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Navigating Cost-Plus Contracts: A Comprehensive Guide to Calculating Your Construction Markup

The ever-changing economic climate has compelled construction firms to reevaluate their pricing strategies.

To mitigate risk, many are considering adopting a cost-plus pricing model. This pricing approach can help secure profits, but to optimize its benefits, it is crucial to understand and apply appropriate markup calculations.

In this blog post, we will explore how to:

  1. Understand the cost-plus pricing model
  2. Calculate the minimum markup to prevent losses
  3. Determine the ideal markup for generating profits
  4. Monitor the competition and industry trends
  5. Regularly review and update your markup

Understanding the cost-plus pricing model The cost-plus pricing model, also known as “transparent pricing” or a “time and materials contract,” involves charging clients for the cost of materials and labor plus a predetermined markup. This pricing method helps protect your bottom line against economic uncertainties by passing increased costs to the client. To maximize profitability, it is essential to calculate and apply the right markup.

Calculating the minimum markup to avoid losses As a business owner, generating revenue is necessary to maintain operations and employ staff. With a transparent pricing model, the goal is not only to break even but also to become more profitable. To ensure you avoid losses, start by calculating the minimum markup necessary.

To calculate your breakeven markup:

Breakeven Markup % = Total Annual Operating Expense / Total Annual Expected Job Costs

Determining the ideal markup for generating profits Once you have calculated the minimum markup needed to avoid losses, the next step is to identify the optimal markup for maximizing profits. The amount you can charge is primarily limited by your competition, so it is crucial to find a balance between competitive pricing and profitability.

Two approaches can help determine a markup target:

  1. Start high and reduce: Suitable for established builders with ample work, this strategy involves beginning with a markup 20% above the breakeven point and decreasing it until clients start signing proposals.
  2. Start low and increase: Ideal for new builders looking to establish themselves, this method involves starting with a markup at least 5% above the breakeven point and gradually increasing it until clients stop signing contracts.

Monitoring competition and industry trends, and staying informed about your competitors’ pricing strategies is crucial for maintaining a competitive edge. You can gather this information by talking to clients and joining local builders’ associations or networking groups.

Additionally, keeping an eye on industry trends will help you anticipate changes in the market and adjust your pricing strategy accordingly.

Regularly reviewing and updating your markup as your business grows and the market evolves, it is vital to review and update your markup regularly.

At a minimum, this should be done once per year.

Continuously analyze your profit margins and recalculate your breakeven markup to ensure you are charging the right amount to maximize profitability.

In conclusion, adopting a cost-plus pricing model can be an effective strategy for construction firms in an unpredictable economic environment.

However, to optimize its benefits, it is essential to understand the model, calculate appropriate markups, monitor the competition, and regularly review and update your pricing strategy. By doing so, you can secure your bottom line and ensure the long-term success of your construction business.

From Blueprint to Bottom Line: How Accurate Construction Takeoffs Can Save You Money

A building proposal’s takeoff is an essential phase in the cost estimation process. The items and supplies required for the project, and their quantities, are calculated by vendors, sub-contractors and project managers using the building plans, selections, and specifications. The budget, schedule, and supplier purchase orders are also created using that data.

Nevertheless, creating a takeoff – extracting this detailed data from project plans – can take up a large chunk of a builder’s time. Historically, builders used a set of blueprints, along with some pens and markers, to create a takeoff manually. For the benefit of modern builders, software has been developed to streamline and create efficiencies for this procedure.

Why Are Construction Takeoffs Vital To A Project?

  • Establish project viability: Since estimators often have a budget to stick to, construction takeoffs specify how financially viable a project is based on the cost of the materials and labor.
  • Provide a profit estimate: By creating an accurate construction takeoff, estimators can calculate how much a construction company will profit from the project.
  • Bids: Estimating a construction project is challenging enough. If you underestimate, you risk losing profits. If you overestimate, you risk losing the job.  This is why an accurate construction takeoff is so important.  It provides a financial figure you’ll need before submitting a bid.

How Many Different Kinds Of Construction Takeoffs Are There?

The two varieties of building takeoffs are as follows:

  • Manual – With a printed set of plans in hand, and following a long list of material, home builders calculate the cost of each component individually to arrive at the total cost of the project. This method can be tedious and time-consuming, and utilizing the following process is better. 
  • Digital – The days of a builder painstakingly going through physical printouts to create a list of items one by one are long gone. Takeoff software was designed specifically to aid in this complex task. Simply upload a plan and the necessary components into a takeoff software program. After the program has analyzed the data, each item is given a figure, and estimates are made to arrive at a total inventory cost.

A Closer Look At Construction Takeoff Software 

The computer software that helps users with estimating their material costs according to digital plans is called Construction Takeoff Software. Software for takeoff frequently includes tools for assessing costs and workforce. 

Takeoff software frequently uses digital model forms. The program often supports the most popular file formats for designs, including SVG, DXF, and even PDF or picture files.

Instead of physically estimating material quantities (a procedure prone to error) estimators may point, click, and drag information off the project designs using the digital representations of the blueprints.

Advantages Of Using Construction Takeoff Software

Although different providers’ software uses its own processes, they are very comparable.  Below, we discuss some essential tasks that takeoff tools may provide to builders and clients to expedite and enhance the takeoff experience.

  • Collaborative Takeoff Process – This functionality will be most prevalent in cloud-based takeoff tools intended for big teams. Collaborators can view someone else’s comments and notifications and prevent future mistakes. The takeoff procedure for a specific configuration frequently involves the utilization of materials from a number of suppliers.
  • Measurement Tools – Every takeoff tool available today enables users to locate and evaluate linear components on the drawings to extract the required dimensions of different materials. This might be any assortment of components assessed in length units, such as concrete, lumber, windows, doors, etc.
  • A Record Of Material Costs – A record of prices for materials organized by manufacturers and suppliers is frequently included in and updated by the more comprehensive takeoff software. As a result, estimators won’t have to personally search for item or material costs.  Even if users can obtain better prices through supplier relationships and/or social connections, it can often add value to work with the pre-built system.
  • Accessibility – Your work will be accessible to you anytime you have internet access if you use cloud-based takeoff software.  This means that you may use the software virtually whenever and wherever you want.  For example, if you are on the job site and need to evaluate an order or confirm material amounts, having the software at your fingertips is a huge convenience.

Closing Thoughts

Creating an accurate construction takeoff is a crucial step in estimating the building costs, regardless of how big or small the project is. Home builders must have the ability to thoroughly explain the project’s required materials, and their pricing, to provide a competitive proposal. 

Accuracy with old-school, manual takeoffs is challenging regardless of the home builder’s expertise level. Construction Takeoff Software provides the ability to create precise estimates in a quick time frame. We suggest using software such as BuilderPad, which can help you achieve your construction goals, keep you in touch with your clients, and help you provide accurate construction takeoffs. 

You can start a free 14-day trial to view what BuilderPad offers, so sign-up now!