Understanding the concept of markup in project estimation is crucial as it fundamentally represents the projected profit of the project. This article delves into the intricacies of markup, its impact on profit, and how strategic project evaluation can potentially optimize profitability.
Key Insights
- Markup in project estimation is the estimated profit, calculated as the estimated amount minus the hard cost, which includes overhead, with any over or underestimated costs typically reflected in the profit.
- Regular and strategic comparison of the actual cost to construct a project to the initial estimated cost can help identify potential areas of improvement and enable more accurate future estimates.
- Proper costing and evaluation of all projects, regardless of whether they made a lot of money or little, allows for more accurate data to be fed back into your estimating tools, resulting in more precise future project estimates.
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Now that we’ve reviewed overhead, let's talk about markup. Markup is the estimated amount above the hard cost, including overhead, and is essentially the estimated profit of the project. Any over- or underestimated costs are typically reflected in the profit.
Why do you need profit on a project? That’s the reason we’re in business. Otherwise, it would be just an employment agency. You can look at it from that aspect.
Each project overall should make a profit in order for the company to grow, to expand, and to have enough financial resources to pursue more projects moving forward. So let’s repeat that. Any over- or underestimated costs are typically reflected in the profit.
If you come in under your estimated budget to complete the project, the profit increases. Obviously, if it takes more money to complete the project, it reduces the profit. A best practice for any estimator is to compare the actual cost to construct the project to the initial estimated cost.
Now, you might be wondering why you would need that information. If the project comes in over budget, we are going to evaluate the project to see how it was built and why it cost so much to build. It could be due to project management during construction, or it could actually be due to the estimate itself. If there wasn’t enough money in the estimate, then future estimates should allocate more funds accordingly for similar projects.
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So the reason I say compare the actual costs is that you need to review this with your project managers and possibly even the accounting department to make sure that the right amounts were spent and on what. This would typically take place at the end of the project, although on bigger projects, you don’t want to find this out at the very end. Larger projects will typically have job cost meetings on a weekly basis, where they look at the actual cost of construction in place versus what was spent.
Even though it’s the estimator’s job to come up with the estimated cost to build a project, it’s important to evaluate what the actual costs are. An estimator typically can’t do this on their own. They have to consult with project management and accounting.
And if actual costs are allocated appropriately throughout the entire project, you can do a full and fair comparison of what it cost, for example, to put the roof structure on a building compared to the estimated cost. It’s not uncommon for companies that make a very good profit on a job to overlook it and simply say, “Yes, we did great, ” and then move on to the next project. But when money is lost, they typically dig into it, break it apart, and find out where the money was lost.
Well, let me tell you right now that it’s just as important to find out why you made more money on a project. You might actually be bidding your projects with too much money in them, and therefore, you have to ask yourself how many projects you might have gotten if your numbers were a little bit lower. So keep that in mind—evaluate your projects whether you made a lot of money, a little money, or lost money for that matter.
I’ll give you an example. While working on a project, one of our estimators got a great price on concrete. He liked it so much that he actually put it into our database.
Therefore, that price got utilized on several projects moving forward. Since we weren’t doing a very good job with job costing—because our projects were making a lot of money—it seemed okay. Therefore, if there was any issue with the unit costs, it didn’t get noticed. Until one day, we had a project that required a lot of concrete, and that unit price was utilized, and the project came in upside down—meaning we were way under budget for the required amount of concrete.
The reason why it wasn’t noticed sooner is that all the other projects had a very small amount of concrete for the foundations. So keep in mind that if you do a good job costing your project—whether money was made or lost on any detail of the project—you’ll learn a lot and help apply the appropriate cost back into your database or spreadsheet, whatever you may use for estimating, to identify what those true unit costs should be on future projects moving forward.
