Markup vs. Margin — The Difference Costing Contractors Money

Here's a question that trips up more contractors than you'd think: If your costs are $10,000 and you add 25% markup, what's your profit margin?

Most people say 25%. The correct answer is 20%.

This confusion is costing contractors real money on every job they bid. Here's why markup and margin are not the same thing — and why it matters.

Definitions First

Markup is calculated on cost: Selling price = Cost × (1 + markup%). $10,000 × 1.25 = $12,500 selling price.

Margin is calculated on selling price: Margin = (Selling price - Cost) / Selling price. ($12,500 - $10,000) / $12,500 = 20% margin.

Same job. Same numbers. 25% markup = 20% margin.

Why It Matters for Contractors

If you're targeting a 20% profit margin, you cannot add 20% markup to your costs. You'll end up with a 16.7% margin and wonder why the job didn't perform.

To achieve a target margin, use this formula:

Markup % = Margin % / (1 - Margin %)

To hit 20% margin:  0.20 / 0.80 = 25% markup
To hit 30% margin:  0.30 / 0.70 = 42.9% markup

The Conversion Table Every Contractor Should Know

10% margin  = 11.1% markup
15% margin  = 17.6% markup
20% margin  = 25.0% markup
25% margin  = 33.3% markup
30% margin  = 42.9% markup
35% margin  = 53.8% markup

The Other Mistake: Forgetting Overhead

Markup needs to cover two things: overhead and profit. Most contractors only think about profit.

If your overhead is 15% of revenue and you want 15% net profit, you need 30% gross margin — which requires 42.9% markup on direct costs.

Required markup = (Overhead % + Profit %) / (1 - Overhead % - Profit %)

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