How to Set Your Markup and Price Jobs for Profit
The difference between markup and margin is the difference between making money and wondering where it all went. Here is how to get your pricing right.
The $8,000 Mistake You Make Without Realizing It
A buddy of mine, an electrician with 15 years in the trade, told me this story. He had been running his own crew for three years, staying busy, doing great work. Billing over $600,000 a year. But every December, his accountant delivered the same verdict: barely broke even.
The problem? He had been confusing markup and margin the entire time. He thought a 30% addition to his costs meant 30% profit. It does not. A 30% markup translates to about a 23% margin. On $600K in revenue, that confusion cost him roughly $42,000 a year.
He is not alone. This is one of the most common and most costly mistakes contractors make.
Markup is calculated on your costs. Margin is calculated on your selling price. They are always different numbers, and using the wrong one means you are making less money than you think on every single job.
Markup vs. Margin: The Critical Distinction
Markup defined
Markup is the percentage you add to your costs to arrive at the selling price. If your total costs are $40,000 and you apply a 25% markup, your selling price is $50,000.
Formula: Selling Price = Cost x (1 + Markup %)
$40,000 x 1.25 = $50,000
Margin defined
Margin is the percentage of the selling price that represents profit. In the example above, $10,000 profit on a $50,000 selling price is a 20% margin.
Formula: Margin = (Selling Price – Cost) / Selling Price
($50,000 – $40,000) / $50,000 = 20%
Why the difference matters
A 25% markup produced a 20% margin. Not 25%. On $600,000 annual revenue, that 5-point gap represents $30,000 in profit you think you are earning but are not. The gap gets worse as percentages go up: a 50% markup only gives you a 33% margin.
The conversion table
Pin this to your wall or save it on your phone. This table converts between markup and margin so you always know where you stand.
| Markup % | Margin % | Example (on $40,000 cost) |
|---|---|---|
| 10% | 9.1% | Sell at $44,000, profit $4,000 |
| 20% | 16.7% | Sell at $48,000, profit $8,000 |
| 25% | 20.0% | Sell at $50,000, profit $10,000 |
| 35% | 25.9% | Sell at $54,000, profit $14,000 |
| 50% | 33.3% | Sell at $60,000, profit $20,000 |
| 67% | 40.0% | Sell at $66,800, profit $26,800 |
| 100% | 50.0% | Sell at $80,000, profit $40,000 |
Quick conversion formulas
- Markup to Margin: Margin = Markup / (1 + Markup). Example: 0.25 / 1.25 = 0.20 = 20%
- Margin to Markup: Markup = Margin / (1 – Margin). Example: 0.20 / 0.80 = 0.25 = 25%
Ask yourself right now: when you say “I add 20% to my jobs,” are you talking about markup or margin? A 20% markup gives you a 16.7% margin. If you want a true 20% margin, you need a 25% markup.
Calculating Your Real Overhead Rate
Before you can set a profitable markup, you need to know your overhead. If you do not know your overhead rate, your markup is a guess.
What counts as overhead
- Vehicle costs: Truck payments, insurance, fuel, maintenance
- Insurance: General liability, professional liability, umbrella policy
- Office costs: Rent, utilities, internet, phone, supplies
- Software and tools: Estimating software, accounting software, subscriptions
- Marketing: Website, advertising, business cards, signage
- Licenses and permits: Contractor license renewal, trade certifications
- Professional services: Accountant, attorney, bookkeeper
- Administrative time: Estimating, bidding, client communication, invoicing
- Your salary: Yes, you need to pay yourself from overhead, not just take what is left over
- Warranty work: Callbacks and warranty repairs that are not billable
Sample overhead calculation
| Overhead Category | Annual Cost |
|---|---|
| Vehicle (payment, insurance, fuel, maintenance) | $18,000 |
| General liability insurance | $8,500 |
| Workers’ comp (owner’s policy) | $4,200 |
| Office / home office | $6,000 |
| Phone, internet, software | $4,800 |
| Accounting and legal | $5,500 |
| Marketing and advertising | $6,000 |
| Licenses, CE, association dues | $2,500 |
| Tools and equipment (non-job-specific) | $4,500 |
| Owner salary (admin/unbillable time) | $45,000 |
| Warranty and callback reserve | $3,000 |
| Total Annual Overhead | $108,000 |
If this contractor does $600,000 in annual revenue, the overhead rate is $108,000 / $600,000 = 18%. If direct costs are $450,000, overhead as a percentage of direct costs is $108,000 / $450,000 = 24%.
Overhead stays mostly fixed regardless of how many jobs you run. A slow year at $400,000 pushes your overhead rate to 27%. Your markup needs to cover that higher rate, or you are underwater. Review it quarterly.
Your own unbillable time. If you spend 15 hours a week on estimating, purchasing, scheduling, and invoicing, that is 780 hours a year. At $60/hour, that is $46,800 in overhead that needs to be recovered through your markup. Most contractors never count this.
