Here is a conversation that happens in every trade. A guy says he marks everything up 20 percent. You ask what his profit margin is. He says 20 percent.
It is not. It is 16.7 percent, and across a year that gap is real money he thought he had and does not.
Markup and margin are two different numbers describing the same job, and mixing them up is the most common pricing mistake in the trades. Here is the difference and how to set your number so it actually lands where you want it.
The difference in one line
Markup is calculated on your cost. Margin is calculated on your price.
Say a job costs you $1,000 in materials and labor.
You add 20 percent markup. That is $200 on top, so you charge $1,200.
Now figure the margin. You made $200 on a $1,200 sale. That is $200 divided by $1,200, which is 16.7 percent.
Same job, same dollars, two different percentages. The markup is bigger than the margin, always, because it is measured against the smaller number.
The conversion table
Tape this to the inside of a cabinet door.
| If you mark up | Your margin is |
|---|---|
| 10% | 9.1% |
| 15% | 13.0% |
| 20% | 16.7% |
| 25% | 20.0% |
| 30% | 23.1% |
| 40% | 28.6% |
| 50% | 33.3% |
| 67% | 40.0% |
| 100% | 50.0% |
Read it the other way when you are setting prices, because margin is the number you actually care about.
Want 20 percent margin? Mark up 25 percent. Want 30 percent margin? Mark up about 43 percent. Want 40 percent margin? Mark up about 67 percent.
The formulas if you want to run your own numbers:
Margin = markup divided by (1 + markup). So 30 percent markup is 0.30 / 1.30 = 23.1 percent margin.
Markup = margin divided by (1 minus margin). So 30 percent margin needs 0.30 / 0.70 = 42.9 percent markup.
If you would rather not do it on paper every time, that is what the job markup calculator is for.
Overhead is not profit
This is the second half of the problem, and it is the one that sinks guys who are busy all year and still broke.
Your markup has to cover two different things. Overhead, which is what it costs to exist whether or not you are on a job. And profit, which is what is left after that.
Overhead is your truck payment, fuel, insurance, tools, phone, software, accountant, licensing, advertising, the time you spend quoting work you do not win, and your own unbilled hours doing paperwork at the kitchen table.
If you add 20 percent and your overhead eats 15 of it, your actual profit is 5 percent. On a $60,000 year of material and labor cost, that is $3,000 for carrying all the risk.
Figure your overhead once. Add up everything you spent last year that was not direct job cost, divide it by your total job costs for the year, and that is your overhead rate as a percentage. Your markup needs to clear that number before a dollar of it is profit.
Most small trade operations run overhead somewhere in the 15 to 30 percent range. If you have never calculated yours, you are guessing, and the guess is usually low.
Your hourly rate is not your hourly rate
Same trap, different shape.
You decide you are worth $75 an hour. You work 40 hours a week, 50 weeks a year, so that is 2,000 hours and $150,000. Except you did not bill 2,000 hours.
You billed the hours you were actually on a job. The rest went to driving, supply runs, quoting, invoicing, chasing payment, waiting on an inspector, and the three days in March when nothing was scheduled. For a lot of one and two man operations, billable hours land somewhere around 1,200 to 1,500 a year, not 2,000.
At 1,400 billable hours, that $75 rate brings in $105,000, not $150,000. If you set your rate off the 2,000 number, you priced yourself 30 percent short and you will never see where it went.
Work out your real billable hours and divide your target income by that, not by the hours you spend working. The hourly rate calculator runs it for you.
What to mark up
Materials. Yes. You carry the cost, you drive to get them, you eat the waste, you warranty the result, and you float the money until you get paid. Material markup is not a fee for buying things, it is payment for carrying the job.
Labor. Your burdened labor cost is not the hourly wage. It is wage plus payroll taxes, workers comp, and any benefits. That burdened number is your cost, and the markup goes on top of it.
Subs. Mark them up too. You found them, you scheduled them, you are managing them, and when they screw up it is your name on it. Something in the 10 to 20 percent range is common, and the rate depends on how much of their work you have to babysit.
Equipment rental, dumpsters, permits, disposal. All real costs that get marked up like anything else. Passing them through at cost means you handled them for free.
Why "industry standard markup" is a trap
Somebody will tell you the standard is 10 and 10. Ten percent overhead, ten percent profit. Somebody else swears by 1.5 times cost.
Those numbers came from somebody else's overhead, somebody else's crew, somebody else's market. A two man deck crew working out of a home garage and a twelve man outfit with a yard, a shop, and an office manager do not have the same overhead rate, so they cannot have the same markup.
Use rules of thumb to sanity check your number, never to set it. The only markup that matters is the one that covers your overhead and leaves the profit you decided you want.
Check your number backwards
Once a quarter, take three finished jobs and work out what you actually made.
Add up everything the job really cost. Materials including the second supply run. Labor hours actually worked, burdened. Subs. Rentals. The warranty callback you did not charge for. Then subtract from what you collected.
Divide that by what you collected and you have your real margin on that job. Compare it to what you thought you were making when you sent the quote.
The gap is where your estimating is off, and it is usually the same gap every time. Underestimated labor hours, forgotten disposal, a change you never wrote up. Find the pattern and your next quote is better. This is also why writing the scope and exclusions down pays off twice, once when you win the job and again when you can see exactly what it cost you.
The short version
- Markup is on cost, margin is on price, and markup is always the bigger number
- 20 percent markup is 16.7 percent margin, not 20
- To hit a target margin, divide it by one minus itself to get the markup
- Your markup has to cover overhead before any of it is profit
- Calculate your overhead rate from last year instead of guessing
- Set your hourly rate off billable hours, not hours worked
- Mark up materials, burdened labor, subs, rentals, and disposal
- Ignore industry standard markups, they are somebody else's overhead
- Back into the real margin on three finished jobs every quarter
You can be the best builder in town and still go under on arithmetic. The guys who last are not always the best craftsmen. They are the ones who know what their number is and hold it.
If you want the version of this applied to an actual job, quoting a deck build walks through where the money hides on one specific kind of project.