Guide · Pricing
Markup vs margin for contractors
Markup is what you add to your cost. Margin is what you keep out of the price. They're different numbers, and mixing them up costs real money.
Markup is a percentage of your cost: cost × (1 + markup) = price. Margin is a percentage of the price: (price − cost) ÷ price. On a $1,000 cost, a 25% markup gives a $1,250 price, and that's a 20% margin. If you want a 25% margin, you need a 33.3% markup. Most underpricing comes from adding "25%" to cost and thinking you kept 25%.
The formulas
Price from markup: price = cost × (1 + markup) Price from margin: price = cost ÷ (1 − margin) Margin from markup: margin = markup ÷ (1 + markup) Markup from margin: markup = margin ÷ (1 − margin)
Conversion table
| Markup on cost | Price on $1,000 cost | Margin you keep |
|---|---|---|
| 10% | $1,100 | 9.1% |
| 20% | $1,200 | 16.7% |
| 25% | $1,250 | 20.0% |
| 30% | $1,300 | 23.1% |
| 33.3% | $1,333 | 25.0% |
| 42.9% | $1,429 | 30.0% |
| 50% | $1,500 | 33.3% |
Why it matters
Say your overhead (truck, insurance, phone, office time) runs about 20% of what you bill, and you want 10% profit on top. You need a 30% margin. If you add 30% to cost, you get a 23.1% margin, which barely covers overhead and leaves almost no profit. To keep 30%, the markup has to be about 43%.
The gap gets bigger as the percentages go up, which is why it hurts most on material-heavy jobs where the markup is doing all the work.
Which one to use
- Price with markup. It's easier on the job: you know your cost, multiply, done.
- Plan with margin. Your overhead and profit goals are shares of revenue, so set the target as a margin and convert it to the markup you'll actually use.
- Labor is different. Build overhead and profit into your hourly rate (see how to calculate your hourly rate) and mark up materials separately.
In Settle
Settle prices estimates with your own hourly rate and the prices you've charged before, so once your rates include the markup you want, every estimate carries it. Any line where Settle had to guess a price is marked so you can check it.
What is the difference between markup and margin?
Markup is profit as a percentage of cost. Margin is profit as a percentage of the selling price. A 25% markup is a 20% margin.
What markup do I need for a 25% margin?
33.3%. Divide the margin by one minus the margin: 0.25 ÷ 0.75 = 0.333.
Is a 20% markup the same as a 20% profit?
No. A 20% markup gives a 16.7% margin, and that's before overhead. Profit is what's left after overhead, which is usually much less.
Put your rates in once and Settle prices every estimate with them.
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