Why Your Bids Miss the Mark: Markup vs. Margin Secrets

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ℹ ABOUT THIS EPISODE

Think markup and margin are the same? This costly mistake could be draining $100K+ from your annual profits. 

Wade breaks down the math with real contractor examples, showing why a 25% markup only gives you 20% margin. 

Learn the correct formulas to bid jobs that actually deliver the profit you expect, plus get access to calculation tools that ensure your estimators use the right numbers every time.

⌚️ Key moments in this episode:

• 00:00 Profit Math Warning
• 00:21 Markup vs Margin Setup
• 02:07 Is 25% the Same
• 03:01 The 2 Million Example
• 03:48 Markup to Hit Margin
• 06:58 Markup Table Shockers
• 08:04 Remodeler Case Study
• 11:20 Commercial GC Mistake
• 13:16 Profit First Cash Impact
• 14:54 Calculator Annual Losses
• 16:17 Wrap Up Key Takeaways
• 17:06 Final Recap and Outro

The Contractor Profit Blueprint is a complete guide that breaks down exactly how to identify where your money's going and start keeping more of it. This isn't theory. It's the same framework I use with contractors I work with every single day.

Head to profitfirstconstruction.com/blueprint to download your free copy. 

Stop working for free. Let's get you keeping what you've earned.

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Find all episodes and related links at ContractorSuccessForum.com.

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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com

Transcript

[00:00:00] 

Wade Carpenter: If you're mixing concrete and your ratios are off, you can still pour it. It just fails later. If you're bidding a job with the wrong math, you might win the bid, but cracks soon form in your profit.

Today we are talking about markup versus margin. And if you stick around, you might just learn why that profit you bid never seems to end up on your bottom line.

This is the Contractor Success Forum. I'm Wade Carpenter with Carpenter & Company CPAs, alongside Stephen Brown with McDaniel Whitley Bonding and Insurance.

Stephen, is markup and margin the same thing? What is your take? Is this a problem? 

Stephen Brown: Wade, I'm fascinated. I mean, what happened to my profit? What happened? Where'd it go?

And here's the thing. You got two terms here that are vital to our listeners understanding what you're gonna teach us today, markup versus your margin.

When we were talking about that I thought, okay, this makes a lot of sense.

So in prior podcasts, our listeners have learned that [00:01:00] if you want to get rid of X percent of your customers to concentrate on the more profitable ones, you need to raise your prices X percent. Okay? So that's what I think of as markup, right? You mark up everything.

I tell my customers, you mark up everything including overhead when you bid a job, if you're gonna make profit off of it. What do you not mark up?

And then it seems to me like the margin is the gauge that tells you whether you've marked it up properly or not, or pulled it off from that certain markup. Am I even remotely close? 

Wade Carpenter: Well, yeah. This is one of those things that sounds simple, but I keep running into contractors that have this exact problem. 

Stephen Brown: Yeah. 

Wade Carpenter: And they don't get the math. So this is where I wanna do a little interactive presentation today. I've sort of enjoyed doing these.

So if you're listening on the podcast, you may wanna jump on YouTube.

Stephen Brown: Oh yeah. I love your scenario generators here [00:02:00] and I can already tell this is gonna be a good podcast. Tell us about markup versus margin, and the difference between the two. 

Wade Carpenter: Well, let me put you on the spot. Is 25% markup the same thing as 25% margin?

Stephen Brown: I don't know. It's like, 25% is what you do and 25% is not always what you end up with. That's what I was trying to talk about before, and you said you're kinda right, but then you're not. 

Wade Carpenter: Okay. A lot of people think of it this way. Let's do some easy math and I'll walk into the examples later.

Let's just say you had a job that was gonna cost you a hundred thousand dollars, and you wanted to add 10% for overhead, and you wanted to make 15% profit, that's 25%, right? 

Stephen Brown: Right. 

Wade Carpenter: So how do you work that math? Do you just take a hundred thousand dollars and add 25% to that number? 

Stephen Brown: I think that's what most people do. 

Wade Carpenter: Why don't we explore that? Because I think that's where a lot of people don't understand really what's happening in that math. 

Stephen Brown: Okay. 

Wade Carpenter: So [00:03:00] that's exactly where I wanted to go with this. So let's just say we started with $1,600,000 in job costs, and we wanted a 400,000 gross Profit. We were looking at $2 million, right? So that's a 20% margin.

Stephen Brown: Okay. 

Wade Carpenter: You agree with the math?

