If you are thinking about hiring or working with a contracting service, you may have heard something called a markup. What does this mean? What does this have to do with your project? There are several important points you need to keep in mind.
Understand the Difference Between Margin and Markup
First, a lot of people confuse these two common terms. Margin and markup are not the same things. Markup is the additional cost added to the overhead expenses related to the project. Contractors are going to have a lot of overhead expenses. For example, they have to pay employees for their labor, pay for the materials, and pay for additional consultants when required. Markup is the price added to this total cost so the contractor can actually generate a profit on the project for himself or herself. As an example, some contractors add a markup of 1.35x to the total cost of the project.
In contrast, the margin is the revenue remaining after the cost of goods has been paid. This amount is calculated without taking into account the other overhead expenses. As an example, if the cost of goods sold is 66 percent, then the gross profit is 34 percent; however, some of this profit may have to go toward other overhead expenses, such as paying other contractors.
Why Is There a Markup Anyway?
Even though this may sound unfair, a markup is necessary because the company has to be paid for his or her services as well. If there is no markup attached to a project, the contractor may not make any money at all, as all revenue from the project will be used to cover overhead expenses. On the other hand, you do need to figure out exactly how much money you are paying for the project. This has to include the markup. That way, you can budget appropriately as well.
When you hire a contractor, complete transparency is important. That way, you know exactly what you are getting and how much you have to pay for your project.
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