Pricing
Markup and margin: the mistake that costs builders money
The short answer
Markup is a percentage added to cost. Margin is a percentage of the selling price. They are not the same number and confusing them under-prices work. Cost £1,000 with 20% markup gives a price of £1,200, and the £200 profit is 16.7% of that price, not 20%. To achieve a 20% margin on £1,000 of cost you must charge £1,250, a markup of 25%. The formula is: price equals cost divided by (1 minus the margin you want). Builders who apply a markup and report it as a margin are consistently earning less than they believe.
At a glance
- Markup
- Added to cost
- Margin
- A share of the selling price
- 20% markup
- 16.7% margin
- 20% margin
- 25% markup
- 50% markup
- 33.3% margin
- Formula
- Price = cost ÷ (1 − margin)
- Where it hurts
- Every job, every year, compounding
What is the arithmetic?
Take £1,000 of cost: materials, labour, plant, everything that goes into doing the work.
- Markup of 20%: £1,000 × 1.20 = £1,200. Profit is £200. As a share of the £1,200 you invoiced, that is 16.7%.
- Margin of 20%: £1,000 ÷ 0.80 = £1,250. Profit is £250. As a share of the £1,250 you invoiced, that is 20%.
The gap on this one job is £50, which is 4% of the price. Repeat it across a year of jobs and it is the whole of a small firm’s profit.
Price = cost ÷ (1 − margin). Write it on the wall. Multiplying by 1.2 does not give you 20%.
Free toolMarkup vs margin calculatorConvert between the two, and see what price a target margin actually needs on your own cost.What does the conversion look like?
| Markup on cost | Actual margin | Markup needed for that margin |
|---|---|---|
| 10% | 9.1% | 11.1% |
| 15% | 13.0% | 17.6% |
| 20% | 16.7% | 25.0% |
| 25% | 20.0% | 33.3% |
| 30% | 23.1% | 42.9% |
| 50% | 33.3% | 100% |
Read the first two columns to see what you are earning. Read the third to set the number you should be adding.
The last row is the one that catches people. Doubling your cost gives a third of the price as profit, not half.
Why does it matter more in construction than elsewhere?
Three reasons, all of them about how thin the numbers already are.
- 01Margins are tight to begin with. A retailer at 60% margin absorbs the confusion. A builder at 8% net does not.
- 02Costs move between tender and completion. Materials, labour, fuel. A margin that was thinner than you thought when priced can be gone by the time you invoice.
- 03The error is systematic. It is not a mistake on one job, it is the same mistake applied to every job in the same way, so it never shows up as an anomaly to investigate.
A firm turning over £200,000 believing it makes 20% is making around £33,400 rather than £40,000. The £6,600 gap does not appear anywhere as a problem. It looks like the year being a bit harder than expected.
What should the number actually be built on?
Cost first, and cost means everything attributable to doing the work. Materials, labour at the real all-in rate including employer’s NI, holiday and pension, plant, subcontractors, waste, and the preliminaries for running the site.
Overheads come next and they are separate: office, insurance, vehicles, accounts, the time spent estimating jobs you do not win. These are recovered as a percentage across all work, and a firm that forgets them is pricing at cost while believing it is pricing at a profit.
Only then apply the margin, using the division rather than the multiplication. See how to price a construction job for the full build-up.
NoteQuoting software that asks for a "markup %" and reports it as your margin will reproduce this error on every quote. Check which one the field means before trusting the summary.
Questions
Frequently asked
Is a 20% markup the same as a 20% margin?
No. A 20% markup produces a 16.7% margin. To earn a 20% margin you need a 25% markup. The two are different bases: markup is a share of cost, margin is a share of the price.
What margin should a builder aim for?
It varies by work type and risk, but many UK contractors target 15–25% gross on domestic work and less on competitively tendered commercial jobs. The figure matters less than knowing which of the two numbers you are quoting.
How do I convert a markup to a margin?
Margin = markup ÷ (1 + markup). A 25% markup gives 0.25 ÷ 1.25 = 20% margin. Going the other way, markup = margin ÷ (1 − margin).
Should overheads be inside cost or inside margin?
Recover them as a separate addition before the margin, not out of it. Treating margin as the thing that pays for the office means the profit line is whatever happens to be left, which is not a plan.
Does VAT change the calculation?
No. Margin and markup are calculated on net figures. VAT is added afterwards, and under the [domestic reverse charge](/blog/vat-domestic-reverse-charge-construction) it may not be added by you at all.
Read next
How to price a job properly
Labour, materials, plant, preliminaries, overhead recovery and margin, in that order.
What is a Schedule of Rates?
How SOR pricing works, where it beats a quote, and where it’ll lose you money.
What is the VAT domestic reverse charge?
When it applies, when it doesn’t, and the wording your invoice has to carry.
Estimark: job costing & CVR
Actual, committed and forecast cost per job, reconciled against certified value.
Markup vs margin calculator
Convert between them, and see what price a target margin actually needs.
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