Stephen Brown: I don't know.

Wade Carpenter: I'm scaring you now, right? I'm sorry. Well, I mean, that is a 20% margin, right?

Stephen Brown: It looks like it's more than a 20% margin.

Wade Carpenter: 400,000, I'll let you off the hook. This is a 20% margin.

Stephen Brown: Okay. 

Wade Carpenter: The problem comes when we're bidding this, right? So, if we were just gonna take $1,600,000 and add 20%, what is that? $320,000? 

Stephen Brown: Uh-huh. 

Wade Carpenter: So, $1,600,000 plus $320,000 does not get you to 2 million. That's where I'm going with this. 

Stephen Brown: It's $1,920,000. Yeah. 

Wade Carpenter: Right. You know, and I've had many conversations with contractors over the years. Markup is actually the percentage that you're gonna add on top of your cost to arrive at your selling price.

If you're trying to get to [00:04:00] a certain level of profitability or you know that's what it is, you have to mark it up by a different percentage. Because we're taking the markup and dividing it by the cost, not the price.

Let me give you an example here.

So if we're trying to do a 25% markup, on a hundred dollars, we'd take $25 or 25%. If we're trying to get a 20% margin, then we need to mark it up 25%.

Let me do the math here. So if you take the price minus the cost and then divide it by the price, that's where most people fail at this calculation. So to get that 20% margin that we were looking at in the example we had before, we can't mark it up by that 20%. Remember it was $1,920,000, I believe.

This is where I wanna talk about somewhat simple math, but it's confusing math.

I did a presentation about two years ago, had about 300 people in this webinar I was doing with Profit First and a bank. There was two [00:05:00] co-hosts on the thing, they were completely stumped by that math. It's math that contractors really need to know because they're thinking I'm gonna make 20%. And they don't realize that 10% plus 15%, just adding 25% on top does not equal that.

So that's where I wanted to walk through a couple of case studies. If you know your markup is 25%, if we're trying to make a margin of 20%, what do we need to target that?

I built a couple of calculators and if our listeners are interested, I'll show you a little more complex one as we get through this.

You know your markup percentage needs to be 25% to get where you wanna be, then you take the selling price, you gotta take the a hundred thousand times 1.25 to get 125. So you take 125 and you have $25,000 gross profit. That's 20% of 125.

Stephen Brown: I see exactly what you're saying. Alright.

Wade Carpenter: But if you want a margin of 25%, if you do the math on that, [00:06:00] you've gotta actually mark it up by 33%. 

Stephen Brown: Wow. Yeah, I get it. 

Wade Carpenter: So it is dividing that cost by the markup percentage, or the margin that you're trying to get. If you know these calculations that we'll walk through in a minute, at a 25% margin, you need to mark it up by 33%.

 There's some people on YouTube saying, you need to mark up everything 50%. And everybody's like, I can never make that profit. Nobody's gonna buy from me. But if you're actually trying to hit a certain level of profitability, you need to know these numbers.

So let me stop here and see if I'm making some semblance of sense here.

Stephen Brown: You are. Say you listen to the consensus and mark your projects up 50% and you can say, I can never get that. Your margin's not gonna be 50%. That's what you're saying. If you just take simple math to figure out what your margin's gonna be by adding your markup to your existing estimate.

Wade Carpenter: Yeah. And so what I've [00:07:00] got here, at a 10% margin, if you're just trying to cover 10%, of you're overhead in profit, that's pretty low. But you would have to add at 1.1%. But using the example we had before at 20% margin, and you're using the wrong factor, you're 5% off.

So, like a million dollar job or a million dollar contractor, that's $50,000 a year. If you're trying to hit a 30% margin, you have to mark it up 42.9%, or another almost 13%. But if you're bidding incorrectly, that's $130,000 on a million dollar bid or a million dollar contractor.

So you can do the math, but what you need to know, and you don't need to really think about it, but if you're trying to tell your estimators to mark to come the 30% margin, they just need to know what percentage you need to mark it up to.

We'll get through in a minute just to prove the math out. A lot of contractors are not getting 50%. But to do that math, you'd actually have [00:08:00] to get a hundred percent markup on your materials.

Let's prove this out in a minute. I'm not gonna walk through some of this stuff, but I wanted to walk through some case studies so that this sort of hits home.

Honestly these are not real contractors. They're just sort of based on some of the ones that I've worked with.

