What is general contractor markup in construction?

How Do You Calculate Construction Markup?

Markup is calculated on cost, not on price. Use price = cost x (1 + markup). To find markup from a finished bid, divide gross profit dollars by direct cost.

With $850,000 in direct cost and a 15% markup, the bid is $977,500. Working backward, ($977,500 - $850,000) / $850,000 = 15%.

Sage states the same formula as ((selling price - cost price) / cost price) x 100. Markup is a share of cost and margin is a share of price. To turn markup into margin, divide the markup by 1 plus the markup, so a 25% markup is a 20% margin. To convert your own numbers, use the markup and margin calculator.

What Is the Average General Contractor Markup?

An expert affidavit in a 2005 federal ruling, GSBCA 16377, cited RSMeans 2005 average contractor overhead and profit rates of 21% to 26%. The same expert, from Navigant Consulting, also called a combined general contractor markup of 16% to 21% reasonable. Those 2005 figures are more than 20 years old, so they are not today's average. No free, current national average exists, because every firm splits overhead and profit its own way. Treat any average as a check, not a target. Your own markup has to come from your own overhead rate and the profit you need, as shown below.

What Is Contract Markup in Construction?

Contract markup in construction is the markup a construction contract permits on cost, not drawing markup or document redlining. The contract states the allowable percentage on added work, often with one rate for self-performed work and a lower rate for subcontracted work.

How a General Contractor Sets Markup

A general contractor sets markup from its own overhead rate and the profit it needs, then adjusts it for the size and risk of the job.

1. Start with overhead. Overhead is usually tracked as a share of revenue, so the markup that only breaks even is overhead / (1 - overhead). If overhead is 6% of revenue (illustrative), break-even markup is about 6.4%, not 6%.

2. Add the profit you need. Work back from a target margin with markup = margin / (1 - margin). A 20% margin target needs a 25% markup.

3. Adjust for job size. Smaller jobs carry a higher percentage, because estimating, project management and office time do not shrink in line with the contract value. Larger jobs take a lower percentage that still returns more dollars.

4. Adjust for risk. Raise markup for incomplete drawings, a tight schedule, liquidated damages, a new owner or architect, a remote site, or sub bids with scope gaps. Lower it when the market is crowded with bidders or you need the work to keep crews busy.

5. Price job overhead as cost. Site supervision, trailers and temporary facilities belong in general conditions as a cost line, not in the markup.

General Contractor Markup on Subcontractors

Yes, general contractors mark up subcontractor quotes, usually at a lower rate than their own self-performed work. The sub's price already includes the sub's own overhead and profit, so the GC's markup pays for what the GC adds: coordinating the trades, holding the schedule, carrying the risk that a sub defaults or leaves a scope gap, and carrying the cash gap when the owner pays late. In general, the more risk a cost carries for the GC, the higher the rate it needs.

In a 2011 Construction Business Owner column, contractor coach George Hedley suggested 20% to 40% markup on labor and used 8% on materials, equipment and subcontracts as an example. Tiered rates. One rate on self-performed labor and material, a lower rate on sub quotes. This is the common approach on bid work. One blended rate. One percentage on the whole estimate. Simpler, but it can overprice a sub-heavy job and underprice a self-performed one. Raise the sub rate when a sub is new to you, unbonded, or much lower than the other bids for the same scope. Read the contract. On cost-plus and GMP work the contract often sets the GC fee instead of a free markup. See GMP vs lump sum contracts.