Markup isn't margin: the one sum that fixes your quotes
Add 20% to your costs and you make 16.7%, not 20%. Here's the difference, the one number to divide by, and what getting it wrong costs over a year.
Ask ten tradies what margin they quote and most will say a number they add on top of cost. That number is a markup. It feels like the same thing, and on a quote it can look the same, but it isn’t, and the gap is real money.
Markup is on your cost. Margin is on your price.
Take a job that costs you $10,000. Add 20% and you quote $12,000. You make $2,000. That $2,000 is 20% of the cost, so the markupis 20%. But it’s only 16.7% of the price, and the price is what the margin is measured on.
- Cost
- $10,000
- Plus 20% of the cost
- + $2,000
- Quote
- $12,000
For a real margin, divide
To make a 20% margin, the profit has to be 20% of the price. So the cost is the other 80%, and the price is the cost divided by 0.8.
- Cost
- $10,000
- Cost ÷ 0.8
- $12,500
- Profit
- $2,500
$500 more on every $10,000 of work, for the same job.
The divide-by table
Stick this on the wall next to the printer.
| Margin you want | Divide cost by | $10,000 job | Same as a markup of |
|---|---|---|---|
| 15% | 0.85 | $11,764.71 | 17.6% |
| 20% | 0.80 | $12,500.00 | 25.0% |
| 25% | 0.75 | $13,333.33 | 33.3% |
| 30% | 0.70 | $14,285.71 | 42.9% |
Example figures, ex GST.
What it costs you over a year
Say your jobs cost you $800,000 in a year and you add 20% to all of them. You bill $960,000 and keep $160,000, a 16.7% margin. Price them at a real 20% margin instead and you bill $1,000,000 and keep $200,000. Same jobs, same crew, $40,000 more.
It works the other way too. If you’ve been told the industry runs on a 20% margin and you’ve been adding 20%, you’ve been quoting under the market and calling it competitive.
Make sure the cost is the real cost
The margin is only as good as the cost under it. If the labour in your cost is the wage, not what an hour actually costs the business, a “20% margin” can still lose money. Work out your real hourly cost first with the what your carpenter really costs guide, then put your margin on top.
If your hourly cost already includes your overheads, the margin left over is close to your profit. If it doesn’t, the margin has to pay the overheads before any of it is profit, so it needs to be bigger.
A $45-an-hour carpenter costs about $86 for every hour on the tools once you add on-costs, leave, lost days and overheads. The maths, step by step.
A prebuild is your price for one unit of work. Build it from your own job hours and real labour cost and every quote that uses it comes out right.
Lay your quote out by floor level, itemise every line and attach take-off sheets that show what's in and what's out. A layout builders can check fast.
Run these numbers on every job, without the spreadsheet.
XGrafter prices every take-off from your own rates, keeps the margin in front of you, and syncs with Xero (MYOB is coming). See it on one of your own jobs.