Ask a contractor what they mark up a job and you will get a number in half a second. Ask what profit margin that markup actually produces and the answer comes slower, if it comes at all. The two are not the same number, and the difference is not academic: a contractor who wants to keep 20% of every revenue dollar and prices with a 20% markup is actually keeping 16.7%. The bid still wins, the job still gets built, and nobody notices the leak.
A 3.3-point gap sounds like a rounding error. It is not. On $1.2 million of annual revenue, the gap between the margin you think you priced and the margin you actually earned is roughly $40,000 - an owner's salary, walking out the door one estimate at a time.
Markup is applied to cost, margin lives on the price
Markup answers one question: how much do I add to my costs to reach a price? Margin answers a different one: of the price the client pays, how much do I keep? Markup is measured against cost. Margin is measured against price. Because the price is always the bigger number, the same percentage shrinks the moment you move it from one base to the other.
Run it on a small job. Direct costs are $10,000. You apply a 20% markup, so you quote $12,000 and book $2,000 of gross profit. Now measure that $2,000 against the $12,000 the client actually paid: 16.7%. You applied 20 and earned 16.7, and the shortfall came from the arithmetic, not from the estimate.
The error always runs in the same direction - against you. There is no version of confusing the two that accidentally makes you money.
The conversion table worth taping to the monitor
The formula is one line: markup = margin / (1 - margin). What matters is how fast the two numbers pull apart as your target rises:
- A 10% margin needs an 11% markup
- A 15% margin needs an 18% markup
- A 20% margin needs a 25% markup
- A 25% margin needs a 33% markup
- A 30% margin needs a 43% markup
- A 35% margin needs a 54% markup - 1.54x your cost, not 1.35x
- A 40% margin needs a 67% markup
- A 50% margin needs a 100% markup: you double your cost
The 35% row is the one that catches remodelers. A 35% gross margin is a perfectly ordinary target once real overhead enters the picture, and it requires multiplying cost by 1.54 - a number that feels aggressive until you see what it is actually paying for.
What healthy looks like, by segment
Industry cost surveys put residential builders at a net profit of 8-12% in a normal year, running markups in the 20-35% range. Remodelers run higher on both ends - typically 10-18% net on markups of 30-45% - because their jobs are smaller, more supervision-heavy, and carry more surprises per dollar of contract.
Notice the spread between the markup and the net. A remodeler marking up 40% is not pocketing 40%. The markup first has to become a gross margin (a 40% markup is a 28.6% margin), and the gross margin then has to pay for everything the job did not: the truck, the insurance, the estimator's time, the office, the software, the owner's admin hours. What survives all of that is net profit, and in a well-run shop it is a single-digit-to-teens number.
Price in two steps, not one guess
Most contractors inherit their markup - from a former boss, a franchise manual, or the counter guy at the supply house. The two-step method replaces the inherited number with your number.
- Compute your real overhead rate. Pull 12 months of costs that exist whether or not you are on a job: office, vehicles, insurance, tools, software, marketing, bookkeeping, estimating time, and the salary you should be paying yourself for administration. Divide that total by the same 12 months of direct job costs. Most contractors land between 25% and 40%, and almost everyone who runs it for the first time comes out higher than they guessed.
- Add your net target with division, not multiplication. Load each job's direct costs with your overhead rate to get true cost, then divide by (1 - target net margin). An 8-15% net target is the healthy range. Dividing by 0.85 is not the same as multiplying by 1.15 - the difference is the whole point of this article.
And never copy a competitor's markup. Their overhead is not your overhead. A two-truck remodeler who copies a production builder's 25% markup is not being competitive - they are pricing below their own break-even and calling it strategy.
One $60,000 job, priced to a real 15% net
Walk one job through the method. Direct costs - labor, materials, subs, permits, equipment - come to $60,000. Your overhead rate, computed from last year's books, is 30%. That allocates $18,000 of overhead to this job, so its true cost is $78,000 before you have earned a dollar.
Target a real 15% net. Price = $78,000 / (1 - 0.15) = $91,765. Check the answer: $91,765 minus $78,000 leaves $13,765 of profit, which is exactly 15% of the price. On the estimate that shows up as a 53% markup on direct costs and a 34.6% gross margin - both of which sound high, and both of which are simply what a 15% net costs.
Now the version that sinks contractors. The same job, priced with the inherited 20% markup, quotes at $72,000. That is $6,000 below true cost. The owner sees $12,000 of 'profit' over direct costs, stays busy all season, and cannot figure out why the bank account shrinks while the backlog grows. Nothing was stolen and nothing was wasted - the job lost money at the moment it was priced.
Reprice one bid this week
You do not have to overhaul your pricing tonight. Pull the last 12 months of your P&L, compute your overhead rate, and run your next estimate through the two-step method alongside your current markup. If the corrected price comes out higher - it almost always does - that is not the method being greedy. That is the size of the discount you have been quietly handing to every client.
Then change what you track. A markup is a habit; a margin is a result. Measure net margin per job, flag the jobs that fall below your floor, and let the winners tell you what your markup should have been all along.
Frequently asked questions
Markup is the percentage you add to a job's cost to build the price; margin is the share of the final price you keep as profit. Because the price is a bigger number than the cost, the same figure means less as a margin: a 20% markup produces a 16.7% margin, and a 50% markup produces only a 33% margin. Use markup to build the price and margin to judge the business.
Enough to cover your actual overhead plus your target net profit. For most residential builders that lands at a 20-35% markup, and for remodelers 30-45%, but those are outputs, not inputs: compute your own overhead rate (usually 25-40% of direct costs), add an 8-15% net target, and let the markup be whatever the math says.
Residential builders typically net 8-12% and remodelers 10-18%, with the strongest firms at the top of those ranges. Treat roughly 8% as the floor - below it, a single busted estimate or slow-pay client can wipe out the profit from every other job that year.
Add up 12 months of costs that exist whether or not you are on a job - office, vehicles, insurance, software, marketing, estimating time, and your own admin salary - then divide by the same 12 months of direct job costs. Most contractors land between 25% and 40%. Recalculate at least once a year, because overhead creeps up faster than markups do.