Cost Item-based Markup Distribution in Construction Projects

Authors: ,


In construction projects, overall markup amount needs to be distributed to each activity. Therefore, a unit price for each activity in unit price bid should be submitted including markup and a value of each activity including cost and markup is required by project owners in lump-sum contract. Since distribution of markup can affect a contractor’s cash flow, a contractor’s profit markup distribution has been of interest to contractors and researchers. Two existing methods for markup distribution are proportional distribution and front-loaded unbalanced distribution. While the proportional markup distribution approach is simple and straightforward, it does not relieve the contractor’s financial burden which is transferred from the project owner. While the front-loaded unbalanced markup distribution approach can improve the contractor’s cash flow, this approach is regarded as an unethical strategy due to potential additional cost to project owners. Furthermore, a front-loaded unbalanced markup distribution may not be accepted by project owners. This paper presents a new approach to markup distribution which is based on different markup rates among different cost items. A framework for the new approach was developed using an Excel spreadsheet and the Excel solver add-in. The framework is to find the optimal markup rates for cost items, and the optimization problem can be solved by the Excel solver. The framework, furthermore, can enhance understanding and control of the problem solving procedure through visual presentation of variables in the Excel spreadsheet. The proposed framework would be helpful to contractors as an alternative tool for markup distribution in construction projects.

Keywords: markup distribution|front-loading|optimization

How to Cite: Shim, E. & Kim, S. (2016) “Cost Item-based Markup Distribution in Construction Projects”, The Journal of Technology, Management, and Applied Engineering. 32(1).