Two percentages, two denominators
Markup answers a cost question: how much was added on top of what the job cost? Margin answers a selling-price question: how much of the price is left after the job cost? Both are legitimate ways to talk about profit, but they are not interchangeable.
Contractors often say "I price at 25%" without saying which one. If the intent is a 25% gross margin, adding 25% to cost delivers only 20%. The gap grows as the percentage rises, which is why the difference matters more on high-margin work.
margin = profit ÷ price · markup = profit ÷ costConverting between markup and margin
With a 25% markup, margin is 0.25 ÷ 1.25 = 20%. With a 25% margin, markup is 0.25 ÷ 0.75 = 33.3%. Those are the same cost and the same profit language, but prices differ by more than 6%.
- Price from a target margin: price = cost ÷ (1 − margin).
- Price from a target markup: price = cost × (1 + markup).
- Margin from markup: margin = markup ÷ (1 + markup).
- Markup from margin: markup = margin ÷ (1 − margin).
Markup vs margin chart
Use this conversion chart as a quick check, then calculate the exact value for the job. Read the first column as a markup added to cost and the second as the gross margin that results. The chart does not include payment processing, overhead or tax.
To go the other direction, divide the target margin by one minus the target margin. A 25% target margin requires a 33.3% markup; a 30% target margin requires a 42.9% markup. The divide-by-price method in the calculator avoids the conversion entirely.
| Markup on cost | Equivalent gross margin |
|---|---|
| 10% | 9.1% |
| 15% | 13.0% |
| 20% | 16.7% |
| 25% | 20.0% |
| 30% | 23.1% |
| 35% | 25.9% |
| 40% | 28.6% |
| 45% | 31.0% |
| 50% | 33.3% |
| 60% | 37.5% |
| 75% | 42.9% |
| 100% | 50.0% |
Worked example
The example ignores payment processing so the markup-versus-margin effect is visible on its own. Processing adds another percentage of price that has to fit inside the denominator.
Illustrative example: a $1,000 job cost
- 25% markup: $1,000 × 1.25 = $1,250. Profit is $250, which is 20% of the $1,250 price.
- 25% margin: $1,000 ÷ 0.75 = $1,333.33. Profit is $333.33, which is 25% of the $1,333.33 price.
- The difference in price is $83.33 for the same $1,000 of cost.
To earn a 25% margin, price at $1,333.33, not $1,250.
Payment processing changes the denominator
A card processor typically keeps a percentage of the amount charged. That fee is calculated on the price, just like margin. If you solve for price with only margin in the denominator, the processing fee comes out of the profit you intended to keep.
QuoteFormula uses price = true job cost ÷ (1 − target margin − payment-processing rate). With a $1,000 cost, a 25% margin and a 3% processing rate, price is $1,000 ÷ 0.72 = $1,388.89. The processing fee is $41.67 and profit is $347.22, which is 25% of the price after the fee.
price = cost ÷ (1 − margin − processing rate)How much should you mark up materials?
There is no universal material markup. A material markup can recover handling, cutting, waste, storage, warranty risk and the cost of carrying inventory, or it can simply be one part of the overall margin. Those are different jobs and they do not produce the same percentage.
The safer method is to put material cost into the job at what you actually pay, add an explicit allowance for waste or handling when the scope supports it, and then apply the target margin to the whole job. If you use a separate material markup, check that the combined result still produces the margin you intend. A 20% material markup stacked on a 20% overall markup is not a 20% margin.
The same logic applies to labor and subcontractors. Markup on labor is not a substitute for a loaded labor rate, and markup on a subcontractor is not a substitute for verifying the subcontract scope and price. Keep each cost visible, then price the job once.
- Do not mark up a cost in two places and assume the percentages add cleanly.
- Separate a waste or handling allowance from profit so the customer and the estimate can show what the money is for.
- Test the final price with the margin formula, not by adding a percentage to the accumulated cost.
- Review material markup against actual invoices and waste; a markup that never covers handling is not doing its job.
Common margin mistakes
- Adding the margin percentage to cost and believing the result is margin.
- Applying a second markup to an already marked-up subtotal without tracking what the combined percentage means.
- Treating sales tax as revenue or as profit. Tax collected for a jurisdiction is not the business's money.
- Quoting a margin before the estimate is complete, then discovering that overhead or contingency was never in the cost.
- Comparing your margin with another contractor's markup, or with a competitor's price, without knowing which denominator they used.
Choosing a target is a business decision
QuoteFormula does not recommend a target margin. The right target depends on the risk in the work, the cost of capital, the owner's required return, the competitive situation and the reliability of the estimate. What the calculator does is make the arithmetic honest once you choose a target.
Whatever target you choose, apply it consistently and review it against actual results. A margin that looks adequate on paper but repeatedly produces less profit in practice is a signal to examine cost estimates, scope control or the target itself.
Sources and scope
QuoteFormula records
- QuoteFormula calculation methodology and formula version 2026.10.1
- Figures recorded by the contractor in this browser
- Illustrative worked examples written for this guide
Primary sources
These guides explain QuoteFormula's arithmetic and common contractor business concepts. They do not provide tax, legal, payroll, insurance or accounting advice. Every example is illustrative, not a benchmark, market rate or promise of profit.
Editorial details
Found an error? Compare the arithmetic with the published methodology, the data sources page and the editorial policy.