Profit margin vs. markup: the mistake that costs contractors money

By Randall Strickland · Updated September 24, 2026 · 3 min read

If you want to make 25% on a job and you add 25% to your costs, you won’t make 25%. You’ll make 20%. That gap is the difference between markup and margin, and it’s one of the most common ways contractors underprice work without knowing it.

The two formulas

Markup is profit as a percentage of your cost:

Markup = (Price − Cost) ÷ Cost

Margin is profit as a percentage of your price (what the customer pays):

Margin = (Price − Cost) ÷ Price

Same profit dollars, different number, because you’re dividing by something different. Markup is always the bigger percentage.

An example

Your costs on a job are $10,000. You add a 25% markup: $10,000 × 1.25 = $12,500. Your profit is $2,500.

• Markup: $2,500 ÷ $10,000 = 25%
• Margin: $2,500 ÷ $12,500 = 20%

If your business needs a 25% margin to cover overhead and leave a profit, that job came up short by more than $800.

How to price a job for the margin you want

Divide your cost by one minus your target margin:

Price = Cost ÷ (1 − Target margin)

For a 25% margin on $10,000 of cost: $10,000 ÷ 0.75 = $13,333. Profit is $3,333, and $3,333 ÷ $13,333 = 25%. Use our profit margin calculator to do this in one step.

Markup to margin conversion chart

To go the other way, from a margin you want to the markup you need: Markup = Margin ÷ (1 − Margin). A 30% margin needs a 42.9% markup.

Gross margin vs. net margin

The margin on a single job is gross margin: price minus the job’s direct costs. Your overhead (office, insurance, trucks, software, your salary if you don’t bill it to jobs) has to come out of that gross margin across all your jobs. What’s left is net margin, the real profit.

So the question isn’t “what margin should I charge?” It’s “what does my overhead cost as a percentage of revenue, and how much profit do I want on top?” If overhead runs 12% of revenue and you want 8% profit, every job needs to average at least a 20% gross margin. Price below that and you’re working to pay the bills, not to make money.

Why this matters more for contractors

• Costs move after you bid. If labor runs 10% over, a thin margin disappears fast. Knowing your margin on each job while it’s running lets you catch it. See our guide to job costing.
• Change orders need margin too. Price extra work with the same formula, not at cost.
• Discounts come straight out of margin. A 5% discount on a job with a 20% margin wipes out a quarter of your profit.

How JobMargin shows it

Bids in JobMargin carry both price and cost for every line item, so you see the margin on a bid before you send it. Once it’s a job, the job shows its live margin as labor and receipts come in, against the contract value including change orders.

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