Caron Beesley, moderator of the U.S. Small Business Administration Community blog, defines gross margin as "a measure of production efficiencies and a determination of a company's break even point." Simply put, it's the revenue minus the cost of goods sold divided by sales revenue. Gross margins, especially those in the remodeling industry, vary and depend largely on economic conditions.
Having a gross margin of 40 percent simply means that the sum of total overhead and profit equals 40 percent. Gross margin is the gross profit expressed as a percentage. The remaining percentage includes the job costs such as labor and material. For example, your company sells a kitchen remodel for $65,000; overhead, the ongoing expense of the remodeling company, is 25 percent or $16,250, and you make a 10 percent or $6,500 net profit. In this example, the gross margin would be 35 percent -- overhead plus net profit. Job costs would equal 65 percent of the total job price.
One of the leading factors that affect the gross margin of remodeling companies is the state of the economy. Times of progressive economic growth see the highest remodeling gross margins, while recessions may force companies to lower their gross margins to stay competitive.
A remodeling company should aim to keep its gross margins within industry standards. Keeping gross margins within standard ranges ensures that such a business stays competitive and its pricing model consistent. Typically, the gross margin range for remodeling jobs run 34 percent to 42 percent.
Knowing the difference between markup and gross margin is important to your bottom line. Markup is the difference between the selling price and the total cost divided by the total cost. For example, a remodeling job with a $25,000 selling price and a total cost of $20,000 represents a 25 percent markup. Calculating gross margin with the same criteria yields 20 percent. To avoid common pitfalls, keep the methodology of your pricing consistent. A pricing model used for a company's estimating structure can be beneficial.