Contractor Business Guide
Markup vs Margin: The Difference That Costs Contractors Thousands
A 20% markup does NOT give you 20% profit. This common confusion costs contractors thousands of dollars per year. Learn the formulas and conversion table to price for real profitability.
Quick Answer
Markup is added on top of cost. Margin is percentage of selling price. A 25% markup = 20% margin. A 50% markup = 33% margin. To get 20% profit margin, you need 25% markup, not 20%.
The Formulas
Markup Formula
Markup % = (Price – Cost) ÷ Cost × 100
Markup is based on your COST
Margin Formula
Margin % = (Price – Cost) ÷ Price × 100
Margin is based on your SELLING PRICE
Why This Matters
When you say “I add 20% to my jobs,” you are using markup. But when you look at your profit and loss statement, you see margin. The numbers are different, and the difference can be substantial:
- 20% markup on $10,000 cost = $12,000 price = 16.7% margin
- 30% markup on $10,000 cost = $13,000 price = 23.1% margin
- 50% markup on $10,000 cost = $15,000 price = 33.3% margin
The Expensive Mistake
If you think you are making 20% profit because you add 20% markup, you are actually making 16.7%. Over $500,000 in annual revenue, that 3.3% difference costs you $16,500 per year.
Markup to Margin Conversion Table
Use this table to understand the relationship between markup and margin:
| Markup % | Actual Margin % | $100 Cost Becomes |
|---|---|---|
| 10% | 9.1% | $110 |
| 15% | 13.0% | $115 |
| 20% | 16.7% | $120 |
| 25% | 20.0% | $125 |
| 30% | 23.1% | $130 |
| 35% | 25.9% | $135 |
| 40% | 28.6% | $140 |
| 50% | 33.3% | $150 |
| 75% | 42.9% | $175 |
| 100% | 50.0% | $200 |
How to Calculate Markup for Target Margin
If you want a specific profit margin, use this formula to find the required markup:
Required Markup Formula
Markup = Target Margin ÷ (1 – Target Margin)
Examples:
- For 20% margin: 0.20 ÷ (1 – 0.20) = 0.20 ÷ 0.80 = 0.25 = 25% markup
- For 25% margin: 0.25 ÷ (1 – 0.25) = 0.25 ÷ 0.75 = 0.333 = 33.3% markup
- For 30% margin: 0.30 ÷ (1 – 0.30) = 0.30 ÷ 0.70 = 0.429 = 42.9% markup
Real World Example
A contractor has $10,000 in costs (materials + labor + overhead) and wants 20% profit:
Wrong Way (20% Markup)
- $10,000 × 1.20 = $12,000 price
- Profit: $2,000
- Actual margin: $2,000 ÷ $12,000 = 16.7%
Right Way (25% Markup for 20% Margin)
- $10,000 × 1.25 = $12,500 price
- Profit: $2,500
- Actual margin: $2,500 ÷ $12,500 = 20%
Think in Margin, Price with Markup
Set your profit goals using margin (percentage of revenue), then convert to the markup multiplier for your estimates. This ensures you actually achieve your target profitability.
Are You Actually Profitable?
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