Markup vs Margin: Why 20% Markup Is Only 16.7% Profit
Markup is the percentage you add on top of your cost. Margin is the percentage of the final price that is profit. They are two different numbers and confusing them is the most expensive arithmetic mistake in the trades.
Also called Contractor markup, Gross margin, Marking up materials.
Convert markup to margin Type either number and it gives you the other one, plus the price. Free, no signup, nothing to install.The one sentence version
Markup looks at the job from the cost side. Margin looks at the same job from the price side. A 20 percent markup produces a 16.7 percent margin, always, on every job, in every trade. Nothing about the size of the job changes it.
That is not a rounding difference. A contractor who marks up 20 percent and believes he is keeping 20 percent is wrong by a third of his profit, every single job, forever.
The two formulas
Markup is applied to cost. If the job costs you 1,000 dollars and you mark it up 20 percent, you charge 1,200.
Margin is measured against the price you charged. You made 200 dollars on a 1,200 dollar sale, so your margin is 200 divided by 1,200, which is 16.7 percent.
Going the other way is the part nobody memorizes. If you want a 20 percent margin you have to mark up 25 percent, because markup equals margin divided by one minus margin.
- Price = cost times (1 + markup)
- Margin = (price minus cost) divided by price
- Markup needed for a target margin = margin divided by (1 minus margin)
What the gap costs on a real year
Take 200,000 dollars of cost put in the ground in a year. Marked up 20 percent, you bill 240,000 and keep 40,000. You believed you were keeping 20 percent of 240,000, which would be 48,000.
The 8,000 dollar difference is not a bookkeeping entry. It is the money you were going to use for the truck payment, and it was never there.
It gets worse at the low end. At a 10 percent markup the margin is 9.1 percent, and a single 1 percent slip on material pricing takes a tenth of the job's profit with it.
Which one to quote and which one to price with
Price the job with markup, because markup is the number you can actually apply. You know your cost, you multiply, you get a price.
Judge the business with margin, because margin is the number your accountant, your lender and every industry benchmark uses. When a supplier or a trade magazine says a healthy remodeler runs 35 percent, they mean margin, not markup, and the markup that produces it is 53.8 percent.
Trouble starts when a contractor reads a margin benchmark and applies it as a markup. That is how a shop that thinks it is profitable ends the year even.
Markup to margin, the whole table
Print this and tape it inside the truck. The middle column is what you charge. The right column is what you actually keep.
| If you mark up | A 1,000 dollar cost becomes | Your margin is |
|---|---|---|
| 10% | $1,100 | 9.1% |
| 15% | $1,150 | 13.0% |
| 20% | $1,200 | 16.7% |
| 25% | $1,250 | 20.0% |
| 30% | $1,300 | 23.1% |
| 35% | $1,350 | 25.9% |
| 40% | $1,400 | 28.6% |
| 50% | $1,500 | 33.3% |
| 67% | $1,670 | 40.0% |
| 100% | $2,000 | 50.0% |
Read it backwards to price a target. To keep 40 percent you have to mark up 67 percent, not 40.
What to do with it
Questions people ask
Is a 20 percent markup the same as a 20 percent profit?
No. A 20 percent markup is a 16.7 percent margin. To actually keep 20 percent of the price you have to mark up 25 percent.
What is a standard material markup in construction?
There is no single standard, but material markups in residential work commonly run 15 to 25 percent, and specialty or hard to source material often runs higher because the risk of a price change between the quote and the delivery is yours. What matters more than the number is that it is applied on top of your real landed cost, including delivery and waste, not the shelf price.
Should I mark up labor as well as material?
Yes, and most underpricing starts by not doing it. Your labor cost is not the wage, it is the wage plus payroll taxes, workers compensation, liability insurance and the hours that are paid but not billable. Mark up that number, not the hourly rate you pay.
Do I show the markup on the estimate?
Usually no on a fixed price job, where the customer is buying a result at a price. You do show it on cost plus work, where the contract says exactly what percentage is added to documented cost, and on insurance restoration, where overhead and profit is quoted as a separate line.