Markup vs. Margin: The Number That Could Be Quietly Draining Your Profits
Every contractor knows their markup. Far fewer know their actual margin. Here’s why that difference matters — and how to get it right.
Walk into almost any construction trailer in the Pacific Northwest and ask the project manager what markup they’re using, and you’ll get an answer in seconds. Ask them what margin they’re actually operating at, and you’ll often get a pause.
These two numbers sound like they should be the same thing. They aren’t. And confusing them is one of the most common — and costly — financial mistakes in the construction business.
The Definitions
Markup is the percentage you add on top of your costs to arrive at your selling price. It is calculated on cost.
Margin (also called gross profit margin) is the percentage of your selling price that represents gross profit. It is calculated on revenue.
Here’s the critical difference in practice:
Say your direct job costs — labor, materials, equipment, subcontractors — total $100,000.
If you apply a 20% markup, your selling price is $120,000. Your gross profit is $20,000. But your margin is not 20%. Your margin is $20,000 ÷ $120,000 = 16.7%.
That gap — between what you think you’re making and what you’re actually making — is where construction businesses get into trouble.
The Markup-to-Margin Conversion Table
| Markup | Actual Gross Margin |
|---|---|
| 10% | 9.1% |
| 15% | 13.0% |
| 20% | 16.7% |
| 25% | 20.0% |
| 30% | 23.1% |
| 33% | 24.8% |
| 40% | 28.6% |
| 50% | 33.3% |
Notice: to achieve a true 25% gross margin, you need a 33% markup — not 25%.
Why Does Margin Matter More Than Markup?
Gross margin is the number that tells you whether your business can survive. Here’s why:
Your gross profit — the dollar amount left after direct job costs — has to cover everything else: your office rent, your trucks, your insurance, your estimator’s salary, your bookkeeper, your own draw, and any net profit you want to keep. In construction, these overhead costs are called general and administrative (G&A) expenses.
If your gross margin is 16.7% and your G&A runs 18% of revenue — a common scenario for small to mid-size contractors — you are losing money on every job, even though your markup looks healthy.
What Margin Should a NW Contractor Be Targeting?
There is no universal answer, but here are broadly accepted benchmarks used in the industry:
Gross margin (after direct job costs, before G&A and profit): 20–35%, depending on project type, market, and risk level.
Net profit margin (after all costs including G&A): 5–10% for a well-run construction business. Anything consistently below 3% is a warning sign.
General and administrative overhead as a percentage of revenue: 10–20% for most small to mid-size contractors.
The formula that ties these together is simple:
Gross Margin % − G&A % = Net Profit %
If your gross margin is 25% and your G&A runs 18%, your net profit is 7%. If your gross margin is only 16.7% (because you confused a 20% markup for a 20% margin), and your G&A is 18%, you’re operating at a net loss of 1.3% — on every single job.
The Practical Takeaway
Before your next bid goes out, answer three questions:
1. What are my actual G&A costs as a percentage of revenue? Pull your last 12 months of financial statements and calculate what you spent on overhead — everything that isn’t directly tied to a specific job — as a percentage of your total revenue. This is your G&A rate.
2. What net profit margin am I targeting? Be specific. “I want to make money” is not a number. Pick a target — 5%, 7%, 10% — and work backward from there.
3. What markup do I need to achieve that margin? Add your G&A rate to your target net profit margin to get your required gross margin. Then use the conversion table above to calculate the markup you actually need.
Example: G&A rate: 18% Target net profit: 7% Required gross margin: 25% Required markup: 33% — not 25%.
In a market where tariffs are pushing material costs up 10–20% and labor is getting more expensive every year, the margin for error is shrinking. The contractors who know their numbers — precisely — are the ones who will still be in business when this cycle turns.
NW Construction News provides general business information only. Consult a qualified construction accountant or financial advisor for guidance specific to your business.
