Plays from YouTube (privacy-enhanced mode) only after you press play. Privacy
Markup vs Margin in Construction
What is the difference between markup and margin, and how do I set a price that keeps the profit I planned?
Markup and margin use different bases. Add $25 to a $100 cost and the price is $125: a 25% markup, but a 20% margin.
You will produce
A priced estimate where a 25% markup on cost is shown as a 20% margin on price, with the conversion between the two.
Transcript
0:00 25 percent is not 20 percent
Add 25 percent to your cost, and you keep 20 percent of the price. If you price jobs for a living, or you're building a house and reading a builder's quote, this one is for you. People use the words markup and margin as if they meant the same thing. They don't, and when you mix them up, your price comes out too low, with nothing on the page to warn you. By the end, you'll know what each word means and how to turn one into the other, and you'll have seen both in a real estimate.
0:29 Cost, price and the gap
Start with two numbers. Cost is what the work costs you, the materials, labor and equipment. Price is what the client pays. The gap between them pays for your office and your risk, and what's left is your profit. Markup measures that gap against your cost. You pay $100, you add $25, and that's a 25 percent markup. It's the number you work with while you estimate, because you start from cost and build up. Margin measures the same gap against the price. $25 out of $125 is 20 percent. It's the share of every dollar the client pays that stays with you, and it's what your accountant and the industry reports talk about. Same $25, two different bases. Cost is the smaller number, so the percentage on it comes out bigger. Price is the larger number, so the margin always comes out smaller.
1:22 Open the estimate
Let's look at both in a real estimate. This is the Maple Street Duplex, from the cost-to-build video. In the sidebar, open Bid Schedule under Estimating, pick the estimate, and scroll below the lines. That's where the Markups and Overheads panel sits. Direct cost here is $153,500. On top sit three lines, and each one is a percentage of that direct cost. Overhead is 12 percent, profit is 8, contingency is 5. All three are markups. Add them up, and the price is $191,869.48. The three lines put $38,374 on top of the cost, and that's 25 percent.
2:12 Margin and cost breakdown
Now the margin. Divide the same $38,374 by the price instead of the cost, and you get exactly 20 percent. 25 percent markup, 20 percent margin, on one estimate. The app shows this view too. Below the panel, the Cost Breakdown lists each markup as a share of the total. Overhead is 9.6 percent, profit is 6.4, and contingency is 4. Look at the profit row. It says 8 percent, and it's easy to read that as 8 cents of every dollar. You keep 6.4. That's the difference between the number you type and the number you take home. For scale, in the US, home builders averaged a gross margin of 20.7 percent in 2023, and kept 8.7 as net profit.
3:05 How the mistake happens
Here's how the mistake happens. Say you want to keep 20 percent of the price, so you add 20 percent to your cost. $100 of cost becomes $120. The $20 you added is only 16.7 percent of that price. You're short, and nothing looks wrong. Same thing in the app. Switch the contingency line off, and only overhead and profit are left, 20 percent on cost. The total drops to $184,194, and that's 16.7 percent margin. The price that really gives you 20 is the one we started with. The gap is $7,674, the contingency line, only because that's the one I switched off. The same mix-up hurts more where overhead is heavy. In the US, remodelers averaged a gross margin near 30 percent in 2024, and operating costs of about 24 percent of revenue. Add a flat 30 percent to your cost, and you end up with 23 percent of the price, a little under what an average remodeler spends to run the business. Margins can be far thinner than that. In the UK, the 100 largest contractors averaged a pre-tax margin of 2.4 percent in accounts filed by mid-2025. When the whole profit is that small, a pricing slip of three points is more than all of it.
4:28 Convert markup and margin
So convert before you type. To go from markup to margin, divide the markup by one plus the markup. To go from margin to markup, divide the margin by one minus the margin. A 25 percent markup is a 20 percent margin, and a 20 percent margin needs a 25 percent markup. A few to remember. 30 percent markup is 23 percent margin, and 50 percent markup is only 33. If you want a 50 percent margin, you have to double your cost, 100 percent markup.
5:02 Work backwards from the margin
Now say you want your profit to be 8 percent of the price. Work backwards. If profit is 8, everything else is 92. So the price is the other lines added up, divided by 0.92. That puts the profit row at 10.17 percent of direct cost. Click the percentage, type it in, and the amounts update. Down in the Cost Breakdown, profit now reads 8 percent of the total. The price goes up by about $3,331. That's the money the 8 percent was supposed to be all along. Whether the client pays it is a separate decision, but now you're making it with the right number.
5:47 A percent of what?
There's a second question behind every percentage, which is a percent of what. In this estimate, every line is a percent of the direct cost, so the lines don't touch each other. Some stacks take a percent of a running total, the direct cost plus every line above it. Then the same 3 percent gets bigger. The app comes with stacks for more than forty regions. Open Apply Regional Template, pick one, and it replaces your lines with that region's. Here's the United Kingdom's. Its design risk line is 3 percent of the running total, which comes to $5,664. 3 percent of the direct cost would be $4,605. A template is a starting point. Check what each line is a percent of, then set the numbers to what your business really spends and needs.
6:37 Approximate numbers
One note on the numbers. The percentages in this video are examples of the method, not what you should charge. Prices and quantities from cost databases and benchmarks are indicative only, a starting point. Check every price and quantity yourself, or with a professional, before you rely on it.
6:56 Recap
To sum up. Markup is the gap measured against cost. Margin is the same gap measured against price, and it's always the smaller number. Your estimate takes markups, while your accounts and your targets speak in margins, so convert before you type. And when a builder or a supplier gives you a percentage, find out whether it's on cost or on price. The answer changes the number.
7:21 Try it
You can try all of this on your own estimate, for free. OpenConstructionERP is free and open source, and the install video is right here. It walks you through setup, all the way to your first estimate.
