Combined Mark-up v Sequential Mark-up

With SME’s one of the most common ways to add their mark up is to add the Overheads and profit, OH&P, as a combined amount. The value of that might be 15%, 20% or 25%. These sorts of mark up are commonly in use, either as they have been used historically or the owners are advised these rounded numbers will work. As the values of projects get larger, owners begin to lose some tenders and will have to step down to a lower band. They complain that things are getting tight, when they may have moved into a different segment of the market. Choosing the right OH&P is crucial to secure projects at the highest price possible and not waste resources bidding work at a price that will never win.

The alternative is to add the Overheads and then the Profit sequentially. For example, this might be 10% overhead plus 5% profit, 10% and 10% or 15% and 5% etc. The additions are done in sequence. With the sequential method the overheads can be adjusted easily depending upon the forecast workload and the net profit recovery can easily be checked as the project progresses regardless of what is actually happening with the overheads. The method is a lot more transparent and controllable. It also relates to figures in the accounts and highlights to owners, what profit is actually being added so they can determine if it’s sufficient for the risks being taken.

Let’s look at an example of how the two methods differ in practice on a £1m project.

Direct costs £1,000,000

Overhead markup = 10%

Profit markup = 5%

Method	Calculation	Tender Price
A: One combined	£1,000,000 × 1.15	£1,150,000
B: Sequential	(£1,000,000 × 1.10) × 1.05	£1,155,000

The combined method is better if you want to offer the sharpest price, but you are kidding yourself that the overheads are fully recovered.

The sequential method is better with repeat work and frameworks as there is full recovery and transparency.

Internally, it is better to be focused upon the real Overhead and Profit situation. You can always back calculate the combined rate if you need to present it as a single figure.

My recommendation is, know your numbers at every level, don’t kid yourself, so

• Track your real overhead rate from your accounts

• Set your profit mark-up you won’t compromise on and adjust for risks

• Price using sequential markup internally

• Decide later how to present it to the client

Getting this discipline in place means you’ll know exactly where your money is made — and where it’s being lost — long before problems occur.

If you would like help with sorting your Overhead or Profit markup, then contact me for a no obligation discussion. Peter.Searle@ba4cs.co.uk