Uniform Percentage Markup Method is the expression coined by builder and author David Gerstel in his book Running a Successful Construction Company_ to describe a markup methodology author of that places a markup to achieve a prescribed Gross Profit on the sum of all the Labor, Materials, SubContractor, and Equipment costs. (The other primary method of markup being the Capacity Based Markup.)
The uniform percentage-based method involves the following steps:
• Total your direct job costs for the past year and anticipate for the new year.
• Total you overhead for the past year and anticipate for the new year.
• Divide new overhead by new direct costs needed to to recover overhead for the new year.
• Markup direct costs on each of your jobs by the percentage to get the amount of overhead you will charge on the job.
(Chapter 5 pg. 166 Running a Successful Construction Company_
For many remodeling contractors coming of age in the mid-1980s, they learned this method of markup through seminars, books, and articles in Remodeling Magazine written by Walter W. Stoeppelwerth_ a remodeling business management consultant and founder of the company HomeTech Publishing_. This method was described in his books Professional Remodeling Management (1985) and Professional Cost Estimating (1981) now out of print.
The Uniform Percentage Markup Method is also the method described in Michael Stone’s book Markup & Profit: A Contractor’s Guide_ (1999 & 2012).
This is what we can project about our companies first year::
- Dollar volume built = $150,000
- Overhead expenses = $37,500
- Net profit at 8 percent = $12,000
Here’s how we’ll compute our markup.
- Add overhead expense and net profit;
- Then subtract that total from our dollar volume to find the job costs.
Our projected job costs for our first year business are $100,500. In other words, that’s the amount we exppect to spend the first year to compute the markup we need to charge:
Total Dollar Volume Built ÷ Job Costs = Markup
- Divide $150,000 by $100,000:
- Markup = 1.49
(Chapter 3 pg. 53 Markup & Profit: A Contractor’s Guide_ (1999 & 2012).
Uniform Percentage Markup ChartWhen using the Uniform Percentage Markup Method to obtain a given Gross Profit percentage you multiply the Direct Job Cost Total by the given multiplier.
|To Obtain a Gross Profit of …||Multiply Direct Cost Total By…|
In his book Running a Successful Construction Company_ David Gerstel describes problems with the method:
To understand the potential problems, think of your company as a shop with “X” amount of capacity and with all of your overhead costs going to support that capacity. if you are in the early stages of your career and are working as your own project lead as well as general manager of your company, your capacity may be one job at a time. Later you may employ three lead, each of whom runs a job so you have the capacity of three jobs. For practical purposes–and here is the key point–you can generally figure that each lead uses the same amount of your overhead support, regardless of the size of job he or she is running.
[…]…, those jobs can vary greatly in terms of the direct costs of building them, yet take roughly the same length of time with the result the small one will soak up as much of your capacity–as much overhead–as the larger one. When that is the case, if you are using uniform percentage markups, the small job is recovering less than the overhead needed to support it. If you have a year packed with such jobs and you are marking up with a percentage derived from a prior year of larger jobs, you may end up falling far short of recovering your overhead, as the figures in the bottom sidebar illustrate.
In my blog, I also write about this in One of the Potential Problems in Using a Traditional Volume Based Markup – Paradigm Projects.
In another article Comparing Markup Methodologies In Real Some World Pricing Scenarios – Paradigm Projects I write about and demonstrate the math to illustrate how users of the Uniform Percentage Markup Method will be terribly and even dangerous underpriced and will be losing money on Projects with High Relative Cost of Labor to Low Cost of Materials, and SubContracting and over-priced on Projects with Low Relative Cost of Labor to High Cost of Materials, and SubContracting.