Markup and margin are not the same number

It is the most common costly mistake in the trades, and it is invisible until you add the year up.

29 August 2026 · 3 min read

Ask ten contractors what margin they make and most will tell you what they add on top of cost. Those are two different numbers, and the gap between them is bigger than it looks. If you have been running a business on the assumption that they are the same, you have been earning less than you thought — consistently, on every job, for as long as you have been doing it.

The difference in one line

Markup is measured against what the job cost you. Margin is measured against what the customer paid. Same job, same money, two different denominators.

A job that costs you $10,000

Add 20% markup and you charge $12,000. Your profit is $2,000. But $2,000 out of $12,000 is 16.7% — not 20%. To actually keep 20% of what you charge, you would need to bill $12,500, which is a 25% markup.

That 3.3% looks like nothing on one job. On $400,000 of work in a year it is a little over $13,000 — roughly the difference between a decent year and a tight one, and it is money you already did the work for.

The conversion, so you can stop guessing

To get from the margin you want to the markup you have to add, divide rather than multiply. The markup is always the bigger number, and the gap widens the higher you go.

10% margin needs 11.1% markup
15% margin needs 17.6% markup
20% margin needs 25% markup
25% margin needs 33.3% markup
30% margin needs 42.9% markup
40% margin needs 66.7% markup

The formula behind that list is markup = margin ÷ (1 − margin). If you want to keep 30 cents of every dollar, you add nearly 43% to your cost. Most people who think they are running at 30% are adding 30% and running at 23%.

Why it usually goes unnoticed

Because nothing announces it. The quote gets accepted, the job gets done, the invoice gets paid, and the shortfall is spread thinly across the whole year. There is no moment where anyone tells you the number was wrong. It shows up only as a vague sense that the business is busier than it is profitable.

It also compounds with the other thing that goes uncounted: the cost side is usually incomplete. If your $10,000 figure covers materials and the crew's hours but not the truck, the fuel, the insurance, the phone, the yard, the time you spent quoting and the time you spent chasing the money — then even the correct markup is being applied to the wrong base.

What to do about it

1Decide the margin you need, not the markup you are used to. Work out what the business has to cover in a year and what has to be left over, and pick the number from that.
2Convert it properly using markup = margin ÷ (1 − margin). Write the markup on a card and keep it where you quote from.
3Get the real cost into the base. Overhead, vehicles, insurance and the unbilled hours are part of what a job costs, whether or not they are on the invoice.
4Check the finished job against the quote. Not the estimate against itself — what it actually cost when the hours and materials came in.
5Do that for a few jobs and the pattern is usually obvious: one kind of work carries the business and another has been quietly subsidised.

The check that matters

The number that tells you the truth is not the one on the quote. It is what the job cost when it was finished, against what you were paid for it. Until hours are tracked against the job and materials are recorded against the job, that comparison is an evening with a calculator, so almost nobody does it — which is exactly why the markup mistake survives for years.

Once it is automatic, the conversation changes. You stop arguing about whether a price feels right and start looking at what that kind of work has actually returned the last six times you did it.