Markup vs Margin for Contractors: Formulas and Table

Markup and margin describe the same dollars

Start with the dollars. Gross profit on an item or a job is the price minus the cost of what you sold. That is the same idea the IRS uses for the whole business: on Schedule C, line 5 gross profit is receipts (line 3) minus cost of goods sold (line 4).

The two percentages then express that one dollar figure two ways:

• Markup (on cost) = (price − cost) ÷ cost
• Margin (on price) = (price − cost) ÷ price

Take a part that costs you $100 and sells for $150. Gross profit is $50. Markup is $50 ÷ $100 = 50%. Margin is $50 ÷ $150 = 33.33%. Same $50, two percentages.

Because price is bigger than cost whenever you make money, margin is always the smaller of the two. A 100% markup (you double the cost) is a 50% margin. A 50% margin needs a 100% markup.

On this site, "margin" always means the share of price, and we say "markup (on cost)" and "margin (on price)" every time. Not everyone does. IRS Publication 334 describes a check where you divide gross profit by net receipts and compare the result with your "markup percentage" (Pub. 334, chapter 7). That ratio is a share of sales, which this site calls margin. When a supplier, consultant or software screen quotes a percentage, ask one question first: of cost, or of price?

The formulas you need

Every markup and margin question comes down to five lines. Write rates as decimals (35% = 0.35).

1. Price from a markup: price = cost × (1 + markup)
2. Price from a target margin: price = cost ÷ (1 − margin)
3. Margin from a markup: margin = markup ÷ (1 + markup)
4. Markup from a margin: markup = margin ÷ (1 − margin)
5. Multiplier: price ÷ cost = 1 + markup = 1 ÷ (1 − margin)

The first formula is the one the SBA teaches for cost-based pricing: multiply the total cost per unit by the markup percentage to get the markup amount, then add it to the cost for the final price (SBA pricing worksheet). The SBA worksheet marks up total cost per unit, which includes a share of fixed costs. The site's tools carry overhead and the truck inside the hourly rate instead, so in this guide a markup on parts applies to the parts cost only.

Two limits follow from the math. A margin can never reach 100%, because the price formula would divide by zero; as margin approaches 100%, the markup needed grows without limit. A markup has no ceiling, so a big markup can describe an ordinary-looking margin: a 150% markup is a 60% margin.

Markup and margin conversion table

All figures below are site arithmetic from the formulas above, rounded to two decimals.

Markup on cost → margin on price

Target margin on price → markup needed on cost

Read the gap between the columns. At low percentages the two numbers are close (a 10% margin is an 11.11% markup). Higher up, the gap is wide: a 40% margin needs a 66.67% markup, and a 60% margin needs 150%. These rows are conversions, not recommendations; none of the government sources behind this guide sets a "right" markup or margin for any trade.

How to price for a target margin

Use this order whenever you know the margin you want and need a price.

1. Decide which margin you mean. A margin on a parts line, a gross margin on the whole job (after direct costs), or a net margin (after overhead too). Write it down; the rest depends on it.
2. Total the real cost. Use what you actually paid, not list price. IRS Pub. 334 says to use the prices you pay after trade discounts and counts freight-in as part of cost. If your state makes you pay sales tax when you buy materials, that tax is part of your cost too (more on that below).
3. Write the margin as a decimal. 35% becomes 0.35.
4. Divide cost by (1 − margin). $250 ÷ (1 − 0.35) = $250 ÷ 0.65 = $384.62.
5. Round up, then recheck. If you round $384.62 up to $385, the realized margin is $135 ÷ $385 = 35.06%. Rounding up only ever helps.
6. Convert to markup if your software wants one. 0.35 ÷ 0.65 = 53.85% markup. Enter 53.85%, not 35%.
7. Check the whole ticket. A ticket's margin is total gross profit ÷ total price, not the average of the line margins. The worked example below shows why.