I got a residential remodeler that does about $1.2 million a year. So she's been using this 30% markup on her jobs, and she tells everybody that she makes 30%, she tells me that. You know, your banker, we're all looking at your bonding guy, you're looking at margin. You're not looking at markup.

When you're bidding this job, she needs more than 30%. But she's telling everybody she's making 30%. Her bookkeeper doesn't realize the math either.

Let's just say she does a typical $80,000 kitchen remodel. That was her standard type job, right? 

Stephen Brown: Right. 

Wade Carpenter: Her direct costs are $68,000, so [00:09:00] if she does a 30% on top of that, that's 88,400. That 30% markup is 20,400. Her actual margin, if you do the math, only comes out to 23.1%. 

Stephen Brown: Yeah. 

Wade Carpenter: So how do we figure that? What she should have been bidding to get that margin is a 42.9% markup that we were talking about before. And when we do that, 43% on top of that, the 68 gives her almost a hundred thousand dollars bid on that job.

We'll walk through some of the math there, but you know, that will bring her to 30% gross profit.

Stephen Brown: Wow. Yeah, I think I'll just keep my kitchen the way it is right now, Wade.

Wade Carpenter: Okay. Well, I'm not saying-- 

Stephen Brown: No I get it. Keep going, please. 

Wade Carpenter: All right, so if she has an $8,700 shortfall on every job, and she does just 15 kitchens a year, that's an annual loss of $131,000 in [00:10:00] profitability.

I see various versions of this all the time, and nobody wants to admit it, but over a three year, I mean, that's $300,000, almost $400,000 in loss. It's just sad to say that I have seen people bidding like that for years. And in their mind, yes, I understand. I'm tacking on 25% Because that's what the industry standard says, but they're not actually getting 25%. 

Stephen Brown: And I imagine the most heartbreaking thing too, Wade, is to analyze these numbers at the end of the year and see how much they were throwing out versus what they wanted to accomplish. And then you've got that whole year's worth of productivity just going down the tubes. You're not meeting your goals. 

Wade Carpenter: Well in construction, we all know things can go wrong on a job, especially when I started transforming the stuff with Profit First. I started diving deeper into a lot of this stuff with contractors and yeah, you can say, okay, well this job just went wrong. But if you consistently saying, okay, I'm making 30% [00:11:00] margin, but you're always coming in at 23%. I mean, that's eyeopening. And sometimes until you dig into how they're bidding, they don't realize that the math doesn't work.

I've got real examples I'm thinking about and I'm trying not to bring those out, but this is hopefully a little simpler.

I do have one more example of this.

Stephen Brown: All right.

Wade Carpenter: I've got a commercial general contractor. This is not their name, it's based on somebody that really does about $4.2 million in retail stuff.

We're gonna stick 20% margin on there. They did have a project manager that did not understand that. They put that 20% as markup, not margin. So, part of it in this case was the fact that one bid it one way and one bid it the other way. The newer guy that was bidding it that way, it took almost two years to catch on, like, his jobs are not making as much money as the other guy.

You show the math, here's 20%. Why is that a problem? When they averaged them out, they weren't as as big a deal. This case we started looking at [00:12:00] $3.4 million. And you take $4 billion, 20% markup versus a 20% margin. This one used the wrong factor. You know, the $85,000

Stephen Brown: difference. 

Wade Carpenter: Yeah. They were sort of averaging them, so it took a while to figure out, hey, this guy's not making us as much money as the other one.

We talk about it and you think your estimators understand that, but a lot of times your estimators are not the ones that are in the books and understand. So there's a disconnect and that's why I really wanted to bring this out today.

On a typical job like that, the shortfall was an $85,000 shortfall on this almost $4.2 million bid.

The revenue effect of that annual lost profit was almost a hundred thousand dollars. Working on $500,000 over the course of-- 

Stephen Brown: Whew. Yeah. 

Wade Carpenter: I know sometimes I feel silly even bringing stuff like this up, but a lot of people don't realize you need to be dividing by the cost, not the desired margin to get there.

Stephen Brown: I [00:13:00] know immediately what I got from it is, I print off your table and I'd make sure that all my estimators were using the exact same markup.

Wade Carpenter: Well, if nothing else, go back, screenshot that. We could probably get you a handout or whatever for that, that you could download.

I started looking at it more. This is partly why I started digging deeper with the Profit First stuff. We're trying to solve for not just profit on paper, we're trying to solve for profit in your bank account in cash. That's what the goal is.

