Markup vs. margin for contractors

Markup is how much you add to your cost, as a percentage of the cost. Margin is how much of the selling price is profit, as a percentage of the price. They use the same dollars but a different base, so a 50 percent markup gives only a 33 percent margin. If you need a certain margin, divide your cost by (1 minus the margin) instead of adding the margin to cost.

That one difference is behind a lot of contractors who feel busy but never seem to keep any money. Here's how the two work, with worked examples you can reuse.

What is markup?

Markup is the amount you add to cost to get the price, expressed as a percentage of the cost.

Markup % = (price − cost) ÷ cost

Example: a part costs you $100 and you sell it for $150.

Profit on the part: $50
Markup: $50 ÷ $100 = 50 percent

Markup is handy for pricing materials, because you start with a known cost and multiply.

What is margin?

Margin, often called gross margin, is the profit as a percentage of the selling price.

Margin % = (price − cost) ÷ price

Same example: cost $100, price $150.

Profit: $50
Margin: $50 ÷ $150 = 33.3 percent

Margin is how your income statement thinks. Your overhead and profit come out of the price, not the cost, which is why margin is the better number for running the business.

Why does the difference matter so much?

Say your overhead is 25 percent of revenue and you want 10 percent net profit. You need a 35 percent gross margin on your jobs.

If you add 35 percent to cost thinking it gives you a 35 percent margin, here's what happens on a $10,000 job cost:

Price with a 35 percent markup: $13,500
Gross profit: $3,500
Actual margin: $3,500 ÷ $13,500 = 25.9 percent

You needed 35 percent. You got about 26. After 25 percent overhead, your net profit is under 1 percent instead of 10. Across a year of jobs, that's the difference between a healthy business and one that just keeps everyone busy.

How do you convert between markup and margin?

Two formulas cover it:

Margin = markup ÷ (1 + markup)
Markup = margin ÷ (1 − margin)

Use decimals in the formulas: 25 percent is 0.25.

Common pairs, rounded:

20% margin = 25% markup
25% margin = 33.3% markup
30% margin = 42.9% markup
35% margin = 53.8% markup
40% margin = 66.7% markup
50% margin = 100% markup
60% margin = 150% markup

Notice that the gap widens as numbers get bigger. A 100 percent markup, doubling your cost, is a 50 percent margin. You can never have a margin of 100 percent, because that would mean the job cost nothing.

How do you price a job to hit a target margin?

This is the most useful formula on the page:

Price = cost ÷ (1 − target margin)

Example 1: a service repair (illustration only)

Labor cost, at your burdened labor rate: $180
Parts cost: $70
Total job cost: $250
Target gross margin: 50 percent
Price: $250 ÷ 0.50 = $500

Check it: profit is $250, and $250 ÷ $500 = 50 percent margin.

Example 2: an installation (illustration only)

Equipment: $4,200
Materials: $600
Labor: $1,800
Permit: $200
Total job cost: $6,800
Target gross margin: 40 percent
Price: $6,800 ÷ 0.60 = $11,333

Adding 40 percent to cost would give $9,520, and an actual margin of only 28.6 percent.

Should every line have the same markup?

Not necessarily. Many contractors use different markups for different things, while watching the margin on the whole job.

Small parts often carry a high markup, because their dollar value is small and they cost you time to stock and fetch.
Big-ticket equipment usually carries a lower markup, because customers compare prices and a high percentage on a large number looks expensive.
Labor is usually priced from a target hourly rate that already includes overhead and profit.
Subcontractor work is commonly marked up to cover your management, scheduling and risk.

A sliding markup scale for materials, with a higher percentage at lower costs, is a common way to put this into practice.

What matters in the end is the total margin of the job. A job with low-margin equipment needs enough margin on labor and other items to bring the whole job up to your target. That's why looking at the margin of a quote before you send it is so useful.

What's the difference between gross margin and net profit?

They are easy to mix up:

Gross margin is price minus the direct costs of the job: labor, materials, equipment, subs, permits, disposal. It's what each job contributes.
Net profit is what's left after you also pay your overhead: rent, office staff, insurance, trucks, software, marketing and your salary.

Your gross margin target should be your overhead percentage plus your net profit target. If overhead is 30 percent of revenue and you want 10 percent net, your jobs need a 40 percent gross margin on average.

To find your overhead percentage, divide last year's total overhead by last year's total revenue. If it's your first year, estimate it and revisit after six months.

How do you use this day to day?

A few practical habits:

Know your target gross margin by type of work, like service, maintenance and installs.
Price from cost using division, not by adding a percentage.
Check job margin before sending a quote. If an option falls below target, adjust it or know why you're accepting less.
Compare estimated and actual margin after the job. Jobs that consistently come in under estimate show where your task times or prices are wrong.
Update costs regularly. A markup is only as good as the cost it's applied to.

For trade-specific pricing, see our guides to pricing HVAC service calls and remodeling estimates.

FAQ

Is a 50 percent markup good? It depends on your overhead and what you're marking up. A 50 percent markup is a 33 percent margin. If your overhead is 30 percent of revenue, that leaves only about 3 percent profit. Work back from your own overhead and profit targets.

Should I tell customers my markup? Most service customers see a single price per task or option, not your cost. On cost-plus contracts, which are more common in construction, the markup is part of the agreement and is shown.

Do I calculate margin before or after sales tax? Before. Sales tax is collected for the government and isn't your revenue. Calculate margin on the price before tax. How sales tax applies to your materials and labor varies by state, so ask your accountant.

What's the quickest way to check a price? Divide the profit by the price. If the result is below your target margin, the price is too low.

How ServFlo helps

ServFlo's pricebook stores each item's cost and price, and can price items as a markup over cost using markup tiers you set, such as a higher percentage on cheaper parts. When costs change, you can preview and apply new prices in one step. For users who can see costs, the quote builder shows an internal margin preview for each option, never visible to the customer. On the Pro plan, job costing shows each job's revenue, labor, materials and gross margin, so you can compare what you estimated with what happened. See quotes and invoices, reports and job costing and pricing.

Photo by Zoe Richardson on Unsplash.

Markup vs. margin for contractors (with worked examples)