9.

PROFIT AND MARK-UP

Profit
Also referred to as a “profit margin”. Profit is what’s left after all costs and expenses
associated with the job have been paid. It is expressed as a percentage of the total estimated
cost and is rarely a fixed percentage in construction.

Four General Types of Profit

1.) Return on Equity
a.) Return on investment is the profit necessary to meet a percent return in equity
commensurate with the contractor's risk.
b.) A return of 20 to 40% is normal for construction risk.
2.) Planned Profit Margin
a.) Planned profit that must be achieved over a certain period to meet the firm's
business goals.
b.) An organization must meet or exceed this profit percentage to remain in business.
3.) Optimum Profit
a.) The optimum markup for profit is the one that yields the greatest total profit.
b.) The expected profit is the total possible profit multiplied by the likelihood of being
the low bidder.
c.) Lowering the profit provides a greater chance of being the successful bidder.
d.) However, if the profits are too low, a contractor can go broke because he does not
perform enough highly profitable work and/or does too much cheap
work.
e.) A markup that is too low will not carry a contractor through dry bidding spells.
4.) Competitive Profit
a.) Competitive profit is the amount chosen that represents the intangibles of past
bidding history and competitors' need for work.
b.) For example, in lean times, contractors might average a 0.5 to 1.5% profit to remain
competitive in the bidding game.

Markup
Markup is "the amount added to the estimated direct cost and estimated job into
overhead cost" to recover the firm's main office allocated overhead and desired profit. Markup
is added at the close of the estimating process and is an allowance for profit plus possibly other
items. It may vary from 5 percent to more than 20 percent of the estimated project cost.
Factors must be considered in deciding a markup figure.