Markup vs margin

The definitions, in one line each

Markup is what you add to your cost. Margin is what you keep out of the price. Same dollars in the middle; different number underneath the fraction.

Cost a job at $8,000 and add 25%. You quote $10,000 and keep $2,000. As a markup that's 25% — $2,000 on top of $8,000 of cost. As a margin it's 20% — $2,000 out of the $10,000 the customer paid. Nothing changed except which number you divided by, but if you needed 25% to stay solvent, you just came up short.

The two formulas

Margin = markup ÷ (100 + markup). Markup = margin ÷ (100 − margin).

So a 30% markup is 30 ÷ 130, which is a 23.1% margin. And a 30% margin needs 30 ÷ 70, which is a 42.9% markup. The markup vs margin calculator does both directions if you'd rather not do it in your head at the kitchen table.

Why it matters more the bigger the number gets

At low numbers the two are close enough that the error hides. A 10% markup is a 9.1% margin — you'd never notice. At 50% markup you're at 33.3% margin, and the gap is sixteen points. Contractors who work on material-heavy jobs with what feels like a healthy markup are usually the ones most surprised by their year-end.

The margin you need is not a preference

Gross margin has one job before it becomes profit: covering overhead. Trucks, insurance, phone, software, the shop, your unbilled quoting hours — none of that is charged to a specific job, so it comes out of the margin on all of them.

Work it from the bottom. If your overhead runs $75,000 a year and you turn over $400,000, overhead alone is 18.75% of revenue. A 20% gross margin leaves 1.25% for you — about $5,000 for a year of running a company and carrying its risk. That's not a business; that's a hobby with a truck payment.

Most residential trades need 30–50% gross margin to leave a real net profit after overhead. Where you sit in that range depends on how material-heavy your work is and how lean your overhead runs, which is why you should calculate your own overhead per billable hour rather than borrow someone's rule of thumb.

Three places the confusion costs real money

Pricing off a competitor's number. "He's at 30, I'll go 28" tells you nothing, because you don't know whether his 30 was markup or margin, or what his overhead is. You may have just underbid a company that's about to fold.

Discounting. Taking 10% off the price doesn't cost you 10% of your profit — it comes entirely out of margin. On a job with a 20% margin, a 10% discount removes half your profit. On a 15% margin job, it removes two-thirds.

Material price increases. When material goes up 8%, adding 8% to the quote doesn't restore your position, because your margin percentage now sits on a bigger cost base and a proportionally smaller share of it. Re-price the job rather than inflating the old number.

What to do about it this week

Take the last three jobs you finished. Add up what each actually cost you — materials, subs, loaded labour hours, disposal, the second trip. Subtract from what you invoiced. Divide by what you invoiced. That's your real gross margin, per job, and it is almost always lower than the number you thought you were quoting at.

Then compare it to your overhead. If the margin doesn't clear it, you don't have a sales problem — you have a pricing problem, and more work will make it worse rather than better.