Markup vs Margin in Construction
(With Formulas)

The two definitions

Both markup and margin express profit as a percentage, but they use a different denominator — and that single difference causes contractors to underprice work year after year without realising it. Markup divides profit by cost: Markup % = (Price − Cost) / Cost. Margin divides the same profit by price: Margin % = (Price − Cost) / Price. Because cost is always smaller than price, markup will always be a larger percentage than margin for the same job.

The two corresponding pricing formulas are: Price = Cost × (1 + Markup) and Price = Cost / (1 − Margin). When you quote from your cost sheet, you are applying markup. When your accountant reads the income statement, they are reading margin. The gap between those two views is where profit disappears.

• Markup = profit as a percentage of cost: Markup % = (Price − Cost) / Cost
• Margin = profit as a percentage of price: Margin % = (Price − Cost) / Price
• Markup is always a larger percentage than margin for the same dollars
• Price = Cost × (1 + Markup)  |  Price = Cost / (1 − Margin)

Conversion table

The table below shows what each markup percentage actually delivers as a margin, and — reading it from the other direction — what markup you need to land a given margin target. Print it and pin it next to the bid sheet.

Notice that a 20% markup and a 20% margin are nowhere near each other. The confusion is so common that many contractors set a "20% profit target," apply a 20% markup, and then wonder why the books show less.

Worked example

Say your direct job cost — labour, materials, subcontractors — comes to $100,000. You want to keep a 20% gross margin to cover overhead and profit. Most contractors reach for 20% markup out of habit: $100,000 × 1.20 = $120,000 bid price. That looks right on the surface. But $20,000 of profit against a $120,000 price is only 16.7% margin, not 20%. You have left $5,000 on the table by using the wrong formula.

The correct approach: use Price = Cost / (1 − Margin) = $100,000 / 0.80 = $125,000. Now the $25,000 of profit is exactly 20% of the $125,000 price. The markup you applied was 25%, even though the margin target was 20%.

On a single job that $5,000 gap feels manageable. But at $1 million of annual job cost — not unusual for a mid-size electrical or mechanical sub — the same arithmetic error silently removes $50,000 from your bottom line every year. The fix is free: use the right formula.

• Job cost $100,000; target margin 20%
• Wrong (20% markup): price $120,000, margin only 16.7%
• Right (25% markup): price $125,000, margin exactly 20%
• At $1M annual cost the gap is $50,000 in missing profit

Markup, overhead, and profit

There is a second common mistake layered on top of the markup/margin confusion: treating markup as if it only needs to equal net profit, when in fact it must cover both company overhead and net profit together. Overhead — office rent, estimating salaries, vehicles, insurance, bonuses — is real cost even though it does not appear on an individual job cost sheet.

The correct breakdown of your markup is: direct job cost + company overhead (general conditions) + net profit = price. If you target, say, 8% overhead recovery and 12% net profit, your margin target is 20% and your markup is 25%, as shown above. If you only mark up for 12% net profit and forget the overhead layer, you are subsidising company overhead out of that 12% — and actual net profit falls well below your target.

General contractor margins on commercial work typically run 10–20%, with thin hard-bid public work sometimes landing below 10%. Specialty and negotiated work can run considerably higher. Whatever the target, set it as a margin first, then calculate the required markup — never the reverse.

• Markup must cover both overhead AND profit, not profit alone
• Separate company overhead (general conditions) from net profit in the markup
• Common GC margins run 10–20%; thin hard-bid work can fall below 10%
• Set markup from a target margin, never the reverse

Questions estimators actually ask