Add 20% to your costs and you are not making 20%. You are making 16.7%. On a million pounds of turnover that gap is about £33,000 you thought you had and did not.
1. What the job costs you
2. How you price it
Markup is what you add on top of cost. Margin is what you keep out of the price. They are not the same number.
Markup and margin are not the same number
Markup is what you add on top of your cost. Margin is what you keep out of the price you charged.
A £100 cost with 25% markup is priced at £125. The £25 profit is 25% of the cost but only 20% of the £125 price. So a 25% markup is a 20% margin.
The gap widens as the numbers get bigger, which is why it catches people out on the jobs that matter most.
Markup to margin
| You add this markup | You actually keep this margin |
|---|---|
| 10% | 9.1% |
| 15% | 13.0% |
| 20% | 16.7% |
| 25% | 20.0% |
| 30% | 23.1% |
| 40% | 28.6% |
| 50% | 33.3% |
| 100% | 50.0% |
Margin to markup
This is the direction you actually want when you are quoting. Decide the margin, then work out what to add.
| To keep this margin | Add this markup |
|---|---|
| 10% | 11.1% |
| 15% | 17.6% |
| 20% | 25.0% |
| 25% | 33.3% |
| 30% | 42.9% |
| 35% | 53.8% |
| 40% | 66.7% |
| 50% | 100.0% |
Questions we get asked
What is the difference between markup and margin?
Markup is a percentage of your cost. Margin is a percentage of your selling price. A 25% markup gives you a 20% margin, because the profit is measured against a bigger number.
How do I convert markup to margin?
Margin equals markup divided by one plus the markup. So 20% markup is 0.20 divided by 1.20, which is 16.7%.
How do I convert margin to markup?
Markup equals margin divided by one minus the margin. So to keep a 25% margin you divide 0.25 by 0.75, which means adding 33.3%.
What margin should a construction business aim for?
It depends on your overheads more than on your trade. The useful question is not what margin the industry makes, it is what margin covers your overheads and leaves a net profit you are happy with. Work backwards from that rather than copying a number.
Should I add markup to materials as well as labour?
Yes. Materials carry cost, cash and risk. Handling them ties up money and you carry the waste, the damage and the price movement. A business that marks up labour only is being paid nothing for all of that.
Does CIS affect my margin?
No. CIS is a deduction against your own tax bill taken early, not a cost. It changes your cash flow, sometimes severely, but the job made what the job made.
If you cannot see this per job
This calculator prices one job. The harder question is which of the jobs you already did actually made money, and most construction businesses cannot answer it until the annual accounts arrive, by which point they have quoted three more the same way.
That is what job costing is for. Or see whether we are a fit.
Who we work with
- Sector: construction only. Contractors, subcontractors and the trades that work on site.
- Turnover: roughly £500,000 to £5 million a year.
- Structure: mostly limited companies, plus established sole traders and partnerships.
- Where: our office is in Cannock, Staffordshire. We work with clients across the UK on cloud accounting.
Who we are not for: businesses outside construction, property developers, brand new start-ups with no trading history, and anyone who wants filing done and nothing else.
If you are not sure, here is the longer version. We will tell you on the first call if we are not the right fit.