Markup vs margin: why 15% isn't 15%
Margin is profit as a share of the price. Markup is profit as a share of the cost. Because the price is always larger than the cost, the same dollar profit is a smaller margin than it is a markup.
That is where bids leak money. Adding a 15% markup to a $40,880 job gives $47,012, which is a margin of only 13.0%. Compared with a true 15% margin, that job leaves $1,082 on the table.
Conversion table
| Target margin | Markup needed |
|---|---|
| 5% | 5.3% |
| 10% | 11.1% |
| 15% | 17.6% |
| 20% | 25.0% |
| 25% | 33.3% |
| 30% | 42.9% |
| 35% | 53.8% |
FIG. 02 · MARGIN TO MARKUP · MARKUP = MARGIN ÷ (1 − MARGIN)
The formulas
- Total cost = direct cost × (1 + overhead %)
- Bid price = total cost ÷ (1 − target margin). Our construction estimate template prices a job with the same formula, from line items up. The roofing estimate template, the landscaping estimate template and the painting estimate template carry this same bid price chain from their own measurements. The fence, concrete, drywall, remodeling, electrical, plumbing, HVAC and handyman estimate templates cover those trades, and the bid tabulation template lines up subcontractor bids.
- Markup needed = margin ÷ (1 − margin). A 20% margin needs a 25% markup; a 25% margin needs a 33.3% markup.
A worked example, line by line
The calculator opens on this job. Every figure below is what it computes from the same inputs.
| Line | How it is worked out | Amount | |---|---|---| | Materials | From the takeoff | $14,200 | | Labor | Burdened hours × rate | $15,800 | | Subcontractors | Signed sub quotes | $5,000 | | Equipment | Rentals and owned-equipment charges | $1,500 | | Direct cost | Sum of the four lines | $36,500 | | Overhead | 12% × $36,500 | $4,380 | | Total cost | $36,500 + $4,380 | $40,880 | | Bid price | $40,880 ÷ (1 − 0.15) | $48,094.12 | | Profit | $48,094.12 − $40,880 | $7,214.12 |
The profit is 15% of the $48,094.12 price, which is the margin the job was priced for. The same profit is a 17.6% markup on the total cost and a 31.8% markup on the direct cost, so three different percentages describe one bid. Say which one you mean when you quote a figure to a partner or a lender.
Where bid prices go wrong
- Overhead left out. Rent, office staff, insurance, vehicles and software are paid whether or not this job is won. Price a job on direct cost alone and the profit goes to paying them.
- Raw wages entered as labor. Payroll taxes, workers' comp and benefits sit on top of every hour; the labor burden calculator works out that rate.
- A margin applied as a markup. Multiplying cost by 1.15 gives a 13.0% margin, not 15%; dividing by 0.85 gives 15%. The table above shows the gap at every common margin.
- Overhead counted twice. If your overhead rate already includes an item, such as a superintendent's pay, leave it out of the direct cost lines.
- Job-specific costs missing. Permits, bonds, dumpsters, cleanup and travel belong in the direct cost lines; the calculator prices only what is entered.
How to use this calculator
- Enter your direct costs for the job. Use burdened labor (wages plus payroll taxes, insurance and benefits), not just wages. The material takeoff template totals material quantities, with waste, by category.
- Add your overhead rate as a percent of direct cost. Our overhead rate calculator and the overhead rate worksheet work out that percent from a year of overhead costs and a forecast of direct cost.
- Set the profit margin you want to keep after overhead.
- Copy the page link to save or share the result. Your numbers stay in the link, not on our servers.