Markup vs margin: the mistake costing builders thousands
Ask ten tradies the difference between markup and margin and most will say they're the same thing. They're not, and mixing them up is one of the most common reasons a busy trade business ends the year with less in the bank than it expected.
The difference in plain English
Markup is what you add on top of your costs. Margin is the share of the final price that's actually left over for you. They're calculated on different numbers, so the same percentage gives very different results.
Say a job costs you $10,000 in materials, labour and subbies. You add a 20% markup and quote $12,000. Your profit is $2,000. But $2,000 out of $12,000 is a margin of 16.7%, not 20%.
Why it costs you real money
Most tradies set a target in their head as a margin ("I want to make 20% on every job") and then apply it as a markup. A gap of a few percent looks small on one quote. Across a year of jobs it adds up fast. On $800,000 of work, the difference between a 20% and a 16.7% margin is about $26,000 you thought you were making and never saw.
And that's before anything goes wrong. Variations you didn't charge for, a material price rise between quote and order, a few extra days on site. Every one comes out of the margin, and a thin margin disappears quickly.
The overheads trap
Your markup has to cover more than profit. It also has to pay for everything that isn't on a job sheet: the ute, insurance, phone, software, the accountant, your own time doing quotes at night. If your markup only covers your profit target, the overheads come out of your pocket instead.
This is how a business can win plenty of work, stay flat out all year, and still struggle to pay itself.
Check your own numbers
Grab your last five finished jobs and work out three things for each:
- What it actually cost, not what you estimated
- What you invoiced, including variations
- The real margin: profit divided by the invoiced price
If the real margins are well below what you thought you were charging, you're not alone. It's the most common gap we see, and it's fixable.
Getting it right every time
The formula is simple. Getting it right on every quote, across every type of job, while staying competitive, is where most businesses need a hand. That's the work we do one-on-one: a pricing system that covers your overheads, pays you properly and still wins jobs.
General information only, not financial, tax or legal advice. Speak to your accountant or adviser about your own situation.