Markup vs Margin: Why Contractors Lose Money on “Profitable” Jobs
A 20% markup is only a 16.7% margin. This single confusion causes contractors to underprice jobs every single day.
The $100,000 Mistake
A contractor bids a job at $100,000. His costs are $80,000. He thinks he's making 20% profit. But is he?
If he calculated using markup (adding 20% to his costs), his math was: $80,000 × 1.20 = $96,000. He actually bid too low.
If he wanted a 20% margin (keeping 20% of the selling price as profit), the correct price is: $80,000 ÷ 0.80 = $100,000.
The Problem
When you add 20% markup to your costs, you only get a 16.7% margin. If your overhead is 15% and you need 5% net profit, a 20% markup leaves you with almost nothing.
Definitions: Markup vs. Margin
Markup
The percentage added TO your cost
Markup = (Price - Cost) ÷ Cost
Price = Cost × (1 + Markup%)
Margin
The percentage OF your selling price that's profit
Margin = (Price - Cost) ÷ Price
Price = Cost ÷ (1 - Margin%)
The key difference: markup is based on cost, margin is based on price. Since price is always larger than cost, the same dollar amount represents a smaller percentage of the price than of the cost.
The Conversion Table Every Contractor Needs
This table shows the relationship between markup and margin. Print it out and put it where you do estimates:
| If Your Markup Is: | Your Actual Margin Is: | Example ($1,000 Cost) |
|---|---|---|
| 10% | 9.1% | Price: $1,100 | Profit: $100 |
| 15% | 13.0% | Price: $1,150 | Profit: $150 |
| 20% | 16.7% | Price: $1,200 | Profit: $200 |
| 25% | 20.0% | Price: $1,250 | Profit: $250 |
| 30% | 23.1% | Price: $1,300 | Profit: $300 |
| 35% | 25.9% | Price: $1,350 | Profit: $350 |
| 40% | 28.6% | Price: $1,400 | Profit: $400 |
| 50% | 33.3% | Price: $1,500 | Profit: $500 |
| 67% | 40.0% | Price: $1,670 | Profit: $670 |
| 100% | 50.0% | Price: $2,000 | Profit: $1,000 |
Key Insight
To achieve a 40% gross margin (which many healthy contractors target), you need a 67% markup—not 40%. This is why “doubling your money” (100% markup) only gives you 50% margin.
Why This Matters for Your Overhead
According to the Construction Financial Management Association (CFMA), typical contractor overhead runs 15-25% of revenue. This includes:
- Office rent and utilities
- Administrative salaries
- Insurance premiums
- Vehicle costs
- Marketing and business development
- Software and equipment
If your overhead is 20% and you're using a 20% markup (thinking you'll make 20%), here's what actually happens:
| Line Item | Amount | % of Revenue |
|---|---|---|
| Job Revenue | $120,000 | 100% |
| Direct Costs | ($100,000) | 83.3% |
| Gross Profit | $20,000 | 16.7% |
| Overhead (20% of revenue) | ($24,000) | 20% |
| Net Profit (Loss) | ($4,000) | -3.3% |
You thought you were making money. You actually lost $4,000 on a job you considered profitable.
The Correct Way to Price Jobs
Step 1: Know Your Required Gross Margin
Your gross margin must cover overhead AND produce net profit. Formula:
Required Gross Margin = Overhead % + Desired Net Profit %
Example: 20% overhead + 10% net profit = 30% required gross margin
Step 2: Calculate the Markup Needed
Use the conversion formula to find your required markup:
Required Markup = Margin ÷ (1 - Margin)
For 30% margin: 0.30 ÷ 0.70 = 42.9% markup
Step 3: Apply to Your Estimates
When your direct costs are $100,000 and you need 30% margin:
Price = $100,000 ÷ (1 - 0.30) = $142,857
Gross profit = $42,857
Overhead (20%) = $28,571
Net profit = $14,286 (10%)
Common Industry Markups
According to industry data from the National Association of Home Builders (NAHB) and CFMA, here are typical markups by project type:
| Project Type | Typical Markup | Resulting Margin |
|---|---|---|
| Residential Remodeling | 50-67% | 33-40% |
| Custom Home Building | 15-25% | 13-20% |
| Commercial Construction | 10-20% | 9-17% |
| Service/Repair Work | 75-150% | 43-60% |
| Specialty Trades | 35-50% | 26-33% |
Source: NAHB Cost of Doing Business Study, CFMA Annual Financial Survey
Key Takeaways
- Markup and margin are NOT the same—never use them interchangeably
- Margin is the more useful metric because overhead is a percentage of revenue
- A 20% markup only gives you a 16.7% margin—not enough for most contractors
- Calculate your required margin first (overhead + desired profit), then convert to markup
- When in doubt, use the formula: Price = Cost ÷ (1 - Margin%)
Sources & Further Reading
- CFMA Annual Financial Survey — Industry-wide construction financial benchmarks and overhead statistics
- NAHB Cost of Doing Business Study — Home builder financial performance benchmarks
- SBA: Managing Your Business Finances — Small business pricing and profitability guidance
- Associated General Contractors of America — Construction industry standards and best practices
Convert Markup and Margin Instantly
Use our free calculator to convert between markup and margin, and ensure you're pricing jobs for actual profitability.
Try the Markup/Margin Calculator