Margin vs markup: the math that protects your profit

The most expensive mistake in contracting

A contractor estimates a job at $10,000 in costs and applies a 20% markup.

$10,000 x 1.20 = $12,000

That looks like a $2,000 profit. But $2,000 out of $12,000 is a 16.7% margin, not 20%. On a $100,000 annual revenue, that difference is thousands of dollars.

Markup vs margin

Markup is a percentage of your cost. Margin is a percentage of your selling price.

| Cost | 20% Markup Price | Actual Margin | |------|-------------------|---------------| | $5,000 | $6,000 | 16.7% | | $10,000 | $12,000 | 16.7% | | $25,000 | $30,000 | 16.7% | | $50,000 | $60,000 | 16.7% |

If you want a true 20% margin, the formula is different:

Price = Cost / (1 - Margin)

| Cost | 20% Margin Price | Actual Margin | |------|-------------------|---------------| | $5,000 | $6,250 | 20.0% | | $10,000 | $12,500 | 20.0% | | $25,000 | $31,250 | 20.0% | | $50,000 | $62,500 | 20.0% |

Why this matters for sealed bidding

In a sealed-bid environment, you cannot see what other contractors bid. You price the job based on your costs, your margin target, and the value of your credentials.

If you use markup when you mean margin, you are systematically underpricing every job. Over a year of sealed bids, that adds up.

Setting a margin floor

Pick a minimum margin that covers your overhead and keeps the lights on. For many residential contractors in North County San Diego, that number is somewhere between 15% and 30% depending on the trade and the job size.

Before submitting any bid, check: does this price give me at least my minimum margin after materials, labor, permits, and overhead?

If the answer is no, the job is not worth bidding at that price.

The takeaway

Use margin, not markup, when pricing bids. The formula is simple:

Price = Cost / (1 - Margin)

Set a floor. Check every bid against it. The sealed-bid format rewards honest pricing, so price honestly and protect your profit.