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Markup is calculated on cost and margin on selling price. A 20 percent markup produces a margin of about 16.7 percent, and confusing them underprices work systematically.
The single most consequential piece of arithmetic in contracting, and it is asked directly.
The definitions
Markup is the amount added to cost, expressed as a percentage of cost.
Margin is the profit, expressed as a percentage of the selling price.
A worked example
Cost is 100 dollars. Add a 20 percent markup and the price is 120 dollars.
The profit is 20 dollars on a price of 120, which is a margin of 16.7 percent. Not 20.
A contractor who needs a 20 percent margin and applies a 20 percent markup is short on every job. Over a year that gap is the difference between profit and no profit, and it compounds silently because each individual job looks fine.
Getting from one to the other
| Markup on cost | Resulting margin on price |
|---|---|
| 10 percent | About 9.1 percent |
| 20 percent | About 16.7 percent |
| 25 percent | 20 percent |
| 50 percent | About 33.3 percent |
| 100 percent | 50 percent |
To achieve a 20 percent margin you need a 25 percent markup. That row is worth memorizing because it is the most commonly targeted margin.
What has to come out of it
Overhead first, then profit. A markup that covers only direct cost plus a little leaves nothing for the office, the truck, the insurance or the estimator.
Overhead is the cost of running the business that cannot be charged to one job, and it has to be recovered across all of them.
Break-even
The revenue at which contribution equals fixed cost. Below it you are losing money on the year regardless of how each job looked.
Common questions
What is the difference between markup and margin?
Markup is calculated on cost; margin is calculated on selling price. They are never the same number.
What margin does a 20 percent markup give?
About 16.7 percent.
What markup gives a 20 percent margin?
25 percent.
Why does confusing them matter?
A contractor applying a markup equal to their target margin underprices every job, and the shortfall compounds across a year.
What must the markup cover?
Overhead first, then profit. Overhead is the cost of running the business that cannot be charged to one job.