Markup is not margin: the mistake that quietly costs contractors money

Ask ten contractors what they add to materials and most will say a number: twenty percent, twenty-five, a third. Ask what share of the finished price they keep and you will often hear the same number back. It is not the same number, and the gap between the two comes straight out of your pocket.

Two words for two different sums

Markup is what you add on top of your cost. Margin is what is left for you out of the price the customer pays. They start from different ends of the same sale.

Take a vanity that costs you $420. Add a 20% markup and you charge $504. Your profit on it is $84. But $84 out of a $504 price is 16.7%, not 20%. The markup was 20%. The margin is 16.7%.

The higher the markup, the wider the gap:

A 20% markup leaves a 16.7% margin.
A 25% markup leaves a 20% margin.
A 33.3% markup leaves a 25% margin.
A 50% markup leaves a 33.3% margin.
A 100% markup (doubling your cost) leaves a 50% margin.

The arithmetic is short. Margin equals markup divided by one plus markup. Going the other way, the markup you need equals the margin you want divided by one minus that margin. Want to keep 30% of the price? You need 0.30 ÷ 0.70, which is a markup of about 42.9%, not 30%.

Why it matters more than it sounds

Say you decided your business needs a 25% margin on materials to cover the trips to the supplier, the waste, the returns, and the time spent picking things out. If you add “25%” as a markup, you are actually keeping 20%. On $8,000 of materials over a season, that is the difference between $2,667 and $2,000. You did nothing wrong on the job. The sum was off before you started.

It also shows up when you discount. A customer asks for 10% off a job you priced with a 20% margin. Ten percent of the price is half of everything you were going to keep. Knowing your real margin is what lets you answer that request with a clear head.

Labor has a cost too

Materials are the obvious place for markup, but labor has a cost as well, even when the labor is you. If you pay a helper $26 an hour and bill $65, the difference has to cover payroll taxes, insurance, the truck, the tools, the hours you spend quoting jobs you do not win, and your own pay. If you work alone, your “cost per hour” is what you need to take home plus what it costs to keep the business standing. Put a number on it. A quote with no labor cost in it will always look more profitable than it is.

Price from your cost, check by your margin

A workable habit for every quote:

Enter what things cost you, not what you plan to charge. The supplier’s price for materials, your real hourly cost for labor.
Apply your markup to materials and your billing rate to labor.
Look at the margin on the whole job before you send it. One line with a thin margin is fine. A whole job at 12% when you needed 30% is a job you are paying to do.
Decide discounts in dollars of profit, not percent of price. “This discount costs me $180 of the $620 I would keep” is an easier decision than “ten percent.”

How QuoteKit shows it

This is the reason QuoteKit’s builder has a field for your cost on every line and a panel called Your profit beside the total. Materials are entered as quantity, your cost, and markup, so the price is worked out for you. The panel then shows your total cost, the price before tax, the profit in dollars, and the margin as a percentage of the price, updating as you type.

That panel is for you only. Your costs and markup are removed before the customer’s copy is built, so nothing on their screen or in the PDF gives your numbers away.

You do not need software to get this right. A calculator and the two formulas above will do it. What matters is that you look at margin, the share you keep, every time, and stop trusting the markup number to tell you how the job will come out.

The short version

Markup is added to cost. Margin is kept from price. They are never the same percentage.
To keep a margin of M, mark up by M ÷ (1 − M).
Give labor a cost, even your own.
Check the margin on the whole job before you press send.