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Profit vs margin vs markup for contractors

Profit, margin and markup get used like they mean the same thing. They don't. Mixing them up is one of the most common ways a contractor underprices a job without noticing.

Here's each one, with one simple example all the way through.

The example job

Say you finish a bathroom remodel.

  • Revenue (what the client paid): $20,000
  • Costs (labor, materials, subs, dump fees and so on): $15,000

Everything below uses these two numbers.

Profit: the dollars left over

Profit = revenue − costs

$20,000 − $15,000 = $5,000 profit

Profit is a dollar amount. It tells you how much the job left you. It doesn't tell you how good that is compared with the size of the job. That's what margin and markup are for.

Margin: profit as a share of the price

Margin = profit ÷ revenue

$5,000 ÷ $20,000 = 25% margin

Margin answers: "Of every dollar the client paid, how much did I keep?" Here, 25 cents of every dollar.

Margin is measured against the price. It can never reach 100%.

Markup: profit as a share of your costs

Markup = profit ÷ costs

$5,000 ÷ $15,000 = 33% markup (33.3%, rounded)

Markup answers: "How much did I add on top of my costs?" Here, you added a third.

Markup is measured against costs. That's why it's always a bigger percentage than margin on the same job.

Same job, two different percentages

Formula Example
Profit Revenue − costs $5,000
Margin Profit ÷ revenue 25%
Markup Profit ÷ costs 33%

A 25% margin and a 33% markup describe the same job. Neither is wrong. They just measure against different numbers.

The common mistake

Here's where contractors get burned. Say you want a 25% margin. So you take your costs and add 25%.

  • Costs: $15,000
  • Add 25%: $15,000 × 1.25 = $18,750 price
  • Profit: $18,750 − $15,000 = $3,750
  • Margin: $3,750 ÷ $18,750 = 20%

You wanted 25%. You got 20%. On this job, that's $1,250 less than you planned, just from using the wrong percentage.

To land a 25% margin on $15,000 of costs, you need a 33% markup, which gets you to the $20,000 price.

Converting between the two

If you know one, you can find the other:

  • Margin = markup ÷ (1 + markup)

  • 0.333 ÷ 1.333 = 0.25, or 25%

  • Markup = margin ÷ (1 − margin)

  • 0.25 ÷ 0.75 = 0.333, or 33%

Keep these two lines on a card in the truck.

Why it matters on every job

Your margin target only means something if you know your real costs on each job. If hours land on the wrong job or receipts never get counted, the "costs" number is wrong. Then both margin and markup are wrong too.

That's the gap Banay OS™ was built to close. Crew clock in from their phone and hours show by week, tied to each job. Snap a receipt and it's filed to the job. Hours, receipts and materials roll into each job's P&L.

Live, automated P&L for every job.*

Want the full picture? See how job costing in Banay OS works. Join the early-access waitlist, see plans or visit the Banay OS home page.

FAQ

Is margin or markup bigger?

On the same job, markup is always the bigger percentage, because it's measured against costs, which are smaller than the price.

What's the margin on a $20,000 job with $15,000 in costs?

Profit is $5,000. Margin is $5,000 ÷ $20,000 = 25%. Markup is $5,000 ÷ $15,000 = about 33%.

If I add 25% to my costs, do I get a 25% margin?

No. A 25% markup gives a 20% margin. To get a 25% margin, you need about a 33% markup.

What margin should a contractor aim for?

It depends on your trade, market and overhead. Talk it through with your CPA. Your own job history is the best starting point.

*Open jobs show a preliminary P&L that updates each time you open it. It becomes official once the job's final P&L is in.

Sources: Standard arithmetic; no external rules cited.