Markup vs. Margin: The Math Mistake Costing You Thousands
You bid 25% markup thinking you'll net 25%. You won't. Here's the math error almost every contractor makes—and how to fix your pricing.
Quick quiz: You have $10,000 in job costs. You add 25% markup. What's your profit margin on that job?
If you said 25%, you just left money on the table. The actual margin is 20%.
This isn't a trick question—it's basic math that trips up contractors every day. And when you're doing millions in revenue, that 5-point gap adds up to real money.
Markup vs. Margin: What's the Difference?
Markup is the percentage you add to your costs to get your selling price.
Margin is the percentage of the selling price that's profit.
Same job, different denominators. Here's the math:
- Job costs: $10,000
- 25% markup: $10,000 × 1.25 = $12,500 selling price
- Profit: $2,500
- Margin: $2,500 ÷ $12,500 = 20%
You marked up 25%. Your margin is 20%. These are not the same thing.
The Conversion Table You Need
Here's how markup translates to actual margin:
| If You Mark Up... | Your Actual Margin Is... |
|---|---|
| 10% | 9.1% |
| 15% | 13.0% |
| 20% | 16.7% |
| 25% | 20.0% |
| 30% | 23.1% |
| 35% | 25.9% |
| 40% | 28.6% |
| 50% | 33.3% |
Notice the pattern: markup is always higher than margin. The gap gets bigger as the numbers go up.
If you want a 25% margin, you need to mark up approximately 33%. Not 25%.
Why This Matters
Let's say you want to net 20% on your jobs to cover overhead and profit. You think "I'll mark up 20%." Here's what actually happens:
- Job costs: $50,000
- 20% markup: $60,000 selling price
- Profit: $10,000
- Actual margin: 16.7%
You're 3.3 points short of where you thought you'd be. On $4 million in annual revenue, that's $132,000 you thought you were making but aren't.
The Formula to Get It Right
If you want a specific margin, here's the markup you need:
Markup = Desired Margin ÷ (1 - Desired Margin)
Examples:
- Want 20% margin? → 0.20 ÷ 0.80 = 25% markup
- Want 25% margin? → 0.25 ÷ 0.75 = 33.3% markup
- Want 30% margin? → 0.30 ÷ 0.70 = 42.9% markup
Tape this formula to your estimating desk. Use it every time you price a job.
What Should Your Target Margin Be?
This depends on your overhead structure, but for most trade contractors doing $3M–$8M:
- Gross margin (before overhead): 35-45%
- Net margin (after overhead): 10-20%
If you want 15% net and your overhead runs 25% of revenue, you need 40% gross margin. That means marking up your direct costs by about 67%—not 40%.
Yes, that sounds like a lot. But it's the math. If your competitors are actually achieving 15% net, this is what they're doing (whether they know it or not).
The Real Problem: Underpricing
Most contractors I work with aren't making the margin they think they're making. The markup/margin confusion is one reason. Here are the others:
- Labor burden isn't included. You bid $30/hour labor but your true cost is $40/hour.
- Overhead isn't covered. Your markup covers direct costs but not your trucks, insurance, and office.
- Scope creep isn't billed. "While you're here, can you also..." becomes free work.
Fix the markup/margin math, and you've plugged one hole. But there are usually more.
The Bottom Line
Markup and margin are not the same. If you've been using them interchangeably, you've been leaving money on the table.
Know the difference. Use the formula. Price for the margin you actually need, not the markup you think sounds reasonable.
Is Your Pricing Leaking Profit?
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