Markup versus margin: why 20 percent on cost is not 20 percent of the price
A painting contractor adds 20% to the estimated cost of a quote. The owner expects that to leave 20% of the selling price. The two percentages use different bases, and the quote leaves less than the owner thought.
Markup is the amount added expressed against cost; margin expresses the difference between price and cost against price. The cited pricing and gross-margin guidance use those different denominators. Define the cost included before using either figure: gross project margin does not by itself establish company net profit. A target percentage is your company's pricing choice, while a change's allowable additions depend on its commercial terms.
Check the denominator before sending the price
- Agree the cost basis. Identify labour, materials and the other items included in the build-up. State whether overhead is included or funded from the price-cost difference. Do not compare one quote's direct-cost margin with another's all-in result as though they were equivalent.
- Calculate the added amount. Subtract the stated cost from the proposed price. Markup percentage is that difference divided by cost, multiplied by 100. Use the same units and basis for both figures, with taxes treated consistently.
- Calculate the margin separately. Divide the same difference by selling price and multiply by 100. Label the denominator on the worksheet. A larger price denominator makes the margin percentage lower than the corresponding positive markup percentage.
- Work back from a chosen target. For this simple build-up, price equals cost divided by one minus the target margin expressed as a decimal. The equivalent markup is margin divided by one minus margin. These are conversions, not recommended profit targets.
- Keep a small reference list. On the same simplified basis, 10% markup gives about 9.09% margin; 20% gives 16.67%; and 25% gives 20%. Recalculate from the actual amounts when sending a quote so rounding does not hide the difference.
- Review the commercial position. Check exclusions, remaining risk and any agreed pricing limits before issue. A percentage that meets a worksheet target does not guarantee the customer will accept the price or that every cost in it is chargeable.
Common mistakes
- Using the words interchangeably when approving a price.
- Changing the included cost items without changing the comparison label.
- Assuming a calculated markup overrides the contract's pricing provisions.
Checklist
On the quote worksheet
- Cost basis stated.
- Price-cost difference shown.
- Markup divided by cost.
- Margin divided by price.
- Target and rounding identified.
- Scope and commercial terms checked separately.
Check your understanding
A quote has a 25% markup on its stated cost. Is its margin also 25%?
Show the answer
Its margin is 20% on that simplified basis: price is 1.25 times cost, so the difference divided by price is 0.25 divided by 1.25. Confirm what the cost includes before interpreting the result as gross or net profit.
