Understanding Markup vs. Profit Margin: A Guide for Builders and Tradesmen

When talking with contractors and estimating project costs, it's important to know the difference between "markup" and "profit margin." Many people mistakenly use these terms interchangeably, which can lead to less profit than expected. Here’s a simple guide to help you understand and calculate each, so you can price your projects correctly and improve your profits.

What’s the Difference Between Markup and Profit Margin?

1. Markup:

• What It Is: Markup is the amount you add to your job cost to determine the selling price. It’s a percentage of the job cost.

• How to Calculate: Markup Percentage=Selling Price−Job CostJob Cost×100\text{Markup Percentage} = \frac{\text{Selling Price} - \text{Job Cost}}{\text{Job Cost}} \times 100Markup Percentage=Job CostSelling Price−Job Cost​×100

• Example: If your job cost is $100 and you add a 20% markup, your selling price will be: Selling Price=Job Cost+(Job Cost×Markup Percentage)\text{Selling Price} = \text{Job Cost} + (\text{Job Cost} \times \text{Markup Percentage})Selling Price=Job Cost+(Job Cost×Markup Percentage) Selling Price=100+(100×0.20)=120\text{Selling Price} = 100 + (100 \times 0.20) = 120Selling Price=100+(100×0.20)=120 So, a 20% markup on a $100 job cost means you’ll charge $120.

2. Profit Margin:

• What It Is: Profit margin is the percentage of the selling price that is profit after covering your job costs. It’s a percentage of the selling price.

• How to Calculate: Profit Margin Percentage=Selling Price−Job CostSelling Price×100\text{Profit Margin Percentage} = \frac{\text{Selling Price} - \text{Job Cost}}{\text{Selling Price}} \times 100Profit Margin Percentage=Selling PriceSelling Price−Job Cost​×100

• Example: If your job costs $100 and you sell it for $120: Profit Margin Percentage=120−100120×100=16.67%\text{Profit Margin Percentage} = \frac{120 - 100}{120} \times 100 = 16.67\%Profit Margin Percentage=120120−100​×100=16.67% This means 16.67% of your selling price is profit.

Why It Matters

For Estimators: Estimators use markup to set prices for their work. By applying a markup percentage, they ensure that all job costs are covered and a profit is added. This helps in creating competitive bids that also make financial sense.

For Business Owners: Owners look at profit margins to see how much of their revenue is actually profit. It helps them understand their overall business health and make strategic decisions.

How to Use Markup and Margin in Your Work

1. Calculating Markup:

• Find out the total job cost (materials, labor, etc.).

• Decide on your markup percentage.

• Use the formula to set your selling price.

• Example: For a job costing $1,000 with a 25% markup: Selling Price=1,000+(1,000×0.25)=1,250\text{Selling Price} = 1,000 + (1,000 \times 0.25) = 1,250Selling Price=1,000+(1,000×0.25)=1,250

2. Calculating Margin:

• Determine your selling price.

• Find out the job cost.

• Use the formula to calculate your profit margin percentage.

• Example: For a job costing $1,000 and selling for $1,250: Profit Margin Percentage=1,250−1,0001,250×100=20%\text{Profit Margin Percentage} = \frac{1,250 - 1,000}{1,250} \times 100 = 20\%Profit Margin Percentage=1,2501,250−1,000​×100=20%

Key Points to Remember

• Markup helps you decide how much to charge by adding a percentage to your job costs.

• Profit Margin shows what portion of the selling price is actually profit after covering your costs.

• Understanding these concepts will help you price your projects correctly, avoid underestimating your profits, and run a more successful business.

By grasping these differences, you’ll be able to price your projects more accurately, improve your profit margins, and make better financial decisions for your business.