes-of-Construction-Business-Owner-Financial-Anxiety)**

**[Don't Put Your Business at Risk by Guessing At What Markup to Use](https://www.shawnmccadden.com/the-design-builders-blog/bid/76906/Don-t-Put-Your-Business-At-Risk-By-Guessing-At-What-Markup-To-Use)**

**[Don’t Confuse Bad Cash Flow with Under-Pricing](https://www.shawnmccadden.com/the-design-builders-blog/bid/76428/Don-t-Confuse-Bad-Cash-Flow-With-Under-Pricing)**

**[The Five Biggest Financial Mistakes Contractors Make](https://www.shawnmccadden.com/the-design-builders-blog/bid/88271/The-Five-Biggest-Financial-Mistakes-Contractors-Make)**

 

 Topics: [Business Financials](https://www.shawnmccadden.com/the-design-builders-blog/topic/business-financials), [Margin and Markup](https://www.shawnmccadden.com/the-design-builders-blog/topic/margin-and-markup), [Financial Related Topics](https://www.shawnmccadden.com/the-design-builders-blog/topic/financial-related-topics)

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