Margin vs. Markup: Don’t Get Confused

This vs. That

Because you’re in construction, you know the difference between certain things that many others often get confused about. Here are three examples:

Roof vs. Ceiling

The difference between a roof and a ceiling is their location and purpose. A roof is the covering that protects the building – it is outside. The ceiling is the upper boundary of a room – it is inside. 

Septic vs. Sewer

The difference between septic and sewer systems is location and responsibility. A septic system is limited to one location and is the owner’s responsibility. A sewer system directs wastewater to a centralized treatment plant and is managed by a local government or a private utility company.

Cement vs. Concrete

The difference between cement and concrete is that cement is a single component that is mixed with water and aggregates to form concrete. Cement is a binder, while concrete becomes a final product. Cement isn’t particularly strong. Concrete, on the other hand, gains considerable strength through the curing process. 

Markup vs. Margin

Markup and margin serve different purposes, like a roof and a ceiling.

Markup and margin are managed in different ways, like septic and sewer systems. 

Markup and margin, when used together, form a final product that gains considerable strength, like cement and concrete.

Markup tells you how much more to charge, while margin tells you how much of that charge is profit.

Margin is the most misunderstood yet the most crucial component of the margin vs. markup challenge. Margin is the number that keeps your business safe, profitable, and growing.

The Margin vs. Markup Error

Many construction subcontractors get confused about Markup vs. Margin. Most trade contractors talk in markup because it feels straightforward: “I marked it up 50%, so I made 50% profit.”

But that’s not how it works. And that assumption could be quietly killing your bottom line.

Let’s say your total job cost: materials + labor + equipment adds up to $10,000. You mark it up 50% and charge $15,000. You figure you made $5,000 in profit. (Spoiler Alert: That is not what happens!)

Here’s what really happens:

That $5,000 still has to cover all your overhead: office expenses, payroll taxes, downtime, insurance, gas, software, and so on.

But wait. There is a big kick! You didn’t make a 50% profit. You made a 33.3% margin, AND that margin was before overhead.

It’s pretty easy to see that that might not be enough to keep the lights on.

The Markup vs. Margin Reality

Markup may feel right, but it can mislead you. Imagine you have a 1X12 that is precisely 100 inches long. That 100 inches represents your total job cost. You may say, “Hey, I need to mark this up by 50%, so I’ll add 50 inches to this 100-inch board.” 

Now, the board is 150 inches long.

But margin doesn’t care what you added – it asks, “How much of the final board is profit?”

Wait for it!

The Answer Is: 50 out of 150 inches = only one-third.  

More Markup and Margin to Come

In the next post, we’ll walk through the math and show you how to convert markup to margin so you can price your work clearly and confidently.

Ambitious Construction Contractors look to The Profit Constructors to provide advocacy in dealing with:

• Clients and customers

• Employees and subcontractors

• Vendors and service providers

• Governmental entities 

Working with The Profit Constructors gives Construction Contractors the means to organize their operations in ways that help them:

• Remain informed

• Avoid hassles

• Reduce risks

• Be future-ready

Ready for action? Or want to know more? Get in touch today to schedule a complimentary discovery call. 866-629-7735