Markup Is Not Margin: The Math Error Quietly Eating Your Profit
By Henry Goudreau, C.S.L., Contractor Coaching
I talk to owners every week who are busy beyond belief. The crews are working, the backlog looks healthy, the phone keeps ringing — and at the end of the month they look at what’s left and shake their heads. “Henry, we’re doing more work than ever. Where’s the money?”
When I dig into their pricing, I find the same quiet error again and again. They price every job “cost plus 25%” and believe they’re making a 25% gross margin.
They’re not. They’re making 20% — and they have been on just about every job they’ve sold for years.
It’s not a work ethic problem. It’s a math problem. And it’s one of the easiest profit leaks in your business to fix once you see it.
Markup and margin are not the same number
These two words get used like they’re interchangeable. They are not.
Markup is your profit divided by your cost. It’s calculated on what the job costs you.
Margin — gross margin — is your profit divided by your selling price. It’s calculated on what the customer pays you.
Same profit dollars. Two different denominators. Two very different percentages.
Here’s why that matters: your financial statements, your break-even, and your bottom line all run on margin. Your profit and loss statement doesn’t care what you marked a job up. It reports what percentage of the selling price you kept. If you price by markup but think in margin, you are aiming at one target and hitting a lower one — on every single job.
Run the numbers with me
Say a job costs you $10,000 — labor, materials, subs, everything it takes to produce the work. And say you want a true 25% gross margin on that job.
To get a 25% margin, the price has to be:
$10,000 ÷ (1 − 0.25) = $10,000 ÷ 0.75 = $13,333
At $13,333, your gross profit is $3,333, and $3,333 ÷ $13,333 is exactly 25%. That’s a real 25% margin. Notice what it took to get there: $3,333 ÷ $10,000 of cost is a 33.3% markup. A 25% margin requires a 33.3% markup. Read that again, because this is where the money leaks out.
Now watch what most owners actually do. They take the same $10,000 cost and “add 25%”:
$10,000 × 1.25 = $12,500
Profit is $2,500. Sounds like 25%, right? But margin is profit divided by selling price: $2,500 ÷ $12,500 = 20%. Not 25%. Twenty.
On that one job, the misunderstanding cost $833 — the difference between the $13,333 price and the $12,500 price. Same job. Same crew. Same cost. The only thing that changed was the math at the kitchen table when the estimate was written.
What it costs you over a year
One job at $833 is annoying. A year of it is serious money.
Say your crews produce $1.6 million a year in job costs. Priced the way most owners price — cost plus 25% — that work sells for $2.0 million and throws off $400,000 in gross profit. That’s the 20% margin doing its quiet work.
Now price that exact same cost base for the true 25% margin you thought you were getting: $1,600,000 ÷ 0.75 = $2,133,333, and gross profit is $533,333.
Same work. Same costs. The difference is $133,333 of gross profit a year — left on the table by one misunderstanding, repeated estimate after estimate. That’s a foreman’s salary. That’s a truck, a cushion in the bank, or the pay raise you haven’t given yourself in three years. And it walked out the door before the job even started, because the price was wrong on day one.
How to fix it
The fix is not complicated, but it has to be done in the right order.
First, know your real costs. You cannot price correctly if your job costs are guesses. Labor burden, materials, subs, equipment, and the overhead it takes to keep your doors open — those numbers have to be real, current, and yours, not your competitor’s and not what somebody at the supply house told you.
Second, decide the gross margin you require — before you price. Your required margin comes from your business: your overhead, your debt, the profit the business needs to keep, and a fair living for you. That percentage is not a wish. It’s the number that makes your company work. If you don’t know what margin your business actually requires to break even and profit, finding out is job one.
Third, convert your margin target into the markup you apply. The formula is simple:
Markup = Margin ÷ (1 − Margin)
Keep this short conversion table taped next to your estimating desk:
- 20% margin = 25% markup
- 25% margin = 33.3% markup
- 30% margin = 42.9% markup
- 35% margin = 53.8% markup
- 40% margin = 66.7% markup
Fourth, check every estimate before it goes out the door. Not most of them. Every one. One “cost plus 25%” slipping through on a big job can erase the profit from three jobs priced right.
Will you lose some bids at the correct price? Possibly — the bids you were winning by accidentally being the cheapest guy in town. Work sold below your required margin was never making you money in the first place. It was just keeping the crew busy while your bank account carried the load.
The bottom line
If you’re working long hours, wearing every hat, and wondering why the profit doesn’t match the effort, check your math before you blame the market, the labor pool, or your customers. A five-point margin leak doesn’t feel like much on one estimate. Spread across a year of work, it’s the difference between a business that owns you and a business that works for you.
This is exactly the kind of gap my S3 Diagnostic looks for. In a free Business Evaluation, I’ll go through your pricing and markup, your systems, and your numbers, and show you where the profit is leaking and what it’s costing you — in plain dollars, not theory.
Book your free Business Evaluation here
No pitch, no pressure. Just your numbers, straight.
— Henry Goudreau, C.S.L., Contractor Coaching
