RHACOVA

Pricing and margin

Markup vs Margin for Contractors

Adding 20% to your cost does not give you a 20% margin. It gives you 16.67%. That gap is the most expensive misunderstanding in contracting.

The short answer

Markup measures profit against your cost. Margin measures the same profit against the price the customer pays. Because price is always larger than cost, the margin percentage is always smaller than the markup percentage. A 20% markup is a 16.67% margin; to get a 20% margin you need a 25% markup.

Definitions

Markup
Profit as a percentage of cost. It answers "how much did I add on top?"
Margin
Profit as a percentage of the selling price. It answers "how much of the customer's money do I keep?"

The formulas and the conversion

Markup = (Price − Cost) ÷ Cost

Margin = (Price − Cost) ÷ Price

Markup = Margin ÷ (1 − Margin)

Margin = Markup ÷ (1 + Markup)

Margin to markup conversion
Target marginMarkup required
10%11.11%
15%17.65%
20%25.00%
25%33.33%
30%42.86%
40%66.67%

Every row is computed by the shared pricing engine at page render, so the table cannot contain a typo the calculator would disagree with.

Worked example: the $10,000 job

A job costs $10,000. Two contractors both say they "work on 20%".

  • Adding 20% markup: price $12,000.00, profit $2,000.00, margin 16.67%
  • Pricing for a 20% margin: price $12,500.00, profit $2,500.00, markup 25.00%

The difference on this single job is $2,500.00 against $2,000.00. Across fifty jobs a year, a contractor who believes they are running a 20% margin while actually running 16.67% is short by a sixth of their intended profit — and there is no single job to point at.

What a discount really costs

A discount comes out of profit, not out of price, which is why a small-sounding discount is rarely small. On a job priced at a 20% margin, a 10% discount removes half the profit: the price falls by 10% of the whole job while the cost does not move at all. Before agreeing to "knock off ten percent", calculate the remaining profit rather than the remaining price.

Which one should you price from?

Price from margin. Margin is the share of the customer's money you keep, it is the number your overhead and profit goals are expressed in, and it is directly comparable across jobs of different sizes. Markup is a mechanism for reaching a margin, not the goal itself — which is why RHACOVA stores a target margin in your rate build-up and prices estimates from it.

Common mistakes

  • Using the words interchangeably in conversation, then in spreadsheets.
  • Applying a margin percentage as though it were a markup: multiplying cost by 1.20 and calling the result a 20% margin.
  • Applying markup to an incomplete cost, so the percentage is right and the base is wrong.
  • Discounting from the price without checking what is left of the profit.
  • Carrying one markup across every job type when material-heavy and labor-heavy work consume the business differently.

Quick answers

What markup gives a 20% margin?
25%. Markup = margin ÷ (1 − margin), so 0.20 ÷ 0.80 = 0.25.
Why is margin always lower than markup?
They divide the same profit by different denominators. Markup divides by cost; margin divides by the larger price.
Which should I quote from?
Price from margin, because margin is the share of the customer's money you keep. Markup is a way to get there, not the goal.

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.

Price from a target margin, not a habit

RHACOVA Estimates price from the margin you intend, and Profit Guard flags a proposal that falls below your minimum before it reaches the customer.

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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.

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