builders margin

Hello,

I was hoping someone could please clarify 2 probably very simple questions, NSW based:

1. does the builders margin include things explicitly excluded from a cost plus contract in which there was also no 'allowance' made in the estimation quote?

2. is the builders margin worked on price inclusive or exclusive of GST? Given GST is then added to the builders margin.

Thank you

Good morning mapr

I will do my best to answer your questions, but I was struggling with number 1. So hopefully my answers are relevant.

Here goes:

1. The builder's margin will be applied to everything that is installed onsite. But depending on which contract you use here in NSW it may be applied at different rates and in different ways. Some larger builders make a very small margin on the base price of a home but apply 25-30% margins on the variations to make up for the low prices needed to be competitive at homeworld, whilst others apply a standard rate of 10, 15 or 20% across everything.

For simplicity assume that you will have a Builder's margin applied to every item which enters the site, so if there are items which are excluded initially in the contract and you ask for them to be added later you will no doubt pay a margin on top if the builder is organising them for you.

2. Mathematically it works out the same, whether the GST is applied before or after the margin is added.

Here is a worked example:

GST Added after the margin -

Cost of goods $100
Builders Margin 10% $ 10
Net Total $110

Add GST 10% $121

GST Added before the margin -

Cost of goods $100
GST 10% $ 10
Net Total $110

Add Margin 10% $121

I hope this helps

Simeon

Hi Simeon,

Thank you for your reply.

I should have clarified in second point, what I was trying to ask is, is it normal for GST to be added twice? So the total price inclusive of GST, + builders margin + gst?

Thank you

In your example where the GST and the Builders margin (BM) is the same it works out, but if the BM and GST is different it doesn't work out. here
Method 1

Cost of goods =$100
Builders Margin= 20% = $ 20
Net Total =$120

Add GST 10% of $120= $12
Total =$132


GST Added before the margin -

Method 2
Cost of goods $100
GST 10% $ 10
Net Total $110

Add Margin 20% of $121=$24 (rounded)
Total = $134

Calcs Simplified and I'm not a tax consultant, but
lol, The builder has r!pped off the ATO and tax payers as GST is paid once on the total including or excluding? the margins.
Instead of paying more tax he has increase his profit
In building the goods have GST added by the supplier, the builder has to add GST to the services provided ie trade labour which is mixed in with his profit margin?

Why are you doing 20% of $121?

Isn't it 20% of the $110, which is $22, and so the total is $132?

Multiplication is transitive, meaning the order does not matter: AxBxC = AxCxB (A = cost, B=GST, C=Margin for those slow on the uptake)

No, there should be no margin on GST. Calculating a margin on GST is equivalent to paying GST on the margin; but doing it twice is wrong.

Method 2 is incorrect No margin on GST
Cost of goods $100
GST 10% $ 10
Net Total $110

Add Margin 20% of $110=$22
Total = $132
Thanks

Sorry I am confused. Is there to be no GST added onto the margin?

I am NSW based if it makes a difference.

GST will definitely be paid on the margin. The builder is supplying a service which is taxed, unless your contract says that the margin is GST inclusive in which you still pay GST but then the 20% becomes 18.1818%.

We use the NSW Fair trading contract which says that the margin excludes GST, so we add the margin to the net cost of the goods and then add GST to the total.

I am not sure what the HIA contract says.

We are doing cost + so get all the builders base prices (ex GST) and work from there for what it will cost us.

Good/service exc GST: $1000
GST: $100
Cost to builder: $1100

Exmaple Margin of 10%
BM: $110
GST on BM: $11

Cost to us = 1100 + 110 + 11 = $1221

HIA cost plus? you've said base prices (ex GST) but your working inc GST? I think. My mind is about to explode.

My builder always uses costs ex GST when talking about quotes etc, so I've had to get used to that. GST is still applied of course so I need to factor that in to work out how much it will ultimately cost me.

GST is not a cost to the builder - they claim it back.

How can you claim GST when you paid the builder with a brown paper bag full of money...just curious

In Budapest's example the builder would collect $111 worth of GST from the client and pay that to the tax Dept in their BAS.

It would have been more correct to say "cost from builder"

The end user pays the GST every one down the line claims the GST back.

Good call, thanks Chippy

(flashbacks to Bluey ep of Tradies sayings that!)

There is some confusion between MARGIN and MARKUP.

The comments so far refer to markup, not margin, and margin is real and should not be confused with markup.

If something costs $100 and I want it to sell it with a 20% margin, then the margin works out at $25 and the final cost to the client is $125. (that is the margin is 20% OF the final selling price)

But if the cost is $100 and I want to sell with a 20% markup, then the profit is $20 and the final cost to the client is $120.

Notice that the $25 dollars MARGIN represents 20% of the $125 selling price.

Whereas the $20 markup represents 16.7% of the $120 selling price.

Many builders actually make this mistake and charge x% markup, when they are contractually entitled to charge x% margin.

Margin is used in all manufacturing and building scenarios, it always has the same meaning.

Markup is used mainly in shops and it always has the same meaning.

It will be easier to understand if we talk about 50% markup, which means something costing $100 will be sold for $100 + 50% of $100 = $150

If we use 50% margin, this means that something costing $100 needs to sell for $200 for the margin to be 50% of the selling price.

QED

Thanks for your very interesting and thought provoking post.

To be honest I had no idea margin was defined this way.

I won't be changing the way we charge as I personally think it is more transparent to use the markup definition.

But I wonder how many builders understand this and are applying it?

You’re welcome.

Isn’t the builders’ margin limited by law? I could be wrong.
If it is then it doesn’t make sense to limit it further.

We use the NSW fair trading contract which limits it to 20%