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Markup vs margin for contractors
Most small contractors price jobs with a markup and judge them by margin. Mix the two up and you can lose a fifth of your profit on every job without noticing. Here is the difference, the two formulas you need, and a worked example you can copy.
The short version
- Markup is profit as a percentage of cost. You add it on top of what the job costs you.
- Margin is profit as a percentage of the selling price. It's what you actually keep from each dollar the client pays.
Because the price is always bigger than the cost, the same dollar profit is a smaller percentage of the price. So your margin is always lower than your markup. A 20% markup gives a 16.7% margin, not 20%.
The two formulas
Markup = Margin ÷ (1 − Margin)
Work in decimals: 20% is 0.20. So a 20% markup gives 0.20 ÷ 1.20 = 0.167, a 16.7% margin. To hit a 20% margin you need 0.20 ÷ 0.80 = 0.25, a 25% markup.
There's an even simpler way to price for a target margin: divide the cost by (1 − margin). For a 20% margin, divide by 0.80.
Worked example: a $40,000 bathroom remodel
Your estimate adds up to $40,000 of direct cost: materials, labour, subs and equipment rental. You want to keep 20% of the price as gross profit.
| Add a 20% markup | Price for a 20% margin | |
|---|---|---|
| Direct cost | $40,000 | $40,000 |
| How the price is set | $40,000 × 1.20 | $40,000 ÷ 0.80 |
| Bid price | $48,000 | $50,000 |
| Gross profit | $8,000 | $10,000 |
| Margin | 16.7% | 20.0% |
| Markup | 20.0% | 25.0% |
Same job, same costs: the first bid leaves $2,000 on the table. Run that across fifteen jobs a year and it's $30,000, which is often the whole difference between a good year and a tight one.
Quick conversion table
| Markup on cost | Margin on price |
|---|---|
| 10% | 9.1% |
| 15% | 13.0% |
| 20% | 16.7% |
| 25% | 20.0% |
| 30% | 23.1% |
| 33.3% | 25.0% |
| 40% | 28.6% |
| 50% | 33.3% |
| 75% | 42.9% |
| 100% | 50.0% |
Notice how far apart they get. Doubling your cost (a 100% markup) only gets you a 50% margin.
The markup that actually covers your overhead
Gross profit isn't take-home. It has to pay for everything that isn't charged to a specific job: the truck, insurance, phone, software, accountant, the office, and the hours you spend estimating jobs you don't win. Only what's left after that is real profit.
Here's how to find your minimum markup:
- Add up a year of overhead. Use last year's books. Say it comes to $60,000.
- Estimate a year of direct job costs. The materials, labour and subs you expect to put through jobs. Say $300,000.
- Break-even markup = overhead ÷ direct costs = $60,000 ÷ $300,000 = 20%. At a 20% markup you cover overhead and make nothing.
- Add your profit target. If you want 10% net profit on revenue, solve for the price: revenue × (1 − 0.10) = $300,000 + $60,000, so revenue = $360,000 ÷ 0.90 = $400,000.
- Your minimum markup = ($400,000 − $300,000) ÷ $300,000 = 33.3%, which is a 25% gross margin.
That's the uncomfortable part for a lot of contractors: the "standard" 20% markup in this example only breaks even. Your own numbers will be different, so run them. It takes ten minutes with last year's figures.
Common mistakes
- Quoting a margin you priced as a markup. If a client or lender asks your margin and you say "20%" because you marked up 20%, you're overstating it.
- Applying overhead and profit separately, then adding. 10% overhead plus 10% profit as markups is 20% markup, a 16.7% margin, not 20%.
- Using one markup for everything. Subcontracted work carries less risk and less of your time than self-performed work. Many contractors use a lower markup on subs and a higher one on their own labour, and both still have to cover overhead.
- Forgetting change orders. Price change orders with the same markup as the base bid. Small extras done "at cost" quietly drag the job margin down.
Doing it in a spreadsheet
If your direct cost is in B2 and your target margin in B3, the bid price is:
Put that formula in B4. To show the markup the price represents:
Format both as percentages and you'll never mix them up again. The free calculator below does all of this, plus the overhead recovery steps, with the table built in.