How to Calculate Markup and Profit Margins

CONSTRUCTION BOOKKEEPING INSIGHTS / FEB. 16, 2024

Using Markup and Profit Margins accurately in a calculation within construction projects, is not easy and involves less predicting and more knowledge of what these two mean.

Firstly, we want to understand the definitions. As mentioned in a previous blog, Markup is an increase of a job cost to reach a final sales price while, Profit Margin is the revenue generated after the job cost.

Ensuring you are calculating the Markup of a job and the Profit Margin desired for a job accurately can be the difference in both how much money you leave on the table when quoting a job and how much money you lose when quoting a job.

Ensuring you are calculating the Markup of a job and the Profit Margin desired for a job accurately can be the difference in both how much money you leave on the table when quoting a job and how much money you lose when quoting a job.

Most often than not, when estimating a job, an estimator will calculate the cost of a job and add on a percentage to get a final cost. This would be the markup method. Normally, another aspect of the job will be looked at during this and that of course, is how much money will be made – the profit margin.

The calculation of the two are similar, but there will be two different answers. It is essential to know that while you can use markups to ensure you are making a profit on the job, without doing the proper calculation, you can end up missing your target profit margin goal. This leads to leaving money on the table.

The same thing can happen if you use the profit margin calculation incorrectly to get to a final job cost, you will instead end with an estimate, that most will pass on. Doing it correctly, while knowing the markup percentage, can get you the most necessary result.

If you read the previous blog, we breakdown what a Markup and Profit Margin Percentage looks like on a job. What we want to focus on today is on the formula used when you know your target markup.

If you know that your target mark up percentage is 30% for example, then calculating this will be different than the previous blog. If you your job cost is $1000 and your target mark up for the job is 30% than the following will be used to calculate your job cost: $1000 x (1 + 30%) = $1300.

We understand this is an easy one that you construction owners know off the top of your head, but the importance is the calculation.

If you read the previous blog, we breakdown what a Markup and Profit Margin Percentage looks like on a job. What we want to focus on today is on the formula used when you know your target markup. If you know that your target mark up percentage is 30% for example, then calculating this will be different than the previous blog. If you your job cost is $1000 and your target mark up for the job is 30% than the following will be used to calculate your job cost: $1000 x (1 + 30%) = $1300. We understand this is an easy one that you construction owners know off the top of your head, but the importance is the calculation.

Male construction worker with his helmet on, holding a calculator, with a pencil on his chin

It is essential to know that while you can use markups to ensure you are making a profit on the job, without doing the proper calculation, you can end up missing your target profit margin goal.

When looking at the target profit margin throughout, is just as essential and again, understanding the difference will make a difference in the money made and less money spent. Let’s use the same numbers to calculate your target profit margin to understand the correct formula: $1000 / (1-30%) = $1,428.57.

You’ll notice that one gets you more money than the other, but that both are very important. It may seam easiest to use the Markup method as it gets you an easier and more simple calculation but It is recommended to use the Profit Margin equation for the obvious reason of more money. It is essential to understand both, to correctly calculate a job cost that is marked up correctly, but also give you the best possible profit margin.