Form CMB-017 Reference
Contractor Markup Formula
The markup formula is the most fundamental calculation in contractor pricing, and getting it wrong costs thousands of dollars per year. At its core, markup is simple: take your cost and add a percentage to arrive at your selling price. Selling Price = Cost x (1 + Markup Percentage / 100). A $1,000 cost with 25% markup becomes $1,000 x 1.25 = $1,250. The profit is $250. But the formula that trips up contractors is the conversion to margin, because the same $250 profit represents a 25% markup but only a 20% margin. Understanding both formulas and the relationship between them is essential for accurate pricing, clear communication with accountants, and avoiding the most expensive math mistake in contracting.
✓ The three formulas you need
Price = cost × (1 + markup ÷ 100)
Margin % = (price − cost) ÷ price × 100
Markup needed = margin ÷ (100 − margin) × 100
The first gives you a price from a cost. The second tells you what share of the price you keep. The third answers the question most contractors actually have: if I want to keep 30% of every job, what markup do I use? The answer is 42.9%, not 30%.
✓ Worked example
A job costs $1,000 in labor and materials. At 25% markup the price is $1,000 × 1.25 = $1,250 and the profit is $250. That $250 is 25% of the cost but only 20% of the price, so the margin is 20%.
To keep a 30% margin on the same job, divide the cost by 0.70: $1,000 ÷ 0.70 = $1,428.57. That is a 42.9% markup. Pricing with a 30% markup instead would leave you at 23.1% margin, almost seven points short on every job.
✓ Frequently Asked Questions
What is the basic contractor markup formula?
Selling Price = Cost x (1 + Markup / 100). For a 30% markup on a $2,000 cost: $2,000 x 1.30 = $2,600. Your profit is $600. To find what markup you applied after the fact: Markup = (Selling Price - Cost) / Cost x 100. Using the same numbers: ($2,600 - $2,000) / $2,000 x 100 = 30%. This formula applies to any cost: materials, labor hours, subcontractor invoices, or total job cost.
How do I convert between markup and margin formulas?
Markup to Margin: Margin = Markup / (100 + Markup) x 100. Example: 25% markup converts to 25 / 125 x 100 = 20% margin. Margin to Markup: Markup = Margin / (100 - Margin) x 100. Example: 30% margin requires 30 / 70 x 100 = 42.9% markup. Memorize a few key pairs: 20% markup = 16.7% margin, 25% markup = 20% margin, 50% markup = 33.3% margin. Use the
converter for any other value.
What markup percentage do most contractors use?
Industry standards vary by trade and cost type. Materials: 15-30% markup is standard, with 20% being most common. Labor: most contractors build profit into their hourly rate rather than marking up labor separately. Subcontractors: 10-20% markup. Total job cost: 20-35% markup is typical for residential work. The right markup depends on your overhead structure and target margin. A contractor with 30% overhead needs a higher markup than one with 20% overhead to achieve the same net margin.
What mistakes do contractors make with markup?
Three common mistakes: First, applying the same markup to everything regardless of cost category or risk. High-risk items (custom orders, volatile materials) deserve higher markup than commodity supplies. Second, confusing markup with margin and setting a 20% markup thinking it delivers 20% profit. Third, calculating markup on the selling price instead of the cost, which produces a higher number and overcharges the client. Always calculate markup as a percentage of your cost, not the selling price.
Should markup cover overhead and profit separately?
There are two valid approaches. Some contractors add overhead as a fixed dollar amount or percentage, then add profit markup on top. Others use a single combined markup that covers both. The single-markup approach is simpler: if your overhead is 30% of direct costs and you want a 15% profit margin, you need roughly a 53% combined markup. The separated approach gives more visibility: you can see exactly how much of each job covers overhead versus profit. Choose whichever method you will consistently apply.