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662a921bbc4633001ea065b7 Profit Margin

Contracting 101: Mark-Up and Margin

April 25, 2024
Get 'em right, or they'll cost ya.

Most contractors have learned the difference between mark-up and margin. It is a simple concept that every contractor needs to know, especially brand new contractors. Getting it wrong is expensive.

Mark-up is the percentage you add on top of your costs. Simply multiply the cost by (1 + Mark Up %). If you have a $100 part and want to mark it up 20%, multiply $100 by (1 + 20%):

$100 X (1 + 20%) = $100 X 1.2 = $120

Margin is the percentage of profit you want after selling a part. To get the margin, you must divide the cost by (1 – Margin %). If you have a $100 part and want a 20% margin, divide $100 by (1 – 20%):

$100 / (1 – 20%) = $100 / 0.8 = $125

The 20% mark up would yield a margin of 17%. To figure this subtract the cost from the sell price and divide the result by the sell price. The $120 sell price minus $100 cost = $20. Divide this by the $120 sell price:

($120 - $100) / $120 = $20 / $120 = 16.67%

Now, look at the $125 sell price:

($125 - $100) / $125 = $25 / $125 = 20.00%

Some contractors like to use tables to find the right margin. The formulas are simple and it is much better to learn how to do this regardless of the cost or target margin. Then, if the tables are readily available, it is easy to figure out a sell price.

Mark up and margin are the simplest pricing approaches. Remember, a selling price for labor should include the labor full labor burden charged by the federal government, state government, and in some cases, local government. It should include sick days, holidays, benefits, and so on. Material should include carrying costs. Then, the margin should be sufficient to cover overhead and leave a profit.

For a full suite of pricing calculators, join the Service Roundtable. Learn more at www.ServiceRoundtable.com. 

About the Author

Matt Michel | Chief Executive Officer

Matt Michel was a co-founder and CEO of the Service Roundtable (ServiceRoundtable.com). The Service Roundtable is an organization founded to help contractors improve their sales, marketing, operations, and profitability. The Service Nation Alliance is a part of this overall organization. Matt was inducted into the Contracting Business HVAC Hall of Fame in 2015. He is now an author and rancher.