Charge materials at what they cost you plus a markup that pays for buying, carrying and standing behind them. Add a wastage allowance that matches how your trade actually loses material, rounded up to the packs you have to buy. Then protect each quote from supplier rises three ways: a validity period that suits how fast your materials move, a price list you update the day a supplier invoice shows a rise, and materials bought only once the customer has said yes. Most trades lose more margin on materials through forgotten wastage and stale prices than through the markup percentage they argue about.
What a markup on materials pays for
A customer who sees a tap online for less than your quoted price assumes the difference is profit. Very little of it is. A markup on materials covers the work of supplying them: the phone call to check stock, the drive to the trade counter, the wait at the counter, the return trip when the wrong fitting was in the box, storage in the ute or the shed, stock that gets damaged in transit, the supplier account you pay before the customer pays you, and the warranty claim you will handle if the product fails in a year.
Put a number on it once. A 40-minute supplier run, at a business cost of $95 an hour, is about $63 of time. On a $400 order, that is nearly 16 per cent of the material cost gone before any profit, and that assumes one trip. Run the same sum on your own figures and the markup you need usually turns out higher than the one you charge.
Setting the markup
Three practical rules work for most trades.
- Use a higher percentage on small orders and a lower one on large single items. A $30 bag of fittings costs nearly as much to collect as a $300 one. A hot water unit or an oven may justify a flat handling amount rather than a percentage, because a percentage on a big-ticket item can look greedy beside the online price.
- Decide once what happens when the customer supplies the materials. If they do, they save your markup and take on the risk: the wrong model, the missing part, the warranty claim. Say in the note that customer-supplied items are fitted as supplied and that their warranty is between the customer and the seller.
- Watch the gap between markup and margin. A 20 per cent markup is a margin of about 16.7 per cent on those materials. If your target is a margin, work back from it.
You do not have to show your markup percentage on a quote. It is part of your price. The exceptions are allowances such as prime cost items, where the quote should say how a difference from the allowance will be charged.
Wastage
Every trade wastes material: offcuts of pipe and cable, broken tiles, timber with a split end, the last litre in a tin, the bag of cement that went hard. Wastage you do not price is wastage you pay for.
Work out your own allowance rather than borrowing someone else's. For the next three or four jobs of each kind, note what you ordered and what was left or thrown away. The percentage that comes out is your figure for that kind of job. It will differ by material: tiles laid in a herringbone pattern lose more than large-format tiles laid square, and a deck with a lot of angles loses more timber than a rectangle.
Then round up to the unit you buy in. A floor that measures 14.2 square metres with a 10 per cent allowance needs 15.62 square metres. If tiles come in boxes of 1.44 square metres, that is 10.85 boxes, so 11 boxes, 15.84 square metres. Price the 11 boxes, not the 14.2 square metres.
When suppliers put prices up
Supplier rises are rarely a surprise. Suppliers send notices, invoices show new prices, and the trade counter mentions it. The damage comes from the gap between the rise and the day you change your prices.
- Update the item on your price list the day an invoice shows a rise. Not at the end of the quarter.
- Keep the validity period on materials-heavy quotes short, so an old price cannot be accepted months later. The guide on how long a quote should stay valid covers choosing one.
- Order materials when the deposit arrives. Until then, the price you quoted is a promise you are making with the supplier's money.
- On long jobs for business clients, some trades add a clause allowing supplier rises before ordering to be passed on at cost, with the supplier's notice as evidence. On domestic building work, some states restrict or prohibit clauses like that, so check with your state's building or fair trading body before using one.
A worked example
Kestrel Bend Plumbing is a fictional two-person business. Its price list includes "Mixer tap supply and fit" at $395, set a year ago when the tap cost $180 at trade price. With a 20 per cent markup the tap was $216 of the price, and the labour was $179.
The supplier has since lifted the tap to $215. At the same markup, the tap should now be $258 of the price, and the item should be $437. Kestrel Bend fits about 40 of these a year. Leaving the old price on the list costs $42 each time, or $1,680 a year, on one item, without anybody noticing a loss on any single job.
The fix took two minutes: the old item removed from the list and the new one added at $437. In Quote Desk, quotes already sent keep the price they went out with, so nothing changes for customers who have a quote in hand; see the price list for how items are added and removed.
On a bathroom quote the same week, the materials at cost come to $1,770, of which $670 is pipe and fittings. Kestrel Bend adds 10 per cent wastage to the pipe and fittings only, $67, because fixtures are bought by the unit and are not wasted. Materials at cost with wastage are $1,837, and with the 20 per cent markup the materials lines on the quote total $2,204.40.
Mistakes to avoid
- Marking up a price that already includes a markup, such as a supplier's retail price, which makes you look expensive for no gain.
- Pricing materials by the exact measured quantity and buying by the box, the tin or the length.
- Quoting a supplier's special price that ends next week on a quote that is valid for a month.
- Buying materials for a job before the customer has accepted it, then wearing the cost when they go with someone else.
- Hiding a price rise in a smaller line elsewhere. If a re-quote is higher because a supplier went up, say so plainly.
What to do this week
- Pull your last three supplier invoices and compare the prices on them with the sell prices on your price list.
- Update every item where your cost has moved.
- Time one supplier run and put a dollar figure on it.
- Start noting ordered against used on the next few jobs to find your real wastage.
- Check the validity period on your materials-heavy quotes against how often your suppliers change prices.