Markup and margin are not the same number
Both describe the same dollars of gross profit, but they divide by different things:
- Markup is gross profit divided by cost. It’s how many contractors build a price: cost plus 30%.
- Gross margin is gross profit divided by price. It’s what shows up on your profit and loss statement, and what lenders, buyers and benchmarks talk about.
Because price is always bigger than cost, margin is always the smaller percentage. A job priced at a 30% markup earns a 23.1% gross margin, not 30%.
Why the mix-up costs money
Say you know you need a 30% gross margin to cover overhead and make a profit. If you add 30% to your costs, you’ll come up about seven points short on every job. On $1 million of work, that gap is roughly $70,000 of gross profit you planned for and never earned.
The fix is simple: decide the margin you need, then work backward to the price. Price = cost ÷ (1 − target margin). For a 30% margin on a $10,000 job, that’s $10,000 ÷ 0.70 = $14,286, which is a 42.9% markup.
| Markup on cost | Gross margin on price |
|---|---|
| 10% | 9.1% |
| 15% | 13.0% |
| 20% | 16.7% |
| 25% | 20.0% |
| 30% | 23.1% |
| 35% | 25.9% |
| 40% | 28.6% |
| 50% | 33.3% |
| 60% | 37.5% |
| 75% | 42.9% |
| 100% | 50.0% |
Quick formulas
- Gross profit = price − direct cost
- Markup = gross profit ÷ direct cost
- Gross margin = gross profit ÷ price
- Margin from markup = markup ÷ (1 + markup)
- Markup needed for a target margin = margin ÷ (1 − margin)
Which costs belong in “direct cost”?
Only the costs you wouldn’t have without the job: materials, field labor and payroll burden, subcontractors, equipment rental, permits and disposal. Office rent, office staff, insurance, trucks and software are overhead. They’re paid out of gross profit, which is why your gross margin has to be high enough to cover them. Our break-even calculator shows how much.
Common questions
Is a 50% markup the same as a 50% margin?
No. A 50% markup produces a 33.3% gross margin. To earn a 50% gross margin, you need a 100% markup, which means doubling your cost.
What gross margin should a contractor aim for?
It depends on your trade, job size and overhead. The right target is the margin that covers your overhead and leaves the profit you want. Use the break-even calculator to find yours, and compare it with your actual job results.
Should I price with markup or margin?
Either works if you do the math correctly. Many contractors estimate with markup because it starts from cost. Just make sure the markup you use produces the gross margin your business needs.
This calculator gives estimates for general planning. It isn’t tax, legal, lending or accounting advice for your specific situation, and lenders may calculate figures differently.