Markup vs Margin Explained

What is Markup?

Markup is the percentage you add to your cost to get your selling price. It is based on cost, not on the final price.

Example: if your cost is $1,000 and you add a 20% markup, you add $200. Your selling price becomes $1,200.

Margin is the percentage of the final selling price that is left after paying the cost. It is based on revenue, not cost.

Using the same numbers, a $1,200 selling price minus $1,000 cost leaves $200 gross profit. That $200 is 16.7% of the $1,200 price, so the margin is 16.7%, not 20%.

Markup

Based on cost.

Formula: Profit / Cost

Used to build the selling price.

Margin

Based on the final price.

Formula: Profit / Revenue

Used to measure how profitable the job actually is.

A 20% markup does not produce a 20% margin. Those numbers are not interchangeable, and using them like they are will leave money on the table.

Example

Here is the simple version contractors need to remember:

Cost: $1,000

Markup: 20%

Price: $1,200

Margin: 16.7%

This matters because if you think you are earning a 20% margin, but you are actually earning 16.7%, your overhead and net profit are being squeezed on every job. Over time, that gap is big enough to create cash flow pressure even when sales look strong.

Why Contractors Get This Wrong

• Estimating habits: a lot of estimating is built around adding a flat percentage to labor and materials without checking what that produces as a true margin.
• "Add 20%" thinking: teams pass down rules of thumb, but the number gets repeated without anyone asking whether it is markup or margin.
• Not tracking actual job profitability: if you do not compare estimate, final cost, and final gross profit, you do not see how often your math is off.

What to Do Instead

• Know your real costs: include labor burden, material waste, subs, small purchases, and overhead.
• Use margin targets: decide what gross margin you need, then calculate the markup required to get there.
• Track results across jobs: compare estimated margin to actual margin so you can fix pricing before low-profit work becomes a pattern.