Recovering lost profits: Margin vs. Mark-Up
The Construction Contractor's Digest explains the difference between these terms and the formula for calculating each.
As explained in the post:
Mark-up is profit percentage as a factor of cost. Cost is the basis for the profit calculation. As an illustration, if we have a $100 of cost and want to make a 10% margin then, we multiply .10 by $100 and add the result - $10 - to our cost of $100. Our price to the client is $110.00. we have all have performed the math thousands of times and there is no mystery. Most professionals were taught this as the only way to calculate profit.Margin is the use of a profit percentage that is a factor of revenue. Revenue is the basis for the profit calculation. Financial pro formas relate all costs as a percentage of revenue, (not to cost). To accurately follow your financial planning, you have to keep all expenses clearly defined and easy to follow for your employees. To use mark-up confuses them if you are seeking a 10% margin. ...
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It is quite simple. To calculate Margin:
1) Take the 1 and subtract the percentage desired (1-.10)
2) Divide the remainder into the cost (100/.9)So in application, our $100 cost is divided by .9 is $111.11. The 11.11 of profit is exactly 10% of 111.11.
Construction contracts often stipulate the mark up on extra work. But if the goal is to make a certain profit, then the margin formula should be used rather than mark up.