I recently attended a business seminar
in which a roomful of builders discussed
various ways to "mark up" direct
costs to arrive at a selling price. The
seminar speaker explained that he uses
a divisor to arrive at his selling price.
For example, take a job where the total
estimated direct cost (material, labor,
and subcontractors) is, say, $10,000. To
add an additional 20% gross profit, this
builder divides by .8. The selling price
would then be $12,500 ($10,000÷.8).
A number of builders in the room
spoke up, saying that this was the same
as multiplying by 1.2. At first glance,
this makes sense: Multiplying by 1.2
marks up costs by 20%, right? Wrong.
Multiplying by 1.2