RHACOVA

Financial fundamentals

Construction Pricing: Cost vs Price vs Profit

Three numbers, three different jobs. Cost is what you spend, price is what you charge, profit is what is left — and no one of them can be derived by guessing at another.

The short answer

Cost is the money leaving your company to deliver the work. Price is the money the customer agrees to pay. Profit is what remains when every cost has been paid out of that price. They are three separate figures, and each one has to be established on its own — profit is a result, never an input you can wish into a price.

Definitions

Cost
Everything the job causes you to spend: material, loaded labor, equipment, subcontractors, disposal, permits, delivery, plus any overhead you deliberately allocate to the job. Cost is a fact about your company, not about the market.
Price
What the customer pays. Price is a decision. It is influenced by cost, but it is set by what the work is worth, what the market bears and what margin you intend to keep.
Profit
Price minus cost. Profit is the residue of two other decisions, which is exactly why it disappears when either of them is sloppy.
Revenue
The total money invoiced across a job or a year. Revenue is not profit, and a company can grow revenue every year while its profit falls.

The formulas

Profit = Price − Cost

Margin = Profit ÷ Price

Markup = Profit ÷ Cost

Margin and markup measure the same profit against different denominators, which is why they never produce the same percentage. Markup vs margin works through that conversion in detail.

Worked example

A job costs $8,000 to deliver, and you intend to keep a 20% margin. Pricing from the margin — not by adding 20% to the cost — gives:

  • Cost: $8,000.00
  • Price: $10,000.00
  • Profit: $2,000.00
  • Margin: 20.00%
  • Markup on cost: 25.00%

Notice the last two lines. The same job is a 20% margin and a 25% markup at the same time. Had you instead added 20% to the cost, the price would have been $9,600 and the margin 16.67% — $400 of profit gone on one job, and every job after it.

Why the distinction decides whether the year works

Overhead does not care which job pays for it. If every job is priced with a margin that is quietly lower than you believe, the shortfall does not appear on any single invoice — it appears at the end of the year as a busy company with an empty account. The failure is almost never one catastrophic job; it is a systematic few points of margin, repeated.

The defence is procedural rather than clever: establish cost from real figures, set price from an intended margin, and treat the resulting profit as a measurement you check later against what actually happened.

Common mistakes

  • Treating the deposit as profit. Early cash is the customer's money funding costs you have not paid yet.
  • Pricing from a competitor's number. Their price reflects their cost structure, not yours.
  • Leaving the owner's own labor out of cost. Unpaid hours make a losing job look profitable until you try to hire a replacement.
  • Calling markup "margin" in conversation. The words are used interchangeably on job sites and the arithmetic is not interchangeable at all.
  • Judging a job by the size of its contract. A $40,000 job at 5% makes less than a $10,000 job at 25%.

Quick answers

Is revenue the same as profit?
No. Revenue is the money the customer pays you. Profit is what is left after every cost of delivering the work has been paid. A job can have high revenue and no profit.
Can I set a price by adding a fixed dollar amount to cost?
You can, but the resulting margin changes with every job size. A flat $500 on a $2,000 job is a 20% margin; the same $500 on a $20,000 job is 2.4%.

Run the numbers

Selling price, profit, markup percentage and margin percentage from any one of cost plus markup, cost plus target margin, or cost plus a price you already quoted.

Open the Markup & Margin Calculator

Free, no account, and the answer stays on the page.

Keep the three numbers separate in your estimates

A RHACOVA Estimate keeps cost, price and profit as distinct figures on every line, so the margin you intended is the margin you quoted.

Start an estimate

How RHACOVA defines these terms

Every calculator, estimate and job in RHACOVA uses one set of financial definitions, and they are written down rather than implied. Read the RHACOVA methodology for the full list of definitions this article relies on.

Keep reading