General Contracting business guide
Markup vs margin: how general contractors should price jobs
Markup is what you add on top of job cost; margin is the share of the selling price you keep. They describe the same dollars, so a 25% markup is only a 20% margin, and a 50% markup is about a 33% margin. Pick the margin your overhead and profit require first, then convert it into a markup.
You finish a bathroom bid, add a 20% markup to your costs, and figure you're making 20%. You aren't. You're keeping about 16.7 cents of every dollar the client pays, and after the office, the truck and the insurance take their share, that bathroom might clear a few hundred dollars. Markup and margin are the same money seen from two sides, and confusing them is how a busy remodeling company stays busy and still runs short on cash.
Two formulas, one difference that matters
Markup is measured against your cost: price minus cost, divided by cost. Margin is measured against the selling price: price minus cost, divided by price. The dollar gap is identical. Only the bottom of the fraction changes, and because the price is always bigger than the cost, the margin percentage is always the smaller one.
Two conversions are all you need:
- Markup needed for a target margin = margin divided by (1 minus margin).
- Margin you get from a markup = markup divided by (1 plus markup).
So a 30% margin needs a markup of 0.30 divided by 0.70, or about 42.9%, not a 30% markup.
Markup to margin conversion table
| Markup on cost | Gross margin on price | $10,000 of cost sells for |
|---|---|---|
| 10% markup | about 9.1% margin | $11,000 |
| 20% markup | about 16.7% margin | $12,000 |
| 25% markup | 20% margin | $12,500 |
| 33.3% markup | 25% margin | $13,333 |
| 42.9% markup | about 30% margin | $14,286 |
| 50% markup | about 33.3% margin | $15,000 |
| 66.7% markup | 40% margin | $16,667 |
Rounded to the nearest dollar or tenth of a percent. The math is fixed; which row fits your company depends on your overhead and the profit you want.
Worked example: pricing a kitchen from your real overhead
Example numbers
A kitchen remodel has $70,000 of direct cost: $38,000 in subcontractor bids, $22,000 in cabinets, counters and materials, $8,000 of your own crew's loaded labor, and $2,000 for the permit, dumpster and portable toilet.
Last year the company did $1,000,000 in revenue and spent $180,000 on overhead: the owner's salary, office, trucks, insurance, software and all the hours spent estimating jobs that never signed. That's overhead of about 18% of revenue.
The owner wants a 10% net profit, so the job needs a gross margin of 18% plus 10%, or 28%.
Markup needed: 0.28 divided by 0.72 is about 38.9%. Price: $70,000 times 1.389 is about $97,200.
If the owner had simply added a 28% markup instead, the price would be $89,600. Gross profit would be $19,600, a margin of about 21.9%. Overhead at 18% of that price is about $16,100, leaving roughly $3,500 of net profit instead of about $9,700. Same kitchen, same crew, and the confusion costs more than $6,000.
Notice where the 18% came from: last year's books, not a number someone mentioned at a supply house. If you're planning to add a salaried person, their cost lands in overhead and changes this math, which is worth running before you decide when to hire a project manager.
The traps that shrink your real margin
- Your own labor left out of cost. If you frame or trim out yourself, price your hours as job cost. Otherwise the "margin" is just your wages coming back to you.
- Sub bids with quiet exclusions. A tile bid that excludes the shower pan or a drywall bid that excludes texture leaves a gap you'll pay for at cost with no markup.
- Allowances priced at cost. When a client picks a pricier fixture, the overage should carry your markup too. The details are in how to handle allowances in remodeling bids.
- No warranty reserve. Callbacks after closeout cost real money. Some GCs set aside a small slice of each job's price for them.
- Overhead from an old year. Insurance renewals and a second truck move your overhead percentage. Recalculate at least once a year.
Fixed price versus cost-plus
On a fixed-price contract, the client sees one number and the markup is baked in. On a cost-plus job, the fee is written as a percentage, and that's where the markup and margin mix-up bites hardest. "Cost plus 20%" sounds like a 20% business, but the margin is about 16.7%, and supervision time on cost-plus jobs tends to run long because the client can add work freely. If you run cost-plus, price the fee from the margin you need, the same way as the example above.
Check your last three jobs this week
Pull the final selling price and the final real cost of your last three finished projects, including change orders and every late invoice. Divide gross profit by price for each. If the margins come out well below the markup you thought you were using, you've found the gap. Fix the markup on your next bid before you touch anything else. Then reuse that real margin everywhere you estimate: the missed-project math on our page for general contractors uses 25% as a stand-in, and your own figure will tell you far more.
Questions owners ask
Is a 20% markup enough for a general contractor?
For most remodelers it's thin. A 20% markup is roughly a 16.7% gross margin, and many small GCs carry overhead of 12% to 20% of revenue before any profit. Run your own overhead percentage from last year's books; if it's anywhere near 15%, a 20% markup leaves almost nothing.
Should I use the same markup on subcontractor bids and materials?
Plenty of GCs don't. Some put a slightly lower markup on large sub packages and a higher one on materials, small purchases and self-performed labor. That works as long as the blended margin across the whole job lands on your target. Check the job total, not each line.
What do I say when a client asks what my markup is?
On a fixed-price contract you can say the price includes your overhead, supervision, warranty and profit, and leave it there. On a cost-plus contract the fee is disclosed by design, so write it clearly and remember that cost plus 20% gives you a margin of about 16.7%, not 20%.
What's the difference between gross margin and net profit?
Gross margin is what's left after direct job costs like subs, materials, permits and field labor. Net profit is what's left after company overhead too: your office, trucks, insurance, estimating time and the owner's pay. A job can show a healthy gross margin and still lose money on the net line.
Do change orders get the same markup as the original bid?
Usually they should carry at least the same markup, and many GCs add a bit more because change work interrupts the schedule and eats supervision time. Whatever you choose, put the change order markup in the contract so the client isn't surprised when the first one arrives.