A lot of builders say “I run 20%” and mean markup. Their accountant hears “20%” and thinks margin. Those are two different numbers, and the gap between them comes out of your profit.
Here is the math, a table you can print, and a worked example.
The two formulas
Markup is profit as a percent of your cost.
Markup = (Price − Cost) ÷ Cost
Margin is profit as a percent of the selling price.
Margin = (Price − Cost) ÷ Price
Same dollars of profit. Different number underneath. Because price is always bigger than cost, margin is always smaller than markup.
To convert between them:
Margin = Markup ÷ (1 + Markup)
Markup = Margin ÷ (1 − Margin)
And to set a price from a target:
Price with a markup = Cost × (1 + Markup)
Price for a target margin = Cost ÷ (1 − Margin)
Conversion table
| Markup on cost | Margin on price |
|---|---|
| 10% | 9.09% |
| 15% | 13.04% |
| 20% | 16.67% |
| 25% | 20.00% |
| 30% | 23.08% |
| 35% | 25.93% |
| 50% | 33.33% |
Read it this way. If you add 25% to your cost, your margin is 20%. If you want a 30% margin, you need about a 42.86% markup. If you add 50%, you keep one third of the price.
A worked example on a $40,000 job
These are example numbers.
Your total cost on a job is $40,000. That covers materials, labor, subs, permits, dumpsters, everything that goes into the job itself.
You want a 20% margin. You apply a 20% markup because it sounds like the same thing.
- Price: $40,000 × 1.20 = $48,000
- Gross profit: $48,000 − $40,000 = $8,000
- Margin: $8,000 ÷ $48,000 = 16.67%
You wanted 20%. You got 16.67%.
Now price it for a real 20% margin:
- Price: $40,000 ÷ (1 − 0.20) = $50,000
- Gross profit: $50,000 − $40,000 = $10,000
- Margin: $10,000 ÷ $50,000 = 20.00%
- Markup: $10,000 ÷ $40,000 = 25.00%
The difference is $2,000 on one job. Do ten jobs like that in a year and it is $20,000 you meant to charge and didn’t.
Why it matters for overhead
Gross profit is not what you keep. It has to pay your overhead first: truck, insurance, office, phone, software, your own salary, the estimator, the time you spend on bids you don’t win.
Overhead is usually tracked as a share of revenue. That means it lines up with margin, not markup. If you plan with markup and pay overhead out of margin, you run short.
Keep going with the example. Say overhead runs 12% of revenue (example number) and you want 8% net left over.
- You need 12% + 8% = 20% margin.
- That takes a 25% markup, not 20%.
At the 20% markup price of $48,000:
- Gross profit: $8,000
- Overhead at 12%: $48,000 × 0.12 = $5,760
- Net: $8,000 − $5,760 = $2,240, which is 4.67% of the price
At the 25% markup price of $50,000:
- Gross profit: $10,000
- Overhead at 12%: $50,000 × 0.12 = $6,000
- Net: $10,000 − $6,000 = $4,000, which is 8.00% of the price
Same job, same crew, same materials. One version leaves you $2,240. The other leaves $4,000. The only change is which percent you used.
Note that the overhead dollars went up a little with the higher price. That is what happens when overhead is a percent of revenue. If your overhead is mostly fixed dollars, figure it per job instead and add it to cost before you mark up.
The mistakes I see most
Saying “20%” without saying which one. Write “markup on cost” or “margin on price” on every estimate template. Make everyone in the office use the same words.
Stacking markups. A sub marks up their material. You mark up the sub. Then you add a contingency on top. That can be fine, but know what the total is and whether the job can carry it.
Discounting off the wrong base. Taking 10% off the price is not taking 10% off your profit. On the $50,000 job, a 10% discount is $5,000. Your profit was $10,000. You just gave away half of it.
Leaving out costs before marking up. If permits, dump fees, equipment rental, or delivery aren’t in your cost, they aren’t in your markup either. They come straight out of profit.
Short checklist
- Know your overhead as a percent of revenue from last year’s books.
- Decide your target net profit.
- Add them. That is your target margin.
- Convert it to markup with Markup = Margin ÷ (1 − Margin).
- Put every job cost in before you mark up.
- Label every percent on your estimates as markup or margin.
- Before you give a discount, check it against gross profit, not price.
- Check finished jobs: did the margin you planned match the margin you got?
Run your own numbers
The free Markup vs. Margin calculator converts markup to margin and back from your job cost. Use it on your next bid before you send it.