Here's a quiz. Your job costs $1,000. You want a 20% profit margin. What do you charge?
If you said $1,200, you're in good company, and you're about $50 short. At $1,200, your profit is $200, and $200 is only 16.7% of $1,200. To make a true 20% margin you need to charge $1,250. On a year of jobs, that gap is real money.
The difference in one sentence each
- Markup is profit as a percent of your cost.
- Margin is profit as a percent of the selling price.
Same dollars of profit, two different percentages, because they're measured against different numbers. Your accountant, your P&L and most industry benchmarks talk in margin. Most contractors price with markup. That mismatch is where the money disappears.
The formulas
- Price from a target margin: Price = Cost ÷ (1 − Margin)
$1,000 ÷ (1 − 0.20) = $1,250 - Markup needed for a margin: Markup = Margin ÷ (1 − Margin)
0.20 ÷ 0.80 = 25% - Margin you actually get from a markup: Margin = Markup ÷ (1 + Markup)
0.20 ÷ 1.20 = 16.7%
Quick reference chart
| Target margin | Markup needed |
|---|---|
| 10% | 11.1% |
| 15% | 17.6% |
| 20% | 25.0% |
| 25% | 33.3% |
| 30% | 42.9% |
| 40% | 66.7% |
| 50% | 100.0% |
"Cost" has to include overhead
The other half of the mistake: marking up only labor and materials. Your insurance, truck payments, phone, software, advertising and office time are costs too. If they're not in the number you mark up, your "profit" is really just paying your overhead. The fix is an overhead rate per billable hour, added to every job before you apply markup. Our Overhead & Markup Calculator figures that rate for you, plus your break-even hourly rate.
What margin should you aim for?
It depends on your trade, your market and how much risk the work carries, so there's no single right answer. What matters is that you choose a target on purpose, price to hit it, and then check your actual results. A simple monthly profit-and-loss shows whether the margin you priced is the margin you kept.
The three-step habit
- Know your full cost, including overhead.
- Price from margin: cost ÷ (1 − margin).
- After the job, compare what you made to what you planned.
Run your own numbers in two minutes with the free Job Profit Calculator.
Ready to run your whole business by the numbers? The Money Tools Pack includes the Overhead & Markup Calculator, a Profit & Expense Tracker with a monthly P&L, and a Mileage & Vehicle Log.