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Markup vs margin: why a 25% markup isn't 25% profit
You add 25% to a part and figure you're making 25% on it. You're not; you're making 20% of the price. Markup and margin describe the same dollars measured against different numbers, and mixing them up quietly underprices every job. Here's how each one works in construction and the trades, how to convert between them, and a table you can keep in the truck.
The difference in one sentence
Markup is your profit measured against your cost; margin is the same profit measured against your selling price. Buy a part for $100 and sell it for $125, and the $25 you make is a 25% markup, because it's 25% of what you paid. It's also a 20% margin, because it's 20% of what the customer paid.
Same $25, two percentages. Markup is always the bigger number, because your cost is always smaller than your price. That's the trap: if someone tells you to aim for a 25% margin and you add a 25% markup, you come up short on every line.
The formulas, in words
You need two short rules, not an app. Write markup and margin as decimals, so 25% is 0.25, and the rest is one division.
- Markup = (price − cost) ÷ cost
- Margin = (price − cost) ÷ price
- To turn markup into margin: margin = markup ÷ (1 + markup)
- To turn margin into markup: markup = margin ÷ (1 − margin)
- Price from a markup: price = cost × (1 + markup)
- Price from a margin: price = cost ÷ (1 − margin)
Markup to margin table
Here are the common markups and the margin each one gives you. Find your markup in the left column; the right column is the share of the selling price you keep before overhead. To work out your own numbers, use the markup and margin calculator.
| Margin | |
|---|---|
| 10% markup | 9.09% |
| 15% markup | 13.04% |
| 20% markup | 16.67% |
| 25% markup | 20% |
| 30% markup | 23.08% |
| 50% markup | 33.33% |
| 100% markup | 50% |
Margin = markup ÷ (1 + markup). Doubling your cost, a 100% markup, is only a 50% margin.
A worked example on a $400 part
Say a water heater costs you $400 at the supply house. Add a 25% markup: $400 × 1.25 = $500 on the invoice. Your gross profit on the part is $100, which is 25% of the cost and 20% of the $500 price.
Now go the other way. Your accountant says parts should bring in a 25% margin. Divide the cost by 0.75: $400 ÷ 0.75 = $533.33. That's $133.33 of profit, which is 25% of the price and a 33.33% markup on the cost. The gap between $500 and $533.33 is $33.33 on a single part, and across a year of jobs it adds up.
- 25% markup on $400: price $500, profit $100, margin 20%
- 25% margin on $400: price $533.33, profit $133.33, markup 33.33%
Which one should a contractor use?
Use markup to price, because you start from what you paid: cost times one plus your markup is quick to work out at the counter. Use margin to check, because margin tells you how much of each dollar the customer pays is left to cover the truck, insurance, tools and your own wage. When an accountant, a supplier or another contractor quotes you a target percentage, ask whether it's markup or margin before you use it.
Pick one markup for parts and use it on every job, so your prices stay consistent and you aren't deciding again on every estimate. If you mark up labor too, keep that a separate decision; many trades build their profit into the hourly rate instead.
How Workeey uses your markup
In Workeey you set your own parts markup as a rate, alongside your other prices. When you build an estimate, parts are priced at your markup, so every estimate carries the same number without you working it out each time. When the job's done, one tap turns the estimate into an invoice with the lines carried over.
Workeey applies the markup you choose; it doesn't track your costs or report your margin on a job. Use the table above to pick the markup that gives you the margin you want, then set it once. The free plan includes 23 quick estimates a month; see pricing, and estimate vs quote for how to word the price you send.
Is a 20% markup the same as a 20% margin?
No. A 20% markup gives a 16.67% margin. To get a 20% margin you need a 25% markup.
What is a good markup for contractors?
It depends on your trade, your overhead and your market, so there's no single right number. Work out the margin you need to cover overhead and pay yourself, then convert it with markup = margin ÷ (1 − margin).
How do I convert margin to markup?
Divide the margin by one minus the margin. A 30% margin is 0.30 ÷ 0.70 = 0.4286, which is a 42.86% markup.
Should I mark up materials on an invoice?
Many contractors do, to cover the time spent sourcing, picking up and standing behind the parts. Put the marked-up figure on the line as your price; the customer sees what they pay, not what you paid.