MARKUP IS NOT MARGIN.
Markup and margin are two ways to state the same profit dollars, and confusing them is the most common pricing error in the trades. Markup divides the profit by the cost. Margin divides the same profit by the price, which is a bigger number, so the margin is always the smaller percentage. A 20 percent markup produces a 16.7 percent margin, and to earn a 20 percent margin you have to mark up 25 percent. The two conversions are margin equals markup divided by one plus markup, and markup equals margin divided by one minus margin.
This isn't a rounding problem. A contractor who decides the business needs a 20 percent margin and then adds 20 percent to cost has priced every job 3.3 points of margin light, and the estimating spreadsheet will never say so, because both numbers are called twenty. On $2M of annual job cost, the difference between marking up 20 percent and marking up 25 percent is $100,000 of price, and all $100,000 of it's profit. No amount of field production recovers money that was never put in the number.
WHAT IT MEANS.
Markup is profit stated as a percentage of cost and margin is the same profit stated as a percentage of price, which is why a 20 percent markup produces a 16.7 percent margin rather than a 20 percent one.
The reason the two percentages diverge is the divisor and nothing else. Take $100,000 of cost and add 20 percent. The price is $120,000 and the profit is $20,000, but that $20,000 is now being measured against $120,000 of revenue rather than against $100,000 of cost, so it reads as 16.7 percent. Same dollars, two denominators, two answers.
The error compounds as the percentage rises, which is why it hurts specialty work more than commodity work. A 10 percent markup is a 9.1 percent margin, so the mistake costs 0.9 of a point. A 20 percent markup is a 16.7 percent margin, so it costs 3.3 points. A 40 percent markup is a 28.6 percent margin, so it costs 11.4 points. The higher your intended margin, the more the confusion takes.
WHERE THE POINTS GO MISSING.
Both numbers are called twenty
The target gets set in one unit and applied in another, and nothing in the spreadsheet flags it because the label is the same either way. An owner says the company needs to hold 20 percent, the estimator multiplies cost by 1.20, and every bid leaves the office at a 16.7 percent margin. The bid isn't aggressive and the estimator isn't careless. The arithmetic was done in the wrong direction.
The goal is set in margin and the estimate is built on cost
Margin is how a profit and loss statement, a bank, a surety, and a bid floor all describe profit, because all four read revenue first. An estimate works the other way, starting from cost and adding to it. So the target comes in as a margin and gets applied as a markup with no conversion in between, which is the single place the money goes.
The job cost report confirms the wrong number
When the job closes, the report divides profit by revenue and returns a margin, so it reads 16.7 percent against a target of 20 percent and looks like a 3.3 point execution miss. Everybody then goes looking in the field for three points that were never priced. That's how a pricing error gets investigated as a productivity problem for a year.
WHAT IT LOOKS LIKE IN DOLLARS.
A 10 percent markup is a 9.1 percent margin. A 15 percent markup is a 13.0 percent margin. A 20 percent markup is a 16.7 percent margin. A 25 percent markup is a 20.0 percent margin. A 33 percent markup is a 24.8 percent margin. A 50 percent markup is a 33.3 percent margin.
A 10 percent margin needs an 11.1 percent markup. A 15 percent margin needs a 17.6 percent markup. A 20 percent margin needs a 25.0 percent markup. A 25 percent margin needs a 33.3 percent markup. A 30 percent margin needs a 42.9 percent markup. A 40 percent margin needs a 66.7 percent markup.
Start with $100,000 of burdened cost. Mark it up 20 percent and the price is $120,000, the profit is $20,000, and the margin is 16.7 percent. Mark it up 25 percent and the price is $125,000, the profit is $25,000, and the margin is 20.0 percent. Same scope, same cost, and 25 percent more profit dollars for the five points of markup that nobody added.
Multiply the miss by your annual cost, because that's the base a markup is applied to. On $2M of job cost the difference between a 20 percent markup and a 25 percent markup is $100,000. On $6M of job cost it's $300,000. That money isn't recoverable after the fact, because it was never in a single price.
HOW THE TWO STOP GETTING SWAPPED.
The profit target is stated as a margin, because that's the unit every financial statement and every bid floor uses. Then it gets converted to a markup one time and written into the estimating template as the multiplier, so the conversion isn't being redone by whoever is bidding that week. A 20 percent margin target becomes a 1.25 multiplier and stops being a judgment call.
Every bid summary shows the markup applied and the margin it produces, on the same line. Two numbers instead of one costs nothing and makes the error impossible to commit silently, because a 20 percent markup that prints a 16.7 percent margin next to a 20 percent target is visible to anyone reading the sheet.
The closed job report reads in margin against a margin target, and the estimate reads in markup against a markup multiplier that was derived from that same target. Both systems then describe the same expectation in their own unit, so a variance at closeout is an execution question rather than an arithmetic one.
THE OUTPUTS, NAMED.
FLAT MONTHLY FEE. NO SURPRISES.
Three tiers, priced by your trailing twelve month revenue. Which one you're in depends on how much of the work you want off your desk. No hourly billing, no payroll, and no add-ons.
| Last 12 months revenue | Monthly fee |
|---|---|
| Up to $1M | $1,900 to $2,900 |
| $1M to $3.5M | $2,600 to $3,900 |
| $3.5M to $6.5M | $3,800 to $5,700 |
| $6.5M to $9.5M | $5,100 to $7,100 |
| $9.5M to $12.5M | $6,100 to $8,500 |
| $12.5M to $15.5M | $7,400 to $11,000 |
| $15.5M to $18.5M | $9,400 to $13,500 |
| $18.5M+ | Quoted individually |
Range reflects the three tiers below. Which one you're in depends on how much of the work you want off your desk. No payroll. No hidden line items.
You stop guessing.
You get the CFO work. Job costing built against the way you estimate, a 13 week cash forecast, monthly WIP, and a meeting every month that ends in decisions rather than a report.
Your bookkeeper keeps doing the books.
You stop touching the books.
Everything in Core, and we run the bookkeeping and the controllership as well. Nobody in your office is answering coding questions or chasing a reconciliation at month end.
We do the books. No payroll.
Every job shows its margin while it's still running.
Everything in Executive, plus the job costing and WIP platform set up, loaded with your cost codes, and managed for you every month. You never have to learn it.
We do the job costing.
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