The site's markup and margin calculator does steps 4 through 6 and shows the realized margin after rounding.

Gross margin, net margin and your hourly rate

"Margin" by itself doesn't say what has been subtracted. Four different numbers get called margin in a trade shop:

A healthy gross margin can still be a net loss. The SBA defines break-even as the point where total cost and total revenue are equal (SBA); gross margin has to pay the rent, the office, the trucks and the owner before any of it is profit.

Your hourly rate is margin math too. On this site, profit is a share of price: rate = break-even cost per billable hour ÷ (1 − net profit %). For the site's example shop (three plumbers, $120,000 of example overhead, one truck per tech; every input and its source is laid out in the labor rate guide), break-even is $112.68 per billable hour. A 10% net profit on price gives $112.68 ÷ 0.90 = $125.20. Expressed as a markup on break-even, that is 11.11%, the same conversion as the table's first row. The full build is in how to calculate your labor rate. These are example figures, not a recommended rate.

Worked example: a water heater swap with labor and parts

Here is one ticket priced two ways. All inputs are examples, not market prices.

• Heater, fittings, connectors and venting parts: $900.00 cost.
• Labor: 4 billable hours at the example shop's rate of $125.20, which already contains overhead, the truck and a 10% net profit.
• The shop's loaded labor cost (wage, payroll taxes, workers' comp, benefits, paid time off and unbillable time) is $66.07 per billable hour; overhead plus truck is $46.61 per billable hour ($32.87 + $13.74).
• The owner wants 40% on the parts, and means 40% margin.

Version A applies 40% as a markup. Version B divides by (1 − 0.40).

The word "40%" was worth $240.00 on this one heater. Version A delivers a 28.57% margin on the parts, which is exactly the conversion in the table.

Three more things the example shows:

• Labor at the shop rate already carries its own margin. Each billable hour brings in $125.20 against $66.07 of loaded labor cost, a gross margin of 47.23% on labor and, after the $46.61 of overhead and truck, a net margin of exactly 10.00%, because that is how the rate was built.
• The ticket's margin is not the average of its lines. The parts line is at 40.00% and labor at 47.23%; the simple average is 43.61%, but the ticket's real gross margin is 41.81%, because the parts dollars are larger and pull the blend toward their margin.
• Parts markup is where the extra profit comes from. With overhead already inside the rate, every dollar of parts gross profit in this example drops to net job profit.

Turning this into a quote you'd hand a customer (permit, haul-away, code-required parts, the right hours) is covered in how to price a water heater replacement.

The classic mistakes

1. Using a margin target as a markup. The error in version A. "I want 40%" multiplied onto cost gives 28.57%. The fix is to divide: cost ÷ (1 − margin).

2. Marking up a rate that is already a price. The $125.20 shop rate already contains overhead, the truck and profit. Multiplying it by 1.40 "to get margin on labor" ($175.28) is not wrong arithmetic, but it is a different rate, and the profit in it is counted twice. If the rate is too low, rebuild the rate.

3. Discounting off price and assuming the margin barely moves. Take the $100 part sold at $150 (33.33% margin). A 10% discount brings the price to $135. Gross profit falls from $50 to $35, which is 30% less profit, and the margin drops to 25.93%. A discount comes entirely out of your gross profit dollars.

4. Comparing your markup with someone else's margin. A target quoted by a consultant, supplier or software vendor is useless until you know whether it is markup or margin and whether it is gross or net. A "50%" that is a margin needs a 100% markup.

5. Treating gross margin as profit. Gross margin is what is left to pay overhead, trucks and the owner. A job can show a positive gross margin and still lose money once those are counted, which is why the site's job cost calculator shows both numbers side by side.

6. Averaging percentages across lines. Add the dollars, then divide. Total gross profit ÷ total price is the only ticket margin that matches your bank account.

Where sales tax and card fees sit

Neither sales tax nor card processing belongs inside the markup on your parts. They sit next to it, and each needs its own line.

