Markup vs margin for contractors: the formulas, a quick conversion table, and how to stop getting it wrong on quotes

Markup is the profit you add on top of cost, as a percentage of that cost. Margin is the same profit as a percentage of the selling price. It's the same pound of profit divided by a different number, so margin is always the smaller figure - a 25% markup gives a 20% margin, and a 20% markup gives you only 16.7%.

This is for contractors, subcontractors, installers and suppliers who price their own jobs. The formulas, a worked example, a conversion table and the Excel versions come first. After that, where margin actually leaks, which is pretty much always in the rules wrapped around the markup on each quote.

Markup is what you add on top of cost, as a percentage of that cost. It's the number you use to build a price.

Margin (gross margin) is how much of the selling price is profit, as a percentage of the price. It's the number your accounts use.

The formulas:

• Price = cost × (1 + markup)
• Markup = (price − cost) ÷ cost
• Margin = (price − cost) ÷ price
• Markup to margin: margin = markup ÷ (1 + markup)
• Margin to markup: markup = margin ÷ (1 − margin)
• Price for a target margin = cost ÷ (1 − margin)

Because a profitable price is always bigger than the cost, margin is always smaller than markup. Margin can never reach 100%, whereas markup can go well past it.

Work both out on figures excluding VAT. If you're VAT-registered, the VAT you charge is collected for HMRC rather than earned, so leaving it in makes the margin look bigger than it is. (If you're not VAT-registered, the VAT you pay on materials is part of your cost.)

Say a flooring job has £4,500 of materials and £3,500 of labour, priced at a 25% markup (the figures are illustrative).

Materials                          £4,500
Labour                             £3,500
Direct cost (ex VAT)               £8,000

Markup 25%     £8,000 x 1.25     = £10,000 price
Profit         £10,000 - £8,000  =  £2,000
Margin         £2,000 / £10,000  =     20%

VAT at 20%, added last             £2,000
Customer pays                     £12,000

So the 25% markup gives you a 20% margin. If you wanted a 25% margin instead, the price is £8,000 ÷ 0.75 = £10,666.67, which is a 33.3% markup.

And if someone works the margin out on the £12,000 the customer pays, they get 33.3%. That's wrong - £2,000 of it belongs to HMRC.

Use this instead of a markup calculator. Find the markup you add to read off the margin it gives, or find the margin you want to see the markup it needs. Everything's rounded to one decimal place.

MARKUP YOU ADD    MARGIN YOU GET
     10%               9.1%
     15%              13.0%
     20%              16.7%
     25%              20.0%
     30%              23.1%
     40%              28.6%
     50%              33.3%

MARGIN YOU WANT   MARKUP YOU NEED
     10%              11.1%
     15%              17.6%
     20%              25.0%
     25%              33.3%
     30%              42.9%
     40%              66.7%
     50%             100.0%

Put the cost in B2, the markup in C2, the price in D2 and the margin in E2. Type percentages as percentages (25%, not 25) and format the answer cells to match. Each formula goes in one cell.

=B2*(1+C2)

=(D2-B2)/D2

=C2/(1+C2)

=E2/(1-E2)

=B2/(1-E2)

The business decides it needs a 20% margin, and the estimator adds 20% to cost. On one job the gap looks small (£9,600 instead of £10,000 on £8,000 of cost) and nobody notices, because every quote still looks profitable.

Over a year of work it stops looking small. Illustrative figures, not a real firm:

ILLUSTRATIVE: £1,000,000 of direct cost priced and won in a year,
£150,000 of overheads

                  Meant to charge      Actually charged
                  (20% margin)         (20% markup)
Turnover            £1,250,000           £1,200,000
Gross profit          £250,000             £200,000
Gross margin             20.0%                16.7%
Overheads             £150,000             £150,000
Net profit            £100,000              £50,000

The overheads don't shrink, so the whole £50,000 comes off the bottom line and net profit halves. The lower prices may have won a few extra jobs, but nobody chose that trade-off - it came from a formula in a cell.

The formula is the easy bit. A real quote is rarely one cost with one markup on top, and these are the places margin quietly leaks:

• Different markups for materials, labour and trades. Mark materials up 15% and labour 35% on the job above and you get a £9,900 price - a 23.75% blended markup and a 19.2% margin. Neither figure appears anywhere on the quote unless someone works it out.
• Minimum charges and small-job premiums. A small job at your standard markup can lose money once travel, setting up and admin are counted. A minimum only works if it's applied every time.
• Uplifts for access, height and out-of-hours work. Does the uplift go on labour only, or on everything? And is it remembered on every quote, by everyone who quotes?
• Overhead recovery. If your markup is meant to cover overheads, the markup that was right at one turnover is wrong at another.
• Discounts. Take 5% off the £10,000 quote and profit falls from £2,000 to £1,500. That's a quarter of the profit gone, and the margin drops to 15.8%.
• The rules live in one estimator's spreadsheet. When they're off, quotes slow down or go out on guesswork. (More on that in what a pricing spreadsheet does well, and where it breaks.)
• Nobody sees margin per quote or per customer. You find out which customers you've been pricing too keenly when the year-end accounts turn up.

A better calculator doesn't fix any of this. What does is applying the same rules the same way on every quote, and checking the margin before it goes out.

We build quoting tools for construction firms around the way they already price. Your markups by trade, material and labour, your minimum charges, your uplifts for access, height or out-of-hours work - all set up once and applied automatically on every quote. No spreadsheet to keep in step, no calculator, no conversion table.

• The margin shows on each quote before it's sent, and gets checked against the minimum you set.
• Apply a discount and you see what it does to the margin straight away.
• Everyone on the team prices the same way, not just the person who built the workbook.
• Margin can be reported per quote and per customer, so the keenly priced customers show up within weeks rather than at year end.

For one client, a UK specialist supplier, pricing a quote went from about 1 to 2 hours to about 5 minutes. That's one client's result, and yours depends on how you price.

To see the idea before talking to anyone, the sample quoting tool prices a job for a fictional flooring contractor from a rate library, applies an out-of-hours labour uplift, checks the margin against an 18% minimum and produces a branded PDF quote. There's no sign-up. There's more on how we build these on our construction page.

When you don't need one. If your jobs are priced with one markup, you send a handful of quotes a week and the formulas above live in a spreadsheet everyone trusts, stick with the spreadsheet. A tool earns its place when the rules have multiplied and only one person can apply them all.

Start by checking your own quotes against the conversion table. If the markup you add doesn't give the margin you need, sort that first - it costs nothing.

If your pricing has more rules than one markup, have a play with the sample quoting tool (no sign-up), see what a build costs (fixed-price builds from £3,000, excluding VAT), or book a free 30-minute quoting review. Bring one recent quote and we'll tell you whether a tool is worth it (and if it isn't, we'll say so).

Comparing products first? Have a look at construction estimating software: your options and costs.