THE MISTAKE OF MARKUP

If a builder wants to make a 20% margin (also called “gross profit) to cover overhead and
profit, he has to mark up his hard costs by 25%. This little twist of math manages to
confuse many people – and has probably lead to the bankruptcy of more than a few small
contractors who thought they could mark up their jobs by 20% for a 20% gross profit. The
math, shown below is simple. To achieve a 20% margin (for overhead and profit), you need
to mark up your costs by 25% (see box below).

SAMPLE JOB MARKUP

Job Costs $10,000+ 25% markup: 2,500
Total price: 12,500
Markup ÷ Price = Margin: 2,500 ÷ 12,500 =
20%

The chart below shows how much a contractor has to mark up his hard costs in order to
make a certain margin. Margin, or gross profit, is used to pay for a company’s overhead and
to provide a net profit at the end of the year.

MARKUP VS. MARGIN

Markup Margin (Gross Profit)
15% 13.0%
20% 16.7%
25% 20.0%
30% 23.0%
35 25.9%
40% 28.6%
50% 33.0%
100% 50.0%
Note: To achieve the margin in the second column, a contractor must
mark up its hard costs by the number in the first column.

The two concepts are telling different sides of the same story. In this light, the profit margin
is addressing the profit as it relates to selling price, whereas the markup addresses the
profit as it relates to cost price.

It measures how much out of every dollar of sales a company actually keeps in earnings.
Gross Profit Margin

A financial metric used to assess a firm's financial health by revealing the proportion of
money left over from revenues after accounting for the cost of goods sold. Gross profit
margin serves as the source for paying additional expenses and future savings.

Calculated as:

Where: COGS = Cost of Goods Sold

Also known as "gross margin."