Markup vs Margin: What is the Difference?

It’s easy to get the two confused but knowing the difference between the two can greatly impact the profitability of your next project.  So, what is the difference between Markup and Margin.

MARKUP is the percentage amount by which the cost of a product is increased to arrive at the selling price or proposed price to the CUSTOMER.

If you look at the combined totals, you will see the total selling price is $15,000 and the total estimated cost is $8000. Total Markup is $7,000. You may also see this referred to as ESTIMATED PROFIT.

The total MARKUP % is 88%, which is calculated as PROFIT / ESTIMATED COST, or $7000/$8000, or 88%.

Once the ESTIMATE is Approved and the CUSTOMER agrees to the proposed price of $15,000, now we start referring to the targeted PROFIT as “GROSS PROFIT” and we express this in terms of MARGIN or MARGIN %.

MARGIN (or GROSS PROFIT) is equal to the Selling Price minus the Cost of Construction. We sold the above Office Relocation Project at $15,000. We estimated the cost to be $8,000. So our MARGIN or GROSS Profit is $7,000.

The MARGIN % or GROSS PROFIT % is calculated as PROFIT / SALES PRICE, or $7,000/$15,000, or 47%.

When you hear a contractor say “I need to make 35 points on my jobs to run a profitable business, he is referring to MARGIN %, or a GROSS PROFIT % of 35%.”

Our new FINANCIAL Summary reflects ESTIMATED PROFIT as both a MARKUP % and a MARGIN % so our users can see the relationship

Confusing PROFIT MARGIN vs. MARKUP can lead to accounting and sales errors. If you Markup your costs 25% when you prepare a quote, you are only generating 20% in Margin and that 5% could make the difference between a company making any real company profits or not once administrative costs and overhead are paid.