Contract Margins and Mark-up calculations
A mathematical explanation
Non-agency staff talk about the "mark up" of an agency. It is natural to think that way, particularly the contractor - as that is what she "sees". However, the agency world thinks and calculates in "gross margin" terms, not "mark up".
The agency's cost of sale - the product - has a "warehouse" value. Let's say that is £70 an hour (a very well paid CRM Consultant). This is the cost of the goods. In other words, it is the contractor's pay rate.
Agencies need to think in terms of "sale price" that's the "charge rate". If they achieved a sale of say £140 per hour, they would have achieved a 50% gross margin. Let's say though for the sake of argument, that they wished to operate at 30% gross margin with a charge rate at the £100 level. Let's work that one out:
 £100 x 30% = £30 (the margin)
£100 - £30 (the margin) = £70.
The fast way to work out the example above is to take the £100 and calculate 70% (100 times 0.7)
To calculate any % margin divide the pay rate by the charge rate:
1 - (70 / 100) * 100 = 30%
(Old hands don't bother with the "1 -" bit, they read the answer (.7) as "30")
Examples
Use our pop-up calculator to practice the fastest methods for checking and calculating gross margins:
1. £700 pay rate, £1000 charge rate = 30% margin:
- Calculate 700 / 1000 = 0.7 (30%)
2. £800 pay rate, £1000 charge rate = 20% margin:
- Calculate 800 / 1000 = 0.8 (20%)
3. Calculate the pay rate from a £1,500 charge rate at 20%
- Answer = 1500 x .8 = 1,200
4. Calculate the charge rate from a £1,750 pay rate with an 18% margin
- Answer = 1750 / .82 = 2,134
That's all there is to it.
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