Markup vs margin in an electrical bid: formulas and a table

In short: Markup and margin describe the same profit dollars against two different bases. Markup is profit as a percent of your cost; margin is profit as a percent of the sell price. Because the sell price is always larger than the cost, the margin is always the smaller number: a 20% markup on an electrical bid produces a 16.7% margin, and earning a 20% margin takes a 25% markup. Typing a margin target into a markup field underprices the job.

Key takeaways

• Markup is profit / cost. Margin is profit / sell price.
• To convert: margin = markup / (1 + markup) and markup = margin / (1 - margin), with both written as decimals.
• A 20% markup is a 16.7% margin. A 20% margin needs a 25% markup.
• Overhead and profit applied one after the other compound: 10% and then 10% is a 21% markup on cost, not 20%.
• TakeOn’s Bid Summary takes profit as a markup on cost and shows the margin that markup produces next to it.

What is the difference between markup and margin?

Markup is profit expressed as a percentage of cost, and margin is profit expressed as a percentage of the sell price. The profit dollars are identical; only the number underneath them changes.

Say an electrical job costs you $80,000 and you sell it for $100,000. The profit is $20,000 either way.

• Markup: 20,000 / 80,000 = 25%
• Margin: 20,000 / 100,000 = 20%

Estimators tend to work in markup, because an estimate is built up from cost. Owners, accountants and lenders tend to work in margin, because a profit and loss statement starts from revenue. Both are correct. The error comes from moving a number from one world to the other without converting it.

How do you convert markup to margin and back?

To convert a markup to a margin, divide the markup by one plus the markup. To convert a margin to a markup, divide the margin by one minus the margin. Write the percentages as decimals first.

margin = markup / (1 + markup)
markup = margin / (1 - margin)

A 35% markup is 0.35 / 1.35 = 0.259, a 25.9% margin. A 35% margin is 0.35 / 0.65 = 0.538, a 53.8% markup.

Markup on cost	Resulting margin
10%	9.1%
15%	13.0%
20%	16.7%
25%	20.0%
30%	23.1%
35%	25.9%
40%	28.6%
50%	33.3%

Going the other way, from a margin target to the markup that earns it:

Target margin	Markup needed
10%	11.1%
15%	17.6%
20%	25.0%
25%	33.3%
30%	42.9%
35%	53.8%
40%	66.7%
50%	100.0%

The gap between markup and margin widens as the numbers grow. At 10% the two are less than a point apart; at 50% they are almost 17 points apart.

What happens if you apply a 20% markup when you wanted a 20% margin?

If you apply a 20% markup when you wanted a 20% margin, you end up with a 16.7% margin and a sell price that is too low. Here is the mistake on an example job with $80,000 of cost.

Example job	20% markup (the mistake)	20% margin (the intent)
Cost	$80,000	$80,000
Calculation	80,000 x 1.20	80,000 / (1 - 0.20)
Sell price	$96,000	$100,000
Profit	$16,000	$20,000
Margin	16.7%	20.0%

The difference is $4,000 on one job, a fifth of the profit you planned to make. Nothing in the spreadsheet looks wrong, because 20 was typed and 20 is displayed. The shortfall shows up later, when the year’s profit comes in under target and no single job explains it.

Where does overhead fit in markup and margin?

Overhead is a cost you have to recover, not profit, so it belongs in its own step ahead of the profit markup. Overhead is what it costs to keep the shop open whether or not this job is won: office rent, estimating and office salaries, software, insurance that is not tied to a job. Profit is what is left after the job’s direct cost and its share of overhead are both paid.

When overhead and profit are applied one after the other, each as a percent of the running cost, they compound. On the same $80,000 example:

direct cost                     80,000
overhead   10% of 80,000         8,000   ->  88,000
profit     10% of 88,000         8,800   ->  96,800

That is a 21% markup on direct cost, not 20%, because the profit markup also lands on the overhead. The profit margin is 8,800 / 96,800 = 9.1%. Overhead and profit together are 16,800 / 96,800 = 17.4% of the sell price, which is the figure an accountant would usually call gross margin on the job. Two different “margins” on one job, so say which one you mean.

The same base problem applies to overhead itself. If your books show overhead at 15% of revenue and you want profit at 10% of revenue, direct cost has to be the remaining 75%. On a job with $75,000 of direct cost, that means a $100,000 sell price: $15,000 of overhead and $10,000 of profit. Entered as markups in order, that is an overhead rate of 15,000 / 75,000 = 20% of cost, then a profit markup of 10,000 / 90,000 = 11.1%. Neither is the 15 or the 10 you started with. Overhead and profit rates vary widely from shop to shop, so work yours out from your own books rather than borrowing a rule of thumb.

Why does markup vs margin matter when an owner or GC says “margin”?

Markup vs margin matters because the person setting the target and the spreadsheet applying it are often using different bases without saying so. A business owner who says “we need 25% on this one” is usually reading a profit and loss statement, where everything is a percent of revenue. If the estimator types 25 into a markup field, the $80,000 example job sells for $100,000 at a 20% margin. A true 25% margin needs a 33.3% markup and a sell price of 80,000 / 0.75, about $106,667. The job went out $6,667 light.

It also runs the other way. Contract language that limits what you can add to a change order is often written as a percent of cost, which is a markup. Read the clause and confirm the base before you price against it.

The habit that prevents both errors is to never say a bare percentage. Say “25% markup on cost” or “25% margin on the sell price”.

How does TakeOn’s Bid Summary handle markup and margin?

TakeOn’s Bid Summary takes profit as a markup on cost and shows the margin that markup produces, so the two numbers sit side by side. The Bid Summary is the page in TakeOn where a priced takeoff becomes a sell price.

The inputs are labelled Overhead (% of cost) and Profit markup (% of cost), so the base is never ambiguous. The Bid Summary applies them in order, the way the compounding example above does: overhead is a percent of the prime cost subtotal (material with waste, burdened labor, small tools and any marked-up direct job expenses or quoted lines, plus contingency if you carry one), and profit is a percent of that cost plus overhead. Sales tax is calculated after profit and is not marked up.

The margin appears in three places:

1. A hint under the Profit input, such as ”= 16.7% gross margin”, which appears as soon as you type a markup.
2. A Gross margin line under the sell price in the waterfall.
3. A gross margin row in the Bid Summary’s CSV export.

TakeOn’s Gross margin figure is the profit as a percent of the pre-tax sell price, which works out to markup / (1 + markup), shown to one decimal. It is the profit-only margin: overhead is recovered on its own line and is not counted in it, and sales tax and pass-through lines billed at cost are left out of the base so the tax rate cannot move it.

What the TakeOn Bid Summary does not do today is accept a target margin and work out the markup for you. If your target is a margin, convert it with the table above and enter the markup. The margin readout will confirm you landed where you meant to.

If the quantities feeding the bid are the part you are still working out, start with what an electrical takeoff is or the PDF to bill of materials walkthrough.

Schedule a demo to see the Bid Summary price a takeoff, markup and margin included.