Markup vs. Margin: The Math That's Costing You Thousands

Why This Math Matters

If you’re in the building industry and still using markup to set your prices, you might be bleeding profit without even knowing it. One of the most common financial mistakes in construction is confusing markup with margin — and while the terms sound similar, getting them wrong can mean the difference between a profitable project and a financial setback.

Let’s break down the math, show you where most builders go wrong, and help you set pricing strategies that ensure your business consistently hits 15–20% gross margins.

Markup vs. Margin: What’s the Difference?

At a glance:

• Markup is the percentage you add on top of your cost.

• Margin is the percentage of the final sales price that’s profit.

Here's how they work in practice:

Notice that a 20% markup does not give you a 20% margin. That’s where many builders get tripped up — thinking a “20% markup” means a healthy margin. In reality, you’re often walking away with far less.

The Fix: If your goal is a 20% gross margin, you need to set prices using margin-based calculations, not markups.

The Right Math: How to Hit a 20% Gross Margin

To calculate your required markup to hit a desired margin, use this formula:

Markup % = Margin % ÷ (1 - Margin %)

So, if you want a 20% margin:

• Markup = 20% ÷ (1 - 0.20) = 25%

That means for every $100 in cost, you must price the item at $125 to achieve a 20% gross margin.

Want to build in a 15% margin?

• Markup = 15% ÷ (1 - 0.15) = 17.6%

This adjustment is simple once you understand it — and it has a significant impact on your bottom line.

Why It Matters in the Real World

Let’s say you do $1.5 million in material sales annually and you use a 20% markup thinking you’re earning a 20% margin. You’re actually only getting about 16.7%.

That 3.3% difference is costing you:

$1,500,000 x 3.3% = $49,500

That’s $49,500 in missed profit — for the exact same work and materials.

Multiply that across labor, equipment, and subcontracted work, and the losses compound fast.

Strategies to Standardize Profit-Driven Pricing

To make sure every job is priced for profit:

1. Price Backwards From Target Margins

Set a company-wide gross margin goal (e.g., 20%) and use it as the foundation for all estimates and bids.

2. Use Margin Calculators or Estimating Software

QuickBooks, Buildertrend, and other estimating tools can automate margin-based pricing. Avoid manual markups on spreadsheets unless your team is trained in the math.

3. Train Sales and Estimating Teams

Everyone pricing jobs should understand the difference and be aligned with margin targets — especially in today’s cost-sensitive environment.

4. Apply Consistently Across All Categories

Don’t just apply this to materials. Labor, subcontractor work, rentals — all of it should be priced based on margin, not markup.

Construction Case: Small Fix, Big Gain

One of our clients in West Michigan was using a 30% markup across the board. When they switched to a 25% markup (to match their 20% margin target), they began tracking margins in real-time and found they had been underestimating job profits by 8–10%.

After correcting their pricing system:

• Their job win rate improved (less sticker shock)

• Their cash flow stabilized (thanks to improved planning)

• They finally saw predictable profit margins on every project

Final Thought

Understanding the difference between markup and margin is more than a math lesson — it's a business survival skill in a competitive market. Small corrections in pricing strategy can lead to tens of thousands in additional annual profit.

If you’re unsure whether your pricing strategy is aligned with your profit goals, now is the time to check.

Need help pricing your materials or sourcing high-quality building supplies at consistent margins?
📞 Contact Construction Material Specialists in Grand Rapids — we’re here to help your next project start strong and stay profitable