Quick answer: Markup is the amount added to cost, expressed as a percentage of cost. Gross margin is the amount left after that cost, expressed as a percentage of the selling price. A 25% markup produces a 20% gross margin, not a 25% gross margin.

Getting the formula right matters, but the cost underneath it matters just as much. If labor, disposal or subcontractor work is missing, applying the correct percentage still produces an incomplete price.

Use the right denominator

Markup: (selling price − cost) ÷ cost.
Gross margin: (selling price − cost) ÷ selling price.
Price for a target gross margin: cost ÷ (1 − target margin).

Use decimals in the pricing formula: a 25% target margin is 0.25. Keep the definition of “cost” consistent when comparing jobs. The figures below use estimated direct job cost; they do not imply net profit.

A worked example with fictional numbers

Illustrative example: Estimated direct job cost is $4,000. This is an invented example for the calculation, not a market price, customer result or recommended rate.

Markup and margin on a $4,000 cost example
Method	Selling price	Gross profit	Gross margin
Add 25% markup	$5,000	$1,000	20%
Target 25% gross margin	$5,333.33	$1,333.33	25%, before rounding

The second price comes from $4,000 ÷ 0.75. Gross profit must still support overhead and other expenses before it becomes net profit. A business with more office, vehicle or supervision expense may need a different pricing structure from another contractor.

Build a cost basis you can explain

Materials: Supplier quotations, freight, applicable purchasing costs and realistic order quantities.
Labor: Expected hours and the labor cost basis your business uses, rather than wages alone when other employment costs apply.
Subcontractors: Written quotes with the same scope and boundaries as your proposal.
Equipment and disposal: Rentals, delivery, hauling and disposal tied to the actual job.
Project conditions: Protection, access, mobilization and supervision that the work requires.

A contingency is not a substitute for inspection. Identify the uncertainty it addresses and keep known work in the base scope. If a condition is unresolved, name it rather than silently assuming the cheapest outcome.

Do not apply percentages twice

Some unit prices already contain labor, overhead or profit. Adding another markup without understanding the rate can double-count those components. Decide whether your price library stores cost rates or selling rates, and label it consistently.

When a customer asks for a lower price, evaluate a smaller scope, a different material selection or a scheduling alternative. Recalculate the cost before agreeing. A discount does not remove the cost of performing the same work.

Compare the estimate with the completed job

After completion, compare estimated and actual labor, material and subcontractor costs. Record why they differ. A missed finish task needs a scope correction; a supplier increase needs a pricing update; repeated labor overruns may need a production assumption review.

SnapDamage lets you review and edit drafted line items and pricing. Enter and check your own rates and markup. Use the estimate template to keep the priced scope clear.

Frequently asked questions

What markup should a contractor use?

There is no universal percentage. Set pricing from your costs, overhead, risk, capacity and business goals, with appropriate accounting input.

Is gross margin the same as net profit?

No. Gross margin in this example is before overhead and other business expenses. Net profit reflects the broader expense picture.

Can software choose my profitable price?

Software can calculate from supplied assumptions. It cannot confirm that your job costs, production rates or desired business return are correct.