Setting Markup by Trade and Project Type
There is no single “right” markup. It varies by trade, project type, complexity, risk, and market conditions.
| Trade / Project Type | Typical Markup Range | Resulting Margin Range | Notes |
|---|---|---|---|
| General contracting (new residential) | 15-25% | 13-20% | Competitive market, volume-driven |
| Remodeling | 35-50% | 26-33% | Higher risk, more unknowns |
| Specialty remodeling (kitchen, bath) | 40-67% | 29-40% | Design-build, high client interaction |
| Electrical | 20-40% | 17-29% | High labor, low material relative cost |
| Plumbing | 25-50% | 20-33% | Service calls higher, new construction lower |
| HVAC | 30-50% | 23-33% | Equipment markup lower, service higher |
| Painting | 40-67% | 29-40% | Labor-intensive, low material cost per SF |
| Roofing | 25-45% | 20-31% | Weather risk, safety premium |
| Landscaping / hardscaping | 30-50% | 23-33% | Seasonal, equipment-heavy |
| Concrete / flatwork | 20-35% | 17-26% | Material-heavy, weather-sensitive |
Adjusting markup for specific situations
- Difficult clients: Add 5-10%. Your time managing expectations and last-minute changes has a cost.
- Rush jobs: 10-25% premium. You are disrupting your schedule and possibly paying overtime.
- Repeat clients: Reduce 3-5% because communication is efficient and referral value is real. But never drop below your overhead recovery.
- Large projects: Slightly lower percentage is acceptable because the dollar amount of profit is larger.
- High-risk projects: Older homes, structural work, hazardous materials. Add a risk premium of 5-15%.
The Pricing Worksheet: From Costs to Selling Price
Here is a step-by-step pricing worksheet using a real example: a bathroom remodel with $18,000 in direct costs.
| Step | Item | Amount |
|---|---|---|
| 1 | Total materials (including waste factor) | $7,200 |
| 2 | Total labor (fully burdened) | $8,400 |
| 3 | Subcontractor costs (plumber, electrician) | $2,400 |
| 4 | Total Direct Costs (1 + 2 + 3) | $18,000 |
| 5 | Overhead allocation (24% of direct costs) | $4,320 |
| 6 | Break-Even Cost (4 + 5) | $22,320 |
| 7 | Profit markup (15% on break-even) | $3,348 |
| 8 | Selling Price (6 + 7) | $25,700 |
The total markup from direct costs to selling price is about 43%. The net profit margin is about 13%. The gross margin (before overhead) is about 30%.
Why you must separate overhead from profit
That 43% total markup has two components: overhead recovery (24%) and profit (15% on break-even). By calculating them separately, you can see clearly whether your markup is covering overhead or whether you are eating into profit to cover business costs. If you need to sharpen your price to win a competitive bid, you know exactly how far you can go before you are working for free.
Your total markup must always be higher than your overhead rate. If your overhead rate is 24%, your markup must be at least 24% just to break even. Profit comes on top of overhead recovery, not instead of it. For more strategies on protecting your bottom line, see our guide on 10 ways to protect your profit margin.
Pricing Psychology: Why How You Present the Number Matters
You can have the math perfect and still lose jobs because of how you present the price.
Anchor high, then justify
Start with a range that anchors toward the higher end. “A project like this typically runs $28,000 to $35,000 depending on finishes and complexity.” Now $25,700 feels reasonable by comparison.
Offer good, better, best options
- Good ($22,500): Basic finishes, stock cabinets, standard tile, existing layout
- Better ($25,700): Semi-custom cabinets, quartz countertops, upgraded tile
- Best ($31,200): Custom cabinets, premium quartz, designer tile, reconfigured layout
Most clients choose the middle option. By anchoring the middle option as your target price, you win at your preferred number more often.
Never apologize for your price
Do not say “I know this is a lot.” State the price confidently. If the client pushes back, discuss scope adjustments rather than price reductions.
Contractors who present prices confidently win bids at higher margins than those who seem uncertain. If you have done the math and your markup is fair, present the price with zero hesitation.
When to Raise Your Prices
Signs you are underpriced
- Win rate above 50%: A healthy win rate for residential contractors is 25-35%. Winning more than half means your prices are too low.
- Fully booked 8+ weeks out: Demand exceeds your capacity. The market is telling you to raise prices.
- No pushback on price: Some price friction is healthy. If clients never negotiate, you are leaving money on the table.
- Net profit below 10%: Your markup is probably too low for the risk you are taking.
- Your costs went up but your prices did not: Materials, insurance, fuel, labor. If any increased without a pricing adjustment, your margin just got smaller.
Your pricing action plan
- Calculate your real overhead. Pull every business expense for the past 12 months. Add it all up.
- Divide overhead by your annual revenue to get your overhead rate as a percentage.
- Decide on your target net profit margin. For most small contractors, 10-15% net is healthy. Convert that margin to a markup using the conversion table above.
- Add your overhead rate to your profit markup to get your total markup. This is the minimum percentage you apply to direct costs on every job.
- Test your new pricing on your next three bids. Track the outcomes and adjust based on real market feedback.
- Set up quarterly reviews. Every 90 days, recalculate your overhead rate, review your win rate, and compare estimated vs. actual costs on completed jobs.
Pricing is not a one-time decision. It is a continuous process that improves as your data improves. The contractors who make real money are the ones who know their numbers, set their prices with confidence, and have the discipline to walk away from jobs that do not meet their margin requirements.
Frequently Asked Questions
Know Your Costs. Set Your Price. Keep Your Profit.
SimplyWise helps contractors capture every receipt, generate photo-based estimates, and track job costs so your pricing reflects reality, not guesswork.