Markup vs Margin: How Should a Contractor Price Work?

Both numbers describe the same gross profit: price minus cost. Markup divides it by cost; margin divides it by price. Penn State Extension puts it plainly: markup is the unit cost times the markup percentage, added to the cost to get the price, while gross profit margin is gross profit divided by the sales price (Penn State Extension).

• Price = cost × (1 + markup).
• Margin = (price − cost) ÷ price.
• Margin from markup = markup ÷ (1 + markup). A 20% markup: 0.20 ÷ 1.20 = 0.1667, a 16.7% margin.
• Markup from margin = margin ÷ (1 − margin). A 20% margin: 0.20 ÷ 0.80 = 0.25, a 25% markup.

Because price is always bigger than cost when you make money, the margin is always the smaller percentage. The gap grows as the percentages grow: a 100% markup is only a 50% margin.

Read it from the right when you start from a margin target: a 30% margin needs a 42.86% markup (0.30 ÷ 0.70 = 0.42857).

The job is fictional. A remodeler prices a bathroom at $40,000 of cost: its own labor at burdened rates, materials, and the plumber's and tile setter's quotes. It wants a 20% gross margin, because its overhead (office, vehicles, insurance, its own salary) runs about 12% of revenue and it wants about 8% net profit.

Marking up 20% because the target was "20%" leaves $2,000 of gross profit on the table on this one job ($10,000 − $8,000), and nearly halves the net profit.

Check: $14,200 + $11,300 + $8,900 + $5,600 = $40,000.

A margin target is not a guess. Add your yearly overhead (everything not charged to a job) and divide it by the revenue you expect, then add the net profit you want as a percentage of revenue. With overhead at 12% of revenue and an 8% profit goal, you need a 20% gross margin across your jobs, which is a 25% markup on cost.

Commercial estimators do the same thing in more lines. GSA's cost policy lists what general conditions, home-office overhead and profit cover (site management, temporary facilities, bonds, insurance, the share of the contractor's office costs, and the fee) and allows them to be estimated as a percentage or by a detailed build-up (GSA P120).

Contracts state change order markups as a percentage of cost. Caltrans' force-account rules, for example, pay labor plus 35%, materials and equipment plus 15%, and subcontracted work plus 10% (Caltrans payment module). A contract that allows "15% overhead and profit" on a change means 15% on cost, which is a 13.04% margin on that change.

That is why the same company can quote a 25% markup on its base jobs and be held to 15% on changes. Know which number you are being held to, and price the change from direct cost: how to price a change order works through one, the change order pricing calculator does the arithmetic, and how to handle a change order on a remodel covers the paperwork with a homeowner.

Markup is on cost and margin is on price; they describe the same dollars and are never the same percentage. Decide your target as a margin, from your overhead and your profit goal, and convert it to the markup you actually price with: margin ÷ (1 − margin).

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1. What's the Difference Between Markup and Profit? — Penn State Extension. Read October 16, 2026.
2. P120, Public Buildings Service Cost and Schedule Management Policy Requirements (GSA Order PBS 1000.6B, November 7, 2022) — U.S. General Services Administration, via the Whole Building Design Guide. Read October 16, 2026.
3. Local Assistance Module 8: Payment (January 2026), force account under Standard Specifications 9-1.04 — California Department of Transportation (Caltrans). Read October 16, 2026.