Markup is the percentage a builder adds to job cost to set the selling price, covering overhead and profit. A 25 percent markup on $100,000 of cost gives a $125,000 price. Margin is measured on the selling price, so a 25 percent markup is a 20 percent margin.
What Is Markup in Construction?
Every price you give a client starts with what the job will cost you: labor, materials, subs, permits and equipment. Markup is what you add on top of that cost so the job pays for your business and leaves a profit.
It is usually written as a percentage of cost. If the job costs you $100,000 and your markup is 25 percent, you add $25,000 and the price is $125,000.
Markup vs Margin
This is where pricing goes wrong. Markup and margin use the same dollars but measure them from different starting points.
- Markup is the gap between cost and price (overhead plus profit) divided by your cost.
- Margin is the same dollars divided by your selling price.
Take one job, with example numbers only. It costs $80,000 and sells for $100,000. The gap is $20,000.
- As markup: $20,000 divided by $80,000 = 25 percent.
- As margin: $20,000 divided by $100,000 = 20 percent.
Now picture a builder who wants a 25 percent margin and simply adds 25 percent to cost. They think they're keeping a quarter of every dollar. They're really keeping 20 cents, and that 20 cents still has to pay overhead before any of it is profit. On $1 million of job cost, that's $62,500 less than they thought they had.
Markup to Margin, Side by Side
Here is how common markups line up with the margin they really give you (the math, not industry averages):
- 10 percent markup = about 9 percent margin
- 15 percent markup = about 13 percent margin
- 20 percent markup = about 17 percent margin
- 25 percent markup = 20 percent margin
- 33 percent markup = about 25 percent margin
- 50 percent markup = about 33 percent margin
The margin is always the smaller number. If someone quotes you a percentage, ask which one they mean.
How to Set Your Markup
- Know your overhead. Add up a year of costs that aren't tied to one job: office, vehicles, insurance, software, marketing, and your own pay for office and management time. Hours you work in the field go into job labor cost.
- Know your volume. Estimate the total job cost you expect to build in that year.
- Divide. Overhead divided by job cost tells you the markup you need just to break even.
- Add profit. Turn your profit goal into dollars, add it to overhead and divide by the same job cost. Example numbers only: $150,000 of overhead plus $150,000 of profit on $1.5 million of job cost is a 20 percent markup, about a 17 percent margin.
- Check it after every job. Compare what you planned with what the job really cost. If costs ran over, your real markup was lower than the one you priced.
Where Markup Goes Wrong
- Estimating loose. Markup is a percentage of cost. If the cost estimate misses items, the markup on those items is missing too. A line-by-line construction estimating template helps you catch them.
- Adding contingency after markup. Put allowances and contingency into the cost first, then mark up, as in estimating costs line by line. Otherwise the markup doesn't cover them.
- Forgetting markup on change orders. A change order is new cost, so it needs markup too. Some builders charge more on changes because they break the schedule. Set your change order markup in the contract before the job starts.
- Allowance overages at cost. When a client goes over an allowance, mark up the overage too. Otherwise you do that work for nothing.
- Letting the job drag. Overhead runs by the month. A job that runs two months long uses up markup you priced as profit.
- Using margin and markup as one number. Pick one way of talking about it and use it everywhere in your company.
- Cutting markup to win the job. A lower markup doesn't lower your overhead. It just means less is left to pay it.
- Not tracking actuals. You only know what you made if you track job costs as the bills come in.
Markup in Your Estimate and Budget
Markup belongs in the estimate, where it turns cost into price. Once the job is sold, strip it back out. Your construction budget tracks the cost side only, so you can see whether each line is on target. The difference between the budget and the contract is your planned gross profit: overhead comes out first, then what you keep. Watching that gap through the job tells you whether you'll keep it.
Billing follows the price, not the cost. A bank draw bills the contract price, so each draw carries its share of markup. On a cost-plus job, your statement shows your costs plus your fee.
In Smart Builder 360, a project estimate organizes costs by category and shows contract pricing and projected profit before you send the price, and Estimated vs Actual tracks cost variance and profit as the job runs.
Frequently Asked Questions
What is markup in construction?
It is the percentage you add on top of what the job costs you, to get the price you charge. If labor, materials and subs come to $80,000 and you use a 25 percent markup, you add $20,000 and price the job at $100,000. That $20,000 has to pay your overhead and your profit.
What is the difference between markup and margin?
Markup is measured on your cost. Margin is measured on your selling price. On a job that costs $80,000 and sells for $100,000, the $20,000 gap is a 25 percent markup but only a 20 percent margin.
How do I turn a margin goal into a markup?
Divide the margin you want by one minus that margin. For a 20 percent margin, that is 0.20 divided by 0.80, which gives a 25 percent markup. Do this once for your target and write it down, so nobody prices from the wrong number.
Does markup have to cover overhead?
Yes. Your markup pays for everything that isn't on the job's cost sheet, like the office, the truck, insurance, software and your own time, and then leaves profit. If your markup only covers profit, overhead eats it.
What markup should a builder use?
There is no single right number. It depends on your overhead, the size and risk of the job, your market and how much profit you need. Work out what your overhead costs you in a year, add the profit you want, and set a markup that covers both.
Should markup show on the client's proposal?
On a fixed-price job, you usually give the client the price, and the markup stays in your estimate. On a cost-plus job, the client sees your costs and your fee. Your construction budget is the cost side only, and the gap between the budget and the contract price is your markup.
