What is Markup and Why is it Important for your Electrical Bids?
September 12, 2023 10 min read
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If you forget to add in markup when you’re submitting a bid, you won’t be able to keep operating your business very long.
In the simplest terms, markup is overhead plus profit. Markup covers your indirect financial obligations like your office lease, salaried employees, insurance, permits, and other costs that are not materials and labor, but are part of your operating costs.
Profit is the percentage you’ll add so you can continue to invest in your business.
In this blog, we’ll give you the lowdown on how all these separate costs affect your bid and show you strategies to ensure you’re adding sufficient markup to your electrical estimates, while keeping your bids competitive.
Electrical Markup: The Fundamentals
Every electrical estimate includes a line item for markup. Markup is a percentage of your electrical estimate and covers overhead costs and profit.
What is Overhead in your Electrical Estimate?
Overhead is the total of all the recurring costs that are part of running your business. Overhead includes costs like your office rent or lease, vehicle payments, utilities, salaried employees, equipment, insurance and more. These costs are consistent no matter how busy your shop is. Overhead does not include materials, labor, or job expenses such as permits or equipment you need to complete the job.
It's important to note that some electrical contractors view Project Manager hours as part of the cost of a job, while others do not. Just make sure you’re consistent with how you assign PM costs to your overhead.
Typically, overhead for electrical contractors should be about 13% to 20% of your total sales.
Here’s a handy formula for calculating the appropriate markup for your bid:
Formula: (Direct Costs, including labor costs + material costs) x (% overhead costs + ideal profit margin %) = your markup.
For example: if your direct costs are $10,000 and your markup is 25%, the total bid would be $12,500.
Key Factors Influencing Electrical Markup
There are multiple factors to consider when you assign your electrical markup price. These factors include project complexity, risk assessment, market conditions, and competition.
Complex projects might warrant a higher markup due to increased uncertainties and potential risks, while a competitive market might require a lower markup to stay competitive. Some markup considerations can seem counterintuitive at first glance.
For example, you could assign higher markup for a small job because it uses more resources compared to a larger job. This is because each job requires a similar amount of administration such as ordering materials and collecting time for payroll and issuing invoices, and that means that smaller jobs take a larger percentage of your resources.
Electrical Markup Strategies for More Accurate Bidding
A. Comprehensive Cost Analysis
Before you apply your markup to the final bid, you should first complete a detailed cost analysis of the entire bid. Using specialized electrical estimating software (link EBM) to create your estimates will speed up your ability to assemble a bid, reduce duplicate calculations, and manual work. Estimating software makes your bidding more accurate by allowing you to calculate labor hours for installing each assembly based on NECA labor units. With electrical estimating software, you can create and track your estimates, deliver professional looking bids to the owners, schedule your jobs, and create invoices from your estimates.
Accurate markup begins with a thorough examination of your direct costs. After you have completed your bid, you should review it to be certain you have included all possible expenses, from wiring to costs for renting any specialized equipment.
B. Adjusting Markup for Project Complexity
As we mentioned above, review your markup amount to account for the project’s complexity and scope. More intricate projects require a higher level of oversight and management. Adjusting your markup to reflect this additional work means you’ll be adequately compensated.
Example 1: Simple Commercial Electrical Project For our simple commercial project, let's consider a lighting installation in a small retail store. The estimated direct costs for this project are as follows:
- Materials: $4,000
- Labor: $2,500
- Subcontractor (for specialized lighting installation): $1,000
- Equipment: $500
- Total Direct Costs: $8,000
Now, let's calculate the markup. In this case, let's assume you want to achieve a 20% markup to cover both overhead costs and profit.
- Markup = Total Direct Costs * Markup Percentage
- Markup = $8,000 * 0.20 Markup = $1,600
- For this simple commercial project, you would apply a markup of $1,600.
Example 2: Complex Commercial Electrical Project Here’s a more complex commercial project, such as wiring a new office building. The estimated direct costs for this project are as follows:
- Materials: $30,000
- Labor: $25,000
- Subcontractor (for various specialized tasks): $10,000
- Equipment: $2,000
- Total Direct Costs: $67,000
Given the increased complexity of this project, you might decide to apply a higher markup to account for additional management and potential risks. Let's assume a 30% markup is appropriate for this complexity level.
- Markup = Total Direct Costs * Markup Percentage
- Markup = $67,000 * 0.30 Markup = $20,100
- For this complex commercial project, you would apply a markup of $20,100.
These examples provide a simplified calculation based on desired profit margins, your overhead costs, and complexity considerations. In actual practice, you would also factor in other elements such as market conditions, competition, and specific project risks. It's crucial to tailor your markup strategy to the unique characteristics of each project to ensure accurate bidding and successful project outcomes.
C. Competitive Market Analysis
Learning about how your competition bids is another strategy for success. The more you know about your competitors and the general market for the projects you bid will allow you to ensure your electrical estimates come in at the sweet spot.
How do you get this intelligence about your competition?
Just ask. If you don’t win the job, ask the project owner for the name of the winning electrical contractor and their bid price so you can track how competitive your bids are. If you find your bid win % is falling over time, you can analyze whether you should adjust your markup higher or lower so that you can better meet the price expectations of the project owners you’re sending your bids to.
Change your Markup Strategy Over Time - Review and Flexibility
Your business changes over time, which means you’re likely to change the types of projects you bid on. When your bids change in size or complexity, or when your competitors change, you can adjust your electrical markup strategies as well.
Learning from previous jobs is the best way to review and adjust your markup strategy. Keep track of your bids, whether you win the job or not, so that you can understand the accuracy of your estimates and whether your markup calculations were too high or low. For jobs you won, how difficult was the job? Should you revise your markup higher for similar jobs in the future?
While it’s simpler and easier to use the same markup strategy for every job you bid, you can maximize your profit and ensure you win more jobs by following some simple electrical markup strategies.
- Review every estimate to be certain you have included all your direct job costs.
- Keep track of your indirect costs, like rent, office administration, and insurance.
- Consider the size of the project, as well as the difficulty level when applying your markup.
- Know your competition so you make sure you can price your bid at the sweet spot that’s competitive and financially beneficial for you.
- Use electrical estimating software to bid more quickly and accurately, as well as to track your bid % won so you can adjust your markup strategy.
Electrical markup strategies are only one piece in the puzzle when creating your electrical bid. Read our Complete Guide to Electrical Estimating for more information.