So, knowing the way people typically say this is your overhead from a financial statement part, but that's not taking into account all these truck notes and all the other stuff that you've gotta cover in there. 

Stephen Brown: Yeah. Every bucket is compromised by you plugging in the wrong markup. Every single one. 

Wade Carpenter: If you're talking about these buckets, you've got your overhead and then like I said, I'll break it down in your profit, owner's compensation and tax, because you need to cover the taxes of the [00:14:00] owner.

When we start bidding it that way, it really does come out that if you're targeting a certain level of profitability, it just never materializes. Why is that happening?

We could walk through this, what our profit percentages are. We can talk about what the impact would be if we're bidding with the wrong numbers. 

Stephen Brown: Okay, I get it.

Wade Carpenter: The owner's gonna take home less money. And again, I'm not gonna get in the math because I think I'm gonna lose everybody in this one.

As you can see, required markup. I mean, that's 8.3%. 

Stephen Brown: Yeah. 

Wade Carpenter: Whatever you think you're gonna make in your owner's comp is actually gonna be 8.3% lower. Same with your profit and your taxes. It's just not gonna be there. Taxes aren't 

Stephen Brown: gonna change. That percentage isn't gonna change. 

Wade Carpenter: When people are getting started with Profit First or even if they're not doing Profit First, they don't recognize why these things are not working out.

I do wanna sort of play with this one a little bit more.

So, what if our typical job is [00:15:00] 250,000 job. And we know we need a certain amount of overhead, and that's where we need to back into a number. We could spend a whole lot of time talking about that OpEx number, I approach it from a cash standpoint, however you want to figure that. If you're looking for that 10% overhead or 15% net profit, then you have X number of jobs per year.

If you're bidding the wrong numbers, it can make a huge difference. So, like I said, we'll just leave these, let's just say we jump up to 20 jobs a year. It can make a huge difference.

So when we're using the right margin, that would be a $50,000 profit on that particular thing, but it would be a $31,000 reduction there if we're bidding incorrectly.

So an annual impact for 20 jobs a year, that's half a million dollars. Does that make sense?

Stephen Brown: It sure does. That's sobering because here's the same discussion about why more revenues, more projects completed don't always translate into the profit that you thought it [00:16:00] was going to. But yeah, I love this calculator. I wish I could play with it while we were talking.

Wade Carpenter: Well we can do that or we could let you. 

Stephen Brown: Mm-hmm. 

Wade Carpenter: We are trying to get this to where our clients and some of the Profit First people that we work with to be able to have access to these things. So that'll be coming.

Stephen Brown: Okay.

Wade Carpenter: Just to sort of wrap this up, as we said, markup and margin are not the same thing.

If you don't standardize the terminology, even if they don't understand the math. Your estimators say, okay, you gotta mark it up by 33% or 43%, or whatever it is. They're gonna do the math that they understand.

So if you're the owner and you need to communicate that, that's something that you need to go back and look at that table.

You need to start doing the math a little differently if you're trying to figure that out. A 25% markup only gives you a 20% margin. We need to build that markup. And I still like the thought of bringing that Profit First in so you're solving for cash.

We also did the one on the WIP reports. That's part of understanding if you are [00:17:00] missing on these bids that you know before it's too late doing anything about it. 

Stephen Brown: Isn't that the truth?

Wade Carpenter: So with that said, I hope our listeners have gotten some insight. How about you Stephen? What do you think?

Stephen Brown: I think it's great. I'm so glad you brought it to my attention. There's just so much more to delve into because you can play with it and you can look at it from every angle, but you're right, margin is always less the markup. Get that stuck in your head. Margin is always less the markup. I need to mark up a job X percent to allow me to do this, and this and that.

So thank you Wade, for supplying this. I can't wait for us to discuss it some more. Maybe the recap and how this might tie into the WIP reports that you do because I understand every element of it affects every element of the WIP and your bucket if you're Profit First.

Wade Carpenter: Yep. I feel like contractors should understand this and really don't. It seems like in my head that it should [00:18:00] click, but it doesn't. I hope it's been enlightening for you.

If so, and you realize you're not bidding with the right numbers, then hopefully you can kind of correct course and figure out why you can't ever make that profit you think on paper you're supposed to.

Stephen Brown: I understand.

Wade Carpenter: Well, with that said we appreciate you listening and if you got any value out of this, we appreciate it and like share, subscribe, love some comments below. If you have any ways you look at it or any aha moments that you might have gotten from it. We do this every single week. We appreciate you and we will see you on the next show.