Contractor markup vs. profit margin, made simple

Start with one example

Suppose a job costs $800 and sells for $1,000. The difference is $200.

The dollars are the same; the denominator is different. A 25% markup does not produce a 25% margin.

Use markup when adding a percentage to cost

The formula is price = cost × (1 + markup). For a $1,000 cost and a 20% markup, the price is $1,200. The $200 difference is about 16.7% of the selling price.

Use margin when working backward from a target

The formula is price = cost ÷ (1 − target margin). For a $1,000 cost and a 20% target margin, divide $1,000 by 0.80 to get $1,250.

Convert percentages to decimals before calculating: 20% becomes 0.20. A target margin of 100% cannot work with a positive cost because it would require division by zero.

Make sure the costs are complete

The result only reflects the costs you entered. If you omit travel, overhead, or owner labor, the calculated margin will look better than the job actually performs.

Be clear about whether you are analyzing direct job costs or all operating costs. Use the profit margin calculator to check a selling price, or the pricing calculator to work backward from a target.