Sales tax

Which sales tax situation you are in depends on your state and on how the contract is written. A few state examples show the range:

• You pay tax when you buy, as the consumer of the materials. The Georgia Department of Revenue says contractors are deemed consumers of materials used in a construction project and must pay tax at the time of purchase (Georgia DOR Contractor FAQs). Florida's Department of Revenue says the same for lump-sum, cost-plus, fixed-fee, guaranteed-price and time-and-materials real property contracts: the contractor is the final consumer of the materials, and no sales tax is collected from the property owner (Florida DOR, Rule 12A-1.051). In that case the tax you paid is part of your cost, and it belongs in the cost you mark up. Leave it out and every margin you calculate is overstated.
• You collect tax from the customer as the seller of the materials. Texas rules treat a contractor on a separated contract as a retailer of the materials incorporated into the realty, who collects tax based on the agreed contract price of those materials and may give suppliers resale certificates instead of paying tax (34 Tex. Admin. Code 3.291). On a lump-sum contract, the same rule has the contractor owe tax on the materials instead. Under a separated contract, the tax is figured on your marked-up parts price, not on your cost.
• You collect tax on the whole job. New York's tax department says repair, maintenance and installation work on real property means you must charge your customer sales tax (New York DTF), and Washington requires prime contractors on custom construction to collect retail sales tax on the gross contract price (Washington DOR). Either way, the tax is a line on top of your price, outside your markup and margin.

When you collect tax and send it to the state, the site's tools treat it as a pass-through: it stays out of the job's price, profit and every margin. In the worked example, 7% (an example rate) collected on the $1,500.00 parts line adds $105.00, so the customer pays $2,105.80, and the ticket's gross profit is still $836.52. For income tax, IRS Pub. 334 says taxes imposed on the buyer that you are required to collect and turn over are generally not included in income, while tax imposed on you as the seller and collected from the buyer is included in gross receipts. Which applies is a question for your accountant.

This is general information, not tax advice. Your state revenue department or a tax professional can tell you which rule covers your jobs; the state-by-state picture is in do plumbers charge sales tax.

Card processing fees

A processing fee is charged on the amount the customer pays, including any sales tax on the invoice. It was not in the cost you marked up, so it comes straight out of your gross profit.

As an example, Jobber's pricing page lists card processing at 2.9% + 30¢ (read October 4, 2026; rates vary by processor and plan). On the $2,105.80 invoice above, the fee is $61.37, and $3.05 of that is the fee on the sales tax you don't keep. Gross profit falls from $836.52 to $775.15, the ticket's gross margin from 41.81% to 38.74%, and net job profit from $650.08 to $588.71 (29.42%).

Because a percentage fee is taken from price, it comes off margin point for point: a part priced for a 40% margin and paid by card at 2.9% keeps 37.10%. To hold the margin after a percentage fee, divide by a smaller number: price = cost ÷ (1 − margin − fee rate). A $100 part at a 40% target and a 2.9% fee prices at $100 ÷ 0.571 = $175.13 instead of $166.67 (add any fixed per-transaction fee to cost first).

Passing the fee to the customer has its own rules. Visa's surcharge Q&A limits surcharges to credit cards (not debit or prepaid), caps them at the lower of your merchant discount rate or 3%, requires notice to your acquirer at least 30 days before you start, and requires disclosure; as of February 15, 2024, Visa understood that Connecticut, Maine, Massachusetts, Oklahoma and Puerto Rico prohibit surcharging. Visa warns that its list may contain errors and sends legal questions to a lawyer, so check your state's current rule with an attorney before you add a surcharge. The details, and how cash discounts differ, are in credit card fees for contractors.

Next step

Open the markup and margin calculator, enter your cost and the margin you actually want, and copy the markup it gives you into your price book or software. Then run one recent ticket through it to see what margin you really earned.