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What Is The Right Builders Margin

The difference between Markup and Margin is widely misunderstood in the building industry.

Most small builders use the word Margin but do the maths using Markup. There are builders in Australia who have been doing the maths wrong their whole careers and left hundreds of thousands of dollars uncharged and uninvoiced which was rightfully theirs (contractually) if the contract price was properly understood.

For the record, Markup is most commonly used in a retail shop setting where the business owner will put a markup on the cost of goods sold to achieve a gross profit and markup is commonly measured as a business matrix in that industry.

Your accountant (or insurance broker) will never use Markup in the building industry, they will always discuss Margin. Now Builders Margin is a measure of your gross profit compared with your total revenue (not your costs). The trouble for builders of course is trying to calculate a retail price they should be charging when they have calculated their exact costs of materials and labour for a job and have an idea (from their budget and industry precedent) what margin they should be charging.

Let use an example for a builder aiming for 20% profit margin in their building contract who has costs of $200,000 (ex GST).

For most builders the calculation is made: $(cost of materials and labour) plus 20% = retail price (plus GST) or $200,000 + 20%= $240,000.

Sadly this is incorrect and will result in your final price being well below the potential market value.

The correct calculation is: $(cost of materials and labour) divided by (1-margin expressed as a decimal) = retail price (plus GST) or $200,000/(1-0.2)=$250,000.

In this example the builder using the correct calculation makes $50,000 builders margin on the total turnover of $250,000 which calculates accurately as a 20% gross margin.

For fixed price contracts this is most relevant when it comes to calculating variations and for that reason your Integrity New Homes specification correctly defines what the word Builders Margin means so that clients can be corrected if a dispute ever arises around this calculation and its application.

The iGyro Building Management software uses this correct accounting approach when calculating your retail price for variations when using the variation tab so you can preserve and grow your net profit.


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