Business Forum: The Mistake of Markup

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