Markup vs. Margin: The Math Every Contractor Must Know

In our last post concerning Margin vs. Markup, we told you that we would “show you how to convert markup to margin so you can price your work clearly and confidently.” 

Here it is: the information construction subcontractors need to know about calculating markup and margin correctly and why getting this math right is critical to staying in business.

Markup and Margin – It’s in the Math

It begins with two mathematical formulas. 

Markup = How much you increase your cost to arrive at a price

Formula: Cost x (1 + Markup %)

Margin = How much of the final price is actual profit

Formula: (Price - Cost) ÷ Price

(Don’t worry. There is a cheat sheet to help you with these formulas, so keep reading.) 

Why the Markup – Margin Math Feels Backwards

It can be somewhat confusing, making you feel like the numbers are backwards. Here’s why:

• Both formulas have different bases of calculation.

• The markup percentage will always be higher than the margin percentage for the same transaction.

• And (doggone it!) it seems like you're getting less profit than expected.

The backward feeling comes from the different denominators used in the calculations. Markup is based on cost, while margin is based on selling price or revenue.

It’s pretty easy to say, “Let me add 30% or 50% on top.” But if you need a 40% margin, you’ll have to mark up your costs by 66.7%.

Need a 30% margin? That takes about a 42.9% markup.

That’s why you can’t guess—or copy what someone else is doing. You’ve got to know your numbers!

Pro Tip: Factor in labor burden, overhead, and actual job costs. If you’re just marking up raw costs, you’re underbidding.

Markup and Margin Depend on Accurate Job Budgets

You must start with an accurate job budget to price your work profitably. These posts,  How Experienced Construction Contractors Control Costs,

Financial Planning in the Construction Industry, Estimates Provide a Foundation for Spending Plans, and Forecasting – How to Look Ahead for Your Construction Business, will give you a better foundation for understanding how to calculate Margin. 

Markup and Margin Need a Goal

It can not be pie-in-the-sky thinking. There must be goals. Goals provide direction, motivation, and accountability, helping you achieve desired outcomes and improve productivity. They allow you to concentrate your efforts on what matters.

Regarding markup and margin, you must have profit goals in mind.  

Not having that profit goal and checking against it regularly with an up-to-date Profit and Loss statement can prevent you from ever noticing the markup and margin difference.

Margin-to-Markup Conversion Chart (You know – the cheat sheet we mentioned above.)

Here is a portion of the cheat sheet, also known as the Conversion Chart, that we’ve created – so you don’t have to do the math – it’s done for you. 

Want the full chart to price with confidence and hit your profit goals? Get your Markup vs. Margin Chart here. 

Markup and Margin – the Finale 

In the final part of the series, we’ll show why mimicking a GC’s pricing strategy is risky and how trade contractors need their own markup model.

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