Marking up hardware costs

Question

I am doing a small software job for a client (who I have worked with before and know fairly well). This particular job requires some additional hardware which from my preliminary research would be in the $1200 range. The client is aware of both the need for the hardware and my estimated cost and is OK with my choice.

During a recent phone call he approved the direction I wanted to go with the hardware and wants me to procure it and then added that I should " .. add in a reasonable mark up on the hardware".

I know that marking up hardware is a common thing to do but how should I determine what is reasonable? Off the top of my head I can think of estimating how much interest I'll get hit with on my credit card between buying the equipment and being paid. But the what other considerations are there that I should think about?

Answer 1

Customarily you do not charge interest. If you finance the purchase(s) that's on your shoulders, not the clients. In addition, you should be able to pay off any balance when you receive payment from the client. So markup due to covering costs would cover your interest in the interim.

It is customary to markup expenses about 20%. That means you aren't marking up the equipment, you are marking up the money you must shell out. You are covering costs with your money.. so there's a fee for you taking that risk. Basically, you charge the client for using your money. You are essentially giving the client a loan to expedite the acquisition of something. The markup is the loan processing fee.

If you were to determine the cost of the item(s) and the client sent you that payment and then you purchased things, there would be no markup because you aren't covering costs at any point and there's no "loan" in play.

Answer 2

Your percentage of markup on the hardware is based upon your decision of what you feel is fair and the other end-user prices out there. You first need to add on your hard expense such as shipping driving to pick it up , time to order etc. then decide how much you want to make that you feel is fair to the client.

Then you should absolutely factor in the cost of carrying charge on your card. You don't put "10% interest" on the invoice but when you add your profit to the hardware, that is a cost factor as well as any shipping or expense to go an pick it up. That potential interest charge is a cost and needs to be considered. You can also create a hardware only invoice with a prompt pay discount whereas you give a discount for paying quickly on the hardware and you would not incur the interest charge such as 5% 10 Net 30. Meaning if they pay you in 10 days you give them a 5% discount and if they pay after 10 days then they pay the full amount of the invoice because you will be carrying the cost on your card. The 5% represents the costs to you from your credit card company.

For example but adjust for yourself as needed.

$1200 hardware

$ 200 markup

$ 20 shipping

$ 120 Tax

$ 50 potential interest on card

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Total $1590

Terms 3% 10 Net 30

If they pay you within 10 days they will pay you $1542.30 which gives you time to pay the credit card without an interest charge. But you need separate hardware and labor invoices

So you are covered in your costs if your credit card bill becomes due before you are paid. If they pay you before hand, you can deduct those costs from the invoice.

I disagree that the interest payments are your fault, they are an expense and not a reflection of your financial decisions. If you paid cash for the products your money is not able to make money elsewhere, that is a carrying cost. If the company does not want to incur additional expenses they could purchase the hardware themselves. With you purchasing the hardware, you make a few extra bucks