Markup vs Margin: Differences and Formulas

What markup and margin each measure

Both start from the same dollar figure, gross profit: the selling price minus the direct cost of the work. Direct cost is what you spent to do that particular job, such as materials, field labor, subcontractors (outside companies hired for part of the work) and equipment, before office rent, insurance and other overhead.

Markup compares that profit with the cost. Margin compares it with the price.

• Markup = (price - cost) / cost
• Margin = (price - cost) / price

Take a service call where parts and labor cost $400 and the invoice is $520. Gross profit is $120. The markup is $120 / $400 = 30%. The margin is $120 / $520 = 23.1%. Same $120, two different percentages.

Since the price is bigger than the cost on any job that makes money, margin always comes out lower than markup. Price a job at twice its cost and you have a 100% markup, but only a 50% margin.

Margin is also the number your accountant reports. Gross margin on a profit and loss statement, the report of a period's income and expenses, is gross profit divided by revenue. The OpenStax accounting textbook calls it the gross profit margin ratio and describes it as the part of revenue left to cover operating expenses, the day-to-day costs of running the business, and profit.

How to convert markup to margin and back

You only need two formulas. To turn a markup into a margin, divide the markup by 1 plus the markup: a 25% markup is 0.25 / 1.25 = 20% margin. To go the other way, divide the margin by 1 minus the margin: a 30% margin needs 0.30 / 0.70 = 42.9% markup.

If you know the margin you want, you can skip the markup entirely. Price = cost / (1 - target margin). A job costing $7,000 at a 30% margin sells for $7,000 / 0.70 = $10,000, which leaves $3,000 of gross profit.

Watch the vocabulary as well as the math. Some pricing guides use "markup" for both numbers and add "on cost" or "on selling price" to tell them apart. A University of Maine Extension bulletin on pricing points out that a 50 percent markup on cost is only a 33 1/3 percent margin on the selling price, and gives 1.4286 as the multiplier for a 30% margin. When someone quotes you a markup, ask whether it's on cost or on price.

Worked example: the 20% markup that wasn't a 20% margin

A roofing contractor prices a tear-off and re-roof on a ranch house. The direct costs are $9,400 for shingles, underlayment and flashing, $6,080 of field labor, $1,550 for a gutter subcontractor, $1,150 for the dumpster and disposal, and a $320 permit. Total: $18,500.

The labor line is 128 crew hours at $47.50 an hour. That's a burdened rate, meaning wages plus the payroll taxes, insurance and benefits that come with each hour.

The owner has told the estimator that every job needs a 20% margin. The estimator adds 20% to cost and sends the quote.

The right price was $18,500 / (1 - 0.20) = $23,125. The quote came in $925 short, and the job looks fine until someone checks its margin at closeout.

It hurts more than $925 suggests. The owner picked 20% because overhead (the office, the estimator's salary, trucks, insurance, software) runs about 12% of revenue, which should leave 8% profit. On a $23,125 price, that's $2,775 for overhead and $1,850 of profit. At $22,200, the job still has to carry the same $2,775 of overhead, so profit drops to $925. One wrong formula cut the job's profit in half. Across 40 similar roofs a year, it's $37,000.

The fix is one cell in the estimating sheet: multiply cost by 1.25 instead of 1.20, or use price = cost / (1 - target margin).

Stacked percentages for overhead and profit

Some contractors quote overhead and profit as two separate percentages, such as "10 and 10." How the two combine depends on the contract wording: on $10,000 of cost, the difference is $100.

If they're added, $10,000 of cost becomes $12,000, a 20% markup and a 16.7% margin. If they compound, profit is figured on cost plus overhead. $10,000 plus 10% is $11,000, and 10% of that is $1,100, for a price of $12,100. That's a 21% markup and a 17.4% margin. Either way, "10 and 10" is not a 20% margin.

Cost-plus contracts, where the client pays your actual costs plus an agreed fee or percentage, run on markup by design, and so does most time and materials work, billed on actual hours and materials. The contract states the percentage you may add to actual costs. Read the clause for what the percentage applies to: labor, materials, subcontractor invoices or all three.

Federal work is different. FAR 16.102, the federal procurement rule (version effective March 13, 2026), bars cost-plus-a-percentage-of-cost pricing, and federal prime contracts other than firm-fixed-price ones must ban it in subcontracts too.

When to use markup and when to use margin

Set targets in margin. Owners and accountants talk in margin because it comes straight off the profit and loss statement and lines up with overhead, which is usually measured as a share of revenue.

Price in markup, but derive it from the margin. If the target is a 30% margin, the markup in your estimating template is 42.9%, not 30%.

Markup also shows up when you rebill job costs to a client. Permit fees, equipment rentals and materials bought for one client are often billed back at cost plus a percentage, while some contracts treat them as pass-through costs billed at cost. Our article on what CFOs need to know about billable expenses covers deciding what counts as billable and getting it onto invoices.

Any percentage is only as good as the cost underneath it. If labor goes into the estimate at the bare wage instead of the burdened rate, the markup sits on a number that's too low. Tracking what each job really cost, as our guide to job costing for contractors explains, is how you find out whether your estimates hold up.

Applying markup to billable costs

When a business passes job costs through to clients, the markup should land the same way on every line, whoever prepares the invoice.

In Clyr, any expense, or any single line of a split, can be flagged billable with its own billing amount, and a percentage markup is applied automatically by your policy. Those billable lines reach the client side of your connected platform, coded and documented, so you can invoice them in your usual billing workflow. Clyr's page on billable expenses and markup shows the line-level flag and the policy setting.

Set that policy percentage with the table above in mind. A 15% markup on billable materials is a 13.0% margin on those lines.

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