This is the single most expensive arithmetic error in the trades, and it is not really an arithmetic error — it is two words that sound like they mean the same thing.
Markup is a percentage of your cost. Margin is a percentage of your price. Same dollar, different denominator, and the denominator is where the money goes.
The maths, in one example
A job costs you $100 in labour and materials. You add 30% markup, so you charge $130. Your profit is $30. But $30 out of $130 is 23.1%, not 30%. You applied a 30% markup and earned a 23.1% margin.
To actually earn a 30% margin on that job you would have to charge $142.86 — because $100 is 70% of $142.86. That is a 42.9% markup.
What the gap costs across forty jobs
Say your average job costs $3,000 to deliver and you intend to earn a 30% margin. You apply a 30% markup, so you charge $3,900 and earn $900 — a 23.1% margin.
To earn the 30% you intended, the price needed to be $4,285.71, and the profit $1,285.71. You are short $385.71 on every job. Across forty jobs in a year that is $15,428.40 — roughly the cost of a used van, given away one job at a time without anyone noticing.
Which one should you actually use
Price in markup, because it is how you build a number from a cost. Judge yourself in margin, because it is what your accountant, your lender and your profit-and-loss statement use.
The trap is only when you mix them: setting a target in margin and applying it as markup. Pick your target margin, convert it once to the markup that produces it, and write that markup on the wall.
And do not forget overhead
Both numbers above are gross — they cover the cost of that job only. Your truck, insurance, phone, the hours you spend writing quotes on Sunday and the jobs you bid and lost all come out of that margin before any of it is yours.
A quick sanity check: add up last year's overhead, divide by last year's revenue, and that percentage is what your gross margin has to clear before you have made anything at all. For most small shops it lands between 20% and 35%, which is why a 23.1% margin you thought was 30% is not a rounding error.
