How to Calculate Profit Margin

Profit Margin 

We define profit or benefit as the income remaining after all expenses have been paid.

These expenses include engineering costs, direct and indirect labor, supplies, consumables, equipment costs, overheads, interest, taxes, etc.

In the figure below, we highlight the Profit Margin line item.

How to Calculate Mark-up

Mark-up for a construction project

The profits made belong to the owners of the company. The shareholders or owners of the company can keep the money or reinvest it in the business.

In short, we calculate profit as total income minus total expenses.

The stage of determining the mark-up is just as important, if not more so, than the stages discussed above.

Determining the industrial profit, or net profit margin, that the contractor expects to receive as compensation for its work is the final step in any budget estimate.

In carrying out a project, each contractor brings its prestige, capacity, experience, capital, equipment and other relevant factors to bear.

For a contractor to receive the expected profit at the end of a project, the starting point must be a reliable estimate that ensures a lucrative contract.

Any negligence or omission in the estimate can reduce or eliminate the expected benefit and cause financial problems.

Markup – Formula

The mark-up is the amount by which the cost of a budget is increased to arrive at the selling price.

We apply the mark-up to the quotation as follows

1 - As a percentage of the final cost of the quotation - Cost mark-up

Final price (excluding tax) = cost + cost * (% cost mark-up)

If the cost is 1 and the mark-up is 20%, the price is 1.20.

2 - As a percentage of the sales price - Price mark-up

In this case, we obtain the final price as follows.

We call the unknown final price Pf.

Pf = cost + Pf *(% mark-up)

From the formula we remove the final price (Pf) and we have

Pf = cost / (1 - (% mark-up)

If the cost is 1 and the mark-up is 20%, the final price is 1.25.

Margin Profit - Formula

The margin or profit on a job is the money left over after all the costs of doing the job have been paid.

In the first case, the margin is [1.20–1/ 1.20] *100 = 16.66 %.

The second case has a margin of [1.25–1/1.25] *100 = 20.00 %.

The margin that the companies set depends, of course, on

• The previous experience of each company in carrying out similar works.
• The characteristics of the work.
• The size of the project.
• The terms of payment.
• The time allotted for carrying out the work.
• The companies with which they will be competing on the market.
• The tenderer's interest or need to carry out the work.
• The risk that the tenderer considers it reasonable to assume, etc.

How to calculate the profit margin - typical contractor profit

In practice, the percentage of profit usually varies between 5 and 30%.

Usually, higher percentages are used for small and/or risky jobs.

The usual is

1. For small and/or difficult jobs, the margin to be charged is between 20 and 30%
2. For medium and low-risk jobs, margins of 15-20% are common
3. For large and low-risk jobs, the margin is 10 to 15%.
4. For very large and low-risk jobs, the margin is 5 to 10%.

Each company defines its own percentage of profit or revenue.