Markup measures profit against cost. Margin measures profit against selling price. That one difference changes the percentage, even when the cost, price, and profit dollars are identical.
For contractors and service businesses, this is more than accounting vocabulary. Estimates are often built by marking up labor, materials, and subcontractors. Financial goals, however, are commonly expressed as gross margin. If a business owner hears “we need a 30% margin” and simply adds 30% to cost, the resulting price produces only a 23.08% margin.
Markup and margin definitions
What is markup?
Markup is the amount added to cost, expressed as a percentage of that cost. If a part costs $100 and you add $25, the markup is 25%.
markup % = (selling price - cost) ÷ cost × 100What is margin?
Margin is gross profit expressed as a percentage of the selling price. On the same $100 cost and $125 price, the $25 profit is 20% of revenue, so the margin is 20%.
margin % = (selling price - cost) ÷ selling price × 100A simple markup vs. margin example
Suppose a plumbing repair has $800 in direct cost. The company applies a 25% markup, adding $200 and producing a $1,000 selling price.
| Measure | Calculation | Result |
|---|---|---|
| Gross profit | $1,000 - $800 | $200 |
| Markup | $200 ÷ $800 | 25% |
| Margin | $200 ÷ $1,000 | 20% |
Nothing about the job changed between the last two rows. Only the denominator changed. Markup divides by cost; margin divides by price.
Check a price or calculate a target
Enter job cost and a target margin to calculate the required selling price, or start with markup or an existing selling price to see every result together.
Use the Markup & Margin CalculatorHow to convert markup and margin
When the desired margin is known, divide it by one minus the margin. Use decimals in the formula: 30% becomes 0.30.
markup = margin ÷ (1 - margin)For a 30% target margin: 0.30 ÷ 0.70 = 0.4286, or a 42.86% markup.
margin = markup ÷ (1 + markup)For a 50% markup: 0.50 ÷ 1.50 = 0.3333, or a 33.33% margin.
| Target margin | Required markup |
|---|---|
| 10% | 11.11% |
| 20% | 25.00% |
| 25% | 33.33% |
| 30% | 42.86% |
| 35% | 53.85% |
| 40% | 66.67% |
| 50% | 100.00% |
Should contractors use markup or margin?
Both are useful, but they answer different questions. Markup is convenient when building a quote from known costs. Margin is better for evaluating revenue quality, comparing jobs, and planning whether gross profit can cover overhead.
- Use markup while assembling a price when your estimating system starts with direct cost.
- Use margin to evaluate the finished quote because margin shows how much of each revenue dollar remains.
- Use the same cost definition consistently. A material-only markup cannot predict whole-job margin if labor, equipment, or subcontractors are missing. When employees perform the work, calculate their loaded labor cost rather than relying on wage alone.
- Review actual job margin afterward. The Job Profit Calculator can reveal whether the estimated margin survived execution.
Common pricing mistakes
Adding the target margin directly to cost
Adding 30% to cost creates a 30% markup, not a 30% margin. A $1,000 cost becomes $1,300, leaving $300 profit. That $300 is only 23.08% of the $1,300 price.
Leaving overhead outside the cost basis
A quote can show an attractive gross margin and still fail to support the business if its cost basis excludes overhead. Use the Overhead Recovery Calculator to find the hourly, crew-day, or per-job amount the work must carry.
Applying one markup to every cost category
Labor, materials, subcontractors, and equipment may have different risk, warranty exposure, or administrative effort. One blended markup can work, but only when it produces the required total price and margin.
Discounting without recalculating margin
A discount comes directly out of profit when costs do not change. Reducing a $1,250 price on $1,000 cost by 10% lowers the price to $1,125 and cuts profit from $250 to $125. Margin falls from 20% to 11.11%.
Gross margin is not net profit
Gross profit is revenue minus the costs included in the calculation. Net profit is what remains after every business expense, financing cost, tax, callback, and other obligation. If direct job costs exclude overhead, gross margin must be high enough to cover overhead before the company earns net profit.
This is why pricing works as a connected system. A sound labor rate covers burden, utilization, overhead, and profit. A sound markup covers the remaining job costs and risk. A break-even analysis shows the sales volume required for those contributions to cover fixed costs.
Frequently asked questions
Is markup the same as profit margin?
No. They use the same profit dollars but different bases. Markup divides profit by cost; margin divides profit by selling price.
What markup produces a 30% margin?
Approximately 42.86%. Divide 0.30 by 0.70.
Can margin be higher than markup?
For a profitable sale with positive cost, no. The selling price is larger than cost, so dividing profit by price produces the smaller percentage.