Markup vs Margin: The Math Most Contractors Get Wrong

Here's a question that has cost contractors more money than bad weather and slow-paying customers combined:

"I marked up my job 20%, so my margin is 20%, right?"

Wrong. And that mistake is why a lot of contractors are busy all year and still broke by December.

Markup and margin are two different numbers. They use different formulas. They produce different results. And if you're using one when you mean the other, you're pricing every job wrong.

Let's fix that.

The Formulas

Markup is how much you add on top of your costs.

Margin (also called gross profit margin) is how much of the selling price is profit.

Same two numbers (selling price and cost), different denominator. That difference changes everything.

The Example That Makes It Click

You bid a job. Your costs (materials + labor + subs + overhead allocation) come to $10,000.

You want to "add 20%."

If you mean 20% markup:

• Selling Price = $10,000 x 1.20 = $12,000
• Your gross profit = $2,000
• Your actual margin = $2,000 / $12,000 = 16.7%

If you mean 20% margin:

• Selling Price = $10,000 / (1 - 0.20) = $10,000 / 0.80 = $12,500
• Your gross profit = $2,500
• Your actual markup = $2,500 / $10,000 = 25%

The difference on one job: $500. Multiply that across 50 jobs a year and you just left $25,000 on the table because you used the wrong formula.

The Quick Conversion Table

Here's the cheat sheet. Print this out and tape it to your desk.

Notice the pattern: markup is always a bigger number than the actual margin it produces. A 50% markup only gives you a 33.3% margin. That's a big gap, and it's where contractors lose money without realizing it.

Why This Matters More Than You Think

Your overhead doesn't care about markup

Your truck payment, insurance, office rent, phone bill, software subscriptions — those are fixed costs that come out of gross profit. If you think you're making 20% on every job but you're actually making 16.7%, your overhead is eating more of your profit than you planned for.

Run the math on a $500K revenue year:

• At 20% margin: $100,000 gross profit
• At 16.7% margin (what a 20% markup actually gives you): $83,500 gross profit

That's a $16,500 difference — which is probably more than your annual truck insurance and fuel combined. All because of the wrong formula.

Your accountant uses margin

When your bookkeeper or CPA talks about your gross profit margin, they're using the margin formula. When you say "I mark everything up 30%," they hear 23.1% margin. If your financial targets are set using margin but you're pricing using markup, nothing lines up at year-end.

Your competitors might know the difference

The contractor who understands margin prices their work correctly. They can run tighter bids on competitive jobs because they know exactly where their profit floor is. If you're guessing, you're either leaving money on the table or underbidding and eating the loss.

How to Price a Job Using Margin (The Right Way)

Here's the formula to go from cost to selling price using a target margin:

Step by step:

1. Add up all your job costs. Materials, labor (including burden — workers' comp, CPP/EI, benefits), subcontractors, equipment rental, permits, dumpster, anything that's a direct cost of this job.
2. Add your overhead allocation. Take your annual overhead and divide by your expected number of jobs or expected revenue. Apply that percentage to this job. If your overhead is 12% of revenue, add 12%.
3. Pick your target margin. For most trades, healthy gross margins look like this:
   • Residential service/repair: 50-65%
   • Residential remodel/renovation: 35-50%
   • New residential construction: 20-35%
   • Commercial: 15-25%
   These vary by market, trade, and competition. Know your number.
4. Apply the formula. If your total cost is $10,000 and your target margin is 35%:
   Selling Price = $10,000 / (1 - 0.35) = $10,000 / 0.65 = $15,385
5. Sanity check. Does that number feel competitive for this job in your market? If yes, send it. If it's way above market rate, look at your costs — not your margin. Cutting margin to win jobs is a race to the bottom.

The "I'll Make It Up on Volume" Trap

Some contractors intentionally run thin margins because they think more jobs equals more money. Here's why that math breaks:

• More jobs = more labor = more trucks = more insurance = more overhead
• Overhead grows with volume, so thin margins get thinner
• One callback or warranty issue on a thin-margin job can wipe out the profit from three other jobs
• You end up working twice as hard for the same take-home

Volume is great when your margins are healthy. Volume at 12% margin is a treadmill.

Markup vs Margin by Trade

Different trades tend to operate at different margins based on material cost ratios, labor intensity, and market expectations. Here's a rough guide:

These are ranges, not rules. Your market, your overhead, and your efficiency determine where you should land.

Stop Guessing. Start Knowing.

The difference between a contractor who makes money and a contractor who's busy but broke usually comes down to knowing their numbers. Markup vs margin is the foundation. Get this right and everything else — pricing, job costing, overhead planning, profit targets — starts to make sense.

Get this wrong and you'll spend another year wondering where the money went.