Markup vs. Margin: The Pricing Mistake That Quietly Eats Contractor Profit

Ask ten contractors what margin they run and at least a few will give you their markup instead. It sounds like a word choice. It is actually one of the most common reasons a busy, fully booked business ends the year with less money than it expected.

The two numbers measure different things

• Markup is profit as a percentage of your cost. If a job costs you $10,000 and you charge $12,000, your markup is $2,000 ÷ $10,000 = 20%.
• Margin is profit as a percentage of the price. On that same job, your margin is $2,000 ÷ $12,000 = 16.7%.

Same job, same $2,000 of profit, two different percentages. Markup is always the bigger number, which is exactly why it is the one people tend to remember.

Where it goes wrong

The trouble starts when you decide you need a 20% margin to cover overhead and profit, then price jobs by adding 20% to cost. You will land at 16.7% instead. On $1 million of annual revenue, that gap is roughly $33,000 you planned on and never had.

Quick conversion table

• 10% markup = 9.1% margin
• 20% markup = 16.7% margin
• 25% markup = 20% margin
• 33.3% markup = 25% margin
• 50% markup = 33.3% margin
• 100% markup = 50% margin

How to price for the margin you actually want

Divide your cost by one minus your target margin. For a 20% margin on a $10,000 job: $10,000 ÷ (1 − 0.20) = $12,500. That price leaves $2,500 of profit, which is exactly 20% of $12,500.

The formula only works if your cost number is honest. If labor is entered as raw wages without payroll taxes, workers comp, and insurance, or overhead is left out entirely, you will hit your target margin on paper and miss it in the bank.

The takeaway

Pick one number to think in, and make it margin, because margin is what shows up on your profit and loss statement. Then check real jobs after they close, not just the estimate. The difference between what you quoted and what you actually made is where most of the lost profit hides.