Issue #1:
Standard markup is 10% AND 5% (note the word ‘and’).
Example:
$10,000 [cost] + 10% [overhead]= $11,000
Now add profit:
$11,000 [cost and overhead] + 5% [profit]= $11,550
Doing it this way as opposed to a straight 15% you make an extra $50 but considering you have to pay your own overhead until you get funded from the contract means you need to make something for that out of pocket expense of being your own banker.
Now that is “Standard Markup”, which is the markup you show your client should they need to know for some reason, like a break down on a change order or on a budget you may have run when negotiating a job with a client. On a hard bid don’t show your numbers or your estimate to anyone.
The real markup is what the market will bear.
Example when there is lots of work available and I am not that hungry:
Jobs 5k to 19k- 15 and 10
Jobs 20k to 39k- 12 and 8
Jobs 40k to 150k- 12 and 6
Jobs 151k to up- 10 and 5
The key here is to pay attention to your market and get a feel for what you can charge. If you are not sure then just do a straight 10&5.
Example when there is not a lot of work available and I am hungry:
Jobs 5k to 19k- 10 and 5
Jobs 20k to 39k- 10 and 3
Jobs 40k to 150k- 9 and 3
Jobs 151k to up- 8 and 3
When I have to have work, or layoffs start I will take them at 3% or even cost if I have to just to keep my good guys. One year I even took one at below cost and project managed it well enough to pull a 3% profit out of it.
I have heard some flack here about the “market will bear” attitude, but contracting is not a nice business, and there has to be balance for the lean jobs and bad “guesses”.
Issue #2
You might want to clearly define two things:
Estimate: An estimate is a proprietary document you generate for your own benefit to make and educated guess as to what it will cost YOU to do a job. Keep in mind there are times when all your crews are busy and it will cost YOU more to do this job than other contractors, this is your guess for YOU. This document is part of the hard bid process and showing it to your client in no way benefits you. If you guess to low, then suck it up and guess higher next time, but if you guess to high don’t feel guilty because you need that extra money to make up for the times you guessed to low.
Watch your job, be a good PM and if your estimate is too low work hard to make it up through working smart. Once you give your client a hard bid based on an estimate, there is no going back for T&M unless they change your scope or otherwise impact your job.
Budget: A budget is a document you generate in conjunction with your client when negotiating a job or when the scope is not clearly defined.
This is a tool to do several things-
a) It helps your client figure out how much money they need to borrow for the project as part of the lending process. Most jobs are bank financed on some level and a good budget helps the money flow.
b) It gets your foot in the door, and while it’s no guarantee you will get the work it will give you an inside look of what’s on the plans and extra time to work up an estimate, and sometimes you will be the only one estimating the job once the scope is defined and the money for the project is secured.
c) It will drive the scope based on what the client can afford. How many times have you had a client who wants way more than they need, or has an architect with very expensive tasted in fixtures? The budget is a great tool to bring the designers down to earth.
d) It builds working relationships with your client, they need your experience and know-how to get their building built and the budget is a great way to share it without really committing to the work.
Once the job it out of design and budget phase you do an estimate and hard bid then build the job and if you did it right everybody wins.
[This message has been edited by ITO (edited 02-28-2007).]
