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TL;DR: Markup is calculated on cost. Margin is calculated on revenue. A 20% markup produces a 16.7% gross margin — not 20%. Most subcontractors bid using markup in their estimating software but analyze profit using margin on their P&L. The mismatch makes the business look less profitable than expected because the numbers are measuring two different things. The fix is straightforward: understand the conversion formula, confirm which number is in your bid model, and make sure the gross margin on every bid covers overhead plus target net profit.
Estimating Fundamentals
Markup vs Margin —
The Number That Matters.
Most subcontractors use markup in their bids and margin on their P&L — and never reconcile the two. That mismatch is why "I bid at 20%" turns into "why is my gross margin only 16%?" Here's what the numbers actually mean.
Published: May 2026 · Updated: May 2026
The Core Difference
Markup Is on Cost. Margin Is on Revenue.
Markup and margin are two different ways of expressing the same relationship between cost and price. Markup is the percentage added to cost to get the selling price. Margin is the gross profit expressed as a percentage of the selling price. They're related — but they're never equal. A 25% markup is always a 20% margin. A 25% margin always requires a 33.3% markup. When you mix them up in your bid model, every job is either underpriced or overpriced.
| Markup on Cost | Gross Margin on Revenue | On $1M Direct Cost | Bid Price |
|---|
| 10% | 9.1% | $100K gross profit | $1,100,000 |
| 15% | 13.0% | $150K gross profit | $1,150,000 |
| 20% | 16.7% | $200K gross profit | $1,200,000 |
| 25% | 20.0% | $250K gross profit | $1,250,000 |
| 33% | 25.0% | $330K gross profit | $1,330,000 |
| 43% | 30.0% | $430K gross profit | $1,430,000 |
| 50% | 33.3% | $500K gross profit | $1,500,000 |
The Fix
What Markup You Actually Need to Hit Your Margin
Start with the gross margin you need — overhead rate plus target net profit. Then calculate the markup required to produce that margin.
The Formula
Gross margin needed = overhead rate + target net profit
Markup required = gross margin ÷ (1 − gross margin)
Example: 14% overhead + 8% target net profit = 22% gross margin needed. Markup = 0.22 ÷ 0.78 = 28.2%. You need a 28.2% markup to hit 22% gross margin — not 22% markup.
The fastest way to find your current overhead rate: pull SG&A from your last 12 months of P&L, divide by revenue. Then use the formula above to find the markup that actually covers it. Or use the overhead rate calculator.
FAQ
Frequently Asked Questions
What is the difference between markup and margin in construction?
Markup is calculated on cost. Margin is calculated on revenue. A 25% markup on $100,000 in direct costs adds $25,000 — resulting in a bid price of $125,000 and a gross margin of 20% ($25,000 divided by $125,000). The same job priced at a 25% gross margin would have a bid price of $133,333. Most subcontractors use markup in estimating software but think about profitability in margin terms — which means the two numbers are almost never the same and the confusion costs real money on every bid.
Why do subcontractors confuse markup and margin?
Estimating software typically uses markup — you enter a cost and apply a markup percentage to get a bid price. But P&L analysis uses margin — gross profit divided by revenue. When a subcontractor says 'I bid at 20%' they usually mean 20% markup, which produces about 16.7% gross margin. When their CPA says 'your gross margin is 16.7%' it sounds lower than expected — because the subcontractor was thinking about markup, not margin. The mismatch leads to incorrect performance assessments and incorrect overhead rate decisions.
How do I convert markup to margin for construction bids?
Margin = markup divided by (1 + markup). Examples: 10% markup = 9.1% margin. 20% markup = 16.7% margin. 25% markup = 20% margin. 33% markup = 25% margin. 50% markup = 33% margin. To go the other direction: markup = margin divided by (1 - margin). A 25% margin requires a 33.3% markup on direct costs.
What gross margin should a construction subcontractor target?
Target gross margin varies by trade. Civil and grading contractors typically target 20–26%. Concrete contractors 21–25%. Electrical contractors 25–30%. SWPPP/erosion control 24–32%. The margin needs to cover all overhead (SG&A as a percentage of revenue) plus the target net profit. If your overhead rate is 14% and you want 8% net profit, you need at least 22% gross margin on every job. Bids below that margin lose money before overhead is applied.
If I add 20% markup to my bids, what is my actual gross margin?
A 20% markup produces a 16.7% gross margin. At $3M in revenue, that's $501,000 in gross profit. If your overhead is $450,000 per year (15% of revenue), you're left with $51,000 in net profit before taxes — 1.7% net margin. If you thought 20% markup meant 20% profit, you're actually making 1.7%. That gap is why so many subcontractors are profitable on paper and always short on cash.
