Markup is profit as a percentage of cost. Margin is profit as a percentage of the selling price. They are different numbers for the same job. If you want a 25% gross margin and you add 25% to cost, you get a 20% margin. To price for a target margin, divide cost by one minus the margin.
This mix-up is easy to make and expensive to repeat. It shows up when someone says “we run 25%” and nobody asks 25% of what.
The formulas
- Markup % = (price minus cost) divided by cost
- Margin % = (price minus cost) divided by price
- Price for a target margin = cost divided by (1 minus target margin)
A worked example
Illustrative numbers: a job has $40,000 of direct cost.
| Approach | Price | Gross profit | Markup | Margin |
|---|---|---|---|---|
| Add 25% to cost | $50,000 | $10,000 | 25% | 20% |
| Price for a 25% margin | $53,333 | $13,333 | 33.3% | 25% |
Same cost, same “25,” a $3,333 difference in gross profit on one job.
A quick conversion table
| Target margin | Markup needed |
|---|---|
| 15% | 17.6% |
| 20% | 25.0% |
| 25% | 33.3% |
| 30% | 42.9% |
| 35% | 53.8% |
The bigger mistake: the cost was wrong
Getting the formula right only helps if the cost in the estimate is real. Two things usually undermine it:
- Estimates based on old costs. Material prices, sub rates and crew productivity change. If the price book is not updated, the markup is applied to the wrong base.
- Actual costs you never see. If job costing is incomplete, you never learn that a job type consistently runs over. The estimate repeats the miss. The estimate vs actual guide explains how to spot that.
Gross margin is not net profit
The margin in this article is gross margin per job: price minus direct job costs. Your overhead (office, insurance, vehicles, software, your own time) still has to be covered from that gross profit. That is why it helps to know your overhead before setting a pricing target, and why your profit and loss can look different from your job reports.
This is general operating math, not financial or tax advice. Set pricing targets with your own numbers and, where it helps, with your accountant.
Next step
If estimates are slow or built on stale numbers, start with the estimating workflow. If you are not sure your actual job costs are complete, try the free Job Cost Readiness Scorecard.