CONSTRUCTION MARKUP VS MARGIN — THE DIFFERENCE AND HOW TO BID CORRECTLY.
Markup is added to cost. Margin is taken from revenue. They produce different percentages for the same transaction. A contractor who targets 20% gross margin but bids at 20% markup achieves 16.7% gross margin on every project. On $1M annual revenue, that 3.3-point gap is $33,000 per year in unrecovered gross profit. The confusion is common. The fix is one formula and a reference table that converts any target margin to the correct bid markup.
SPM applies the correct markup-to-margin conversion in the overhead rate and bid template review at every engagement. The bid template produces the correct price for the target margin — every time.
WHY THESE TWO NUMBERS ARE NOT THE SAME AND WHY CONFUSING THEM COSTS MONEY.
Markup Is Added to Cost. Margin Is Taken from Revenue.
Markup is the percentage added on top of cost to arrive at a price. A 25% markup on $80,000 in direct costs produces a price of $100,000. Margin is the profit as a percentage of the selling price. On that same $100,000 project with $80,000 in direct costs, the gross margin is 20% — not 25%. The markup percentage and the margin percentage are always different numbers for the same transaction. A 25% markup produces a 20% margin. A 33% markup produces a 25% margin. A 20% markup produces a 16.7% margin. Confusing the two produces a bid that is systematically underpriced.
Bidding at a 20% Markup and Expecting a 20% Margin
A contractor who targets 20% gross margin and bids at 20% markup over direct costs will achieve 16.7% gross margin on every project — not 20%. On a $1M annual revenue base, that 3.3-point margin gap is $33,000 per year in unrecovered gross profit. Over 5 years, it is $165,000 — simply from confusing markup and margin at bid time. The contractor who understands the difference uses the correct markup percentage to hit the target margin: for 20% target margin, the required markup is 25%. For 25% target margin, the required markup is 33.3%.
How to Calculate the Right Markup for Any Target Margin
Required markup = target margin divided by (1 minus target margin). For 20% target margin: 0.20 divided by (1 minus 0.20) = 0.20 divided by 0.80 = 25% markup. For 25% target margin: 0.25 divided by 0.75 = 33.3% markup. For 15% target margin: 0.15 divided by 0.85 = 17.6% markup. These are the bid markup rates that produce the corresponding gross margin on revenue. Applying these formulas at bid time eliminates the margin gap from markup/margin confusion.
THE CORRECT CALCULATION FROM DIRECT COST TO FINAL BID PRICE.
| TARGET GROSS MARGIN | REQUIRED MARKUP ON COST | EXAMPLE ON $400K DIRECT COST |
|---|---|---|
| 15% | 17.6% | $470,400 bid price |
| 18% | 22.0% | $488,000 bid price |
| 20% | 25.0% | $500,000 bid price |
| 22% | 28.2% | $512,800 bid price |
| 25% (SPM target) | 33.3% | $533,200 bid price |
| 30% | 42.9% | $571,600 bid price |
The overhead rate connection: Direct cost in this calculation includes all direct job costs — labor, material, equipment, subcontractors, and direct job expense. Overhead is then applied as a separate markup on top of direct cost, before the profit markup. The correct sequence: direct cost → add overhead → add profit. The overhead markup and profit markup are both applied to recover different cost categories, and both need to be correctly calculated to hit target net margin.
FREQUENTLY ASKED.
