Markup v Margin and what the difference is costing you……
Two words. Used interchangeably every day. They are not the same, and the difference
could be thousands of dollars on every job.
Advisabuild | 5 min read
Picture this. You have just quoted a landscaping job. Materials and labour come to $20,000. You add
25% on top, it feels healthy, and you send the quote at $25,000. The client says yes, the job runs
smoothly, and you invoice. But at the end of the month, after paying your bills and overheads, there is
far less left over than you expected.
What went wrong? Most likely, you applied a markup but were thinking about it as a margin. They
sound the same. They are very different things.
MARKUP IS ADDED ON TOP OF YOUR COSTS
Markup is straightforward: it is the amount you add on top of what a job costs you to do.
On a $20,000 job with a 25% markup, you charge $25,000. Easy to work with when you are building a
quote. You know your costs, you add a percentage, you have a price. The problem is what that
percentage actually represents once the money comes in.
MARGIN IS WHAT YOU KEEP FROM YOUR REVENUE
Gross margin is the percentage of your revenue that remains after paying your direct job costs. It is
calculated on revenue, not on costs.
Take that same job. You charged $25,000 and it cost you $20,000 to deliver.
WORKED EXAMPLE
Revenue (quoted price) - $25,000
Direct costs (materials + labour) - $20,000
Gross profit ($25,000 minus $20,000) - $5,000
Gross margin ($5,000 divided by $25,000) - 20%
You applied a 25% markup but only 20% of your revenue came back as gross profit. That 5-point gap is
the trap. And it is the gap that has to cover your overheads before you see a cent of real profit.
A 25% markup does not produce a 25% margin. It never will.
WHY THE GAP MATTERS
That gross profit has to cover everything it costs to run your business: vehicles, insurance, tools, office
expenses, software, accounting. Whatever is left after those overheads is your actual net profit.
If your gross margin is not large enough to absorb your overheads, you can be winning jobs and staying
busy while still going backwards. And if you have been confusing markup with margin, you may have
been undercharging for years without realising it.
25% - Markup you applied
20% - Margin you actually earned
On a $100,000 project, that 5-point gap is $5,000 in gross profit you thought you had but do not. Before
a single overhead dollar is paid.
HOW TO WORK OUT THE RIGHT MARKUP
Start with the margin you need, then work out the markup from there. Here is how to do it in plain steps.
Say your overhead rate is 15% of revenue and you want 10% left as net profit. That means you need a
25% gross margin on every job. Here is how you find the markup that delivers it:
FINDING YOUR MARKUP FROM A 25% MARGIN TARGET
1 - Take 100 and subtract your margin target
100 minus 25 = 75
2 - Divide your margin target by that number
25 divided by 75 = 0.333
3 - Multiply by 100 to get your markup percentage
0.333 x 100 = 33.3%
To earn a 25% gross margin, apply a 33.3% markup to your direct costs.
Now work through your own numbers. Add up your annual overheads: vehicles, insurance, rent, wages
for non-billable time, all of it. Divide that total by your annual revenue. That percentage is your
overhead rate. Your gross margin target needs to sit comfortably above it.
QUICK CHECK
Take your last three jobs. For each one, subtract your direct costs from what you invoiced, then
divide that number by the invoice amount. That is your gross margin on each job. Is it high enough
to cover your overheads and leave something behind?
MAKE IT AUTOMATIC
Once you know your markup, bake it into your quoting process so it applies every time without a
manual calculation. If you need a 33.3% markup, set your template to multiply direct costs by 1.333
automatically.
Review it once a year, or whenever your overhead costs change. A markup that was right two years ago
may not be right today.
That is really all there is to it. Know the difference, know your number, and apply it consistently. The
jobs that once felt profitable but were not will start looking very different.
NOT SURE WHAT MARGIN YOUR BUSINESS ACTUALLY NEEDS?
Advisabuild helps trades and construction businesses get their pricing right and keep it right as
they grow.