Estimating & Bidding for Profit (Markup vs. Margin)

The fastest way to go broke while staying busy is mispricing your work. The classic mistake: confusing markup and margin.

The two definitions

• Markup = added to your cost. Markup % = (Price − Cost) ÷ Cost.
• Margin = a share of your price. Margin % = (Price − Cost) ÷ Price.

They are NOT the same number.

The trap

Add "20% markup" to a $100,000 cost → price $120,000. But your margin is only 20,000 ÷ 120,000 = 16.7%, not 20%. Many contractors think they made 20% and actually made less.

The formula that fixes it

To hit a target margin, use: Markup % = Margin ÷ (1 − Margin).

• Want 20% margin? Mark up 25%.
• Want 25% margin? Mark up 33%.

Don't forget overhead

Your price must cover direct job cost + a fair share of company overhead + profit. If your markup only covers direct cost and profit, you're paying for overhead out of profit — "making money on the job, losing money in the business."

Going Deeper (Intermediate)

Profit starts at the estimate. You must know your numbers — true cost, overhead recovery, and a target margin — and price to hit them. Chasing revenue instead of profit is how busy contractors go broke; a bigger top line with no margin just means more ways to lose money.

Advanced / Pro-Level

Pricing for profit, not just for work:

• Set target gross and net margins and measure every job against them (many contractors aim ~15–20% gross, ~5–10% net — know your required numbers).
• Select jobs — fire bad clients and low-margin work; a full schedule of break-even jobs is a trap.
• Compete on value/relationship, not just low bid, so you're not forced to the bottom of the market.
• Track margin by job type and do more of what's profitable, less of what isn't. The most profitable bid is often the one you walk away from.

Practice Challenge

Contractor A does $3M revenue at 4% net; Contractor B does $1.5M at 12% net. Who's better off and what's the lesson? (Answer: A nets $120k, B nets $180k — B is more profitable on half the revenue; chasing volume over margin means more risk and work for less money. Profit, not revenue, is the scoreboard.)

In Practice

Adding '20% markup' to a $100k cost gives $120k — but that's only a 16.7% margin, not 20%. To hit a 20% margin you mark up 25%. That gap is where contractors quietly go broke.

Common Mistakes to Avoid

• Confusing markup with margin
• Not recovering overhead in the price
• No contingency for risk

Takeaway: Price for the margin you need, and make sure overhead is in the number.

Educational content — not legal, financial, or accounting advice. Run your numbers with your CPA.