Markup vs Margin: The Pricing Trap That Catches Out Construction Businesses

If you’ve ever finished a job and wondered why the profit in your bank account doesn’t match the profit you thought was in your quote, you’re not alone.

One of the biggest pricing mistakes I see construction businesses make is confusing markup with margin. On paper, the difference looks small. In practice, it can mean the difference between a business that grows sustainably and one that’s always scrambling for cash.

Let’s break it down.

Markup vs Margin – What’s the Difference?

Markup is how much you increase your costs by when quoting.

• If a job costs you £100 in materials and labour, and you apply a 20% markup, you’ll charge the client £120.

Margin is the profit you actually keep from the selling price.

• In the example above, you spent £100 and sold for £120. Your profit is £20. That’s not 20% of the sale price — it’s 16.7%.

The key point: a 20% markup does not give you a 20% margin.

Quick example:

• £100 cost + 20% markup = £120 sell price → £20 profit → 16.7% margin
• £100 cost + 25% markup = £125 sell price → £25 profit → 20% margin
• £100 cost + 50% markup = £150 sell price → £50 profit → 33.3% margin

To hit a 20% margin, you actually need a 25% markup.

Where Construction Businesses Go Wrong

Many contractors believe that adding 20% on top of costs means they’re making 20% profit. But the numbers tell a different story.

Common problems include:

• Quoting too low – Jobs look profitable on paper, but real margins are razor thin once costs are added up.
• Forgetting overheads – Vans, tools, insurance, downtime, tenders, and admin all need to be covered.
• Retention and late payments – If 5–10% of your cash is locked up for months, that eats into your real margin.
• Cashflow mismatches – At year-end, accounts don’t line up with expectations because actual margins were weaker than forecast.

And in construction, where costs move quickly, even a 5% rise in materials or a project overrun can turn a thin margin into a loss.

The Impact on Your Business

Misunderstanding markup vs margin doesn’t just hurt one job. Over time, it leads to:

• Working harder for less return – You’re flat out, but the profit isn’t there.
• Undervaluing your services – You’re effectively subsidising clients with your time and risk.
• Scaling struggles – A £1–2m turnover business with weak margins will always struggle to grow, because overheads grow faster than profit.
• Hiring headaches – Weak margins make it harder to recruit or retain good people.
• Less reinvestment – No cash for new kit, systems, or reserves when you need them.

In short: confusing markup with margin keeps you stuck in busy-but-broke mode.

How to Price Properly – Shift from Markup to Margin

The smarter way to price is to work backwards from the margin you want, not the markup you think will get you there.

Examples:

• To achieve a 20% margin, you need a 25% markup.
• To achieve a 30% margin, you need a 42.9% markup.

Here’s a quick reference:

• 10% margin → 11.1% markup
• 20% margin → 25% markup
• 30% margin → 42.9% markup
• 40% margin → 66.7% markup

This way, you’re not just “adding a bit on top.” You’re deliberately building in the profit your business needs.

Practical Steps to Get Your Pricing Right

Here’s how to make sure you’re pricing for profit, not just covering costs:

• Set your target margin first – Don’t default to “20%.” Decide the profit level that makes the job worthwhile.
• Convert margin to markup – Use the table (or a simple calculator) so you know the exact markup to apply.
• Include overheads – Vans, insurance, downtime, admin, tenders, and retentions all eat into profit. Price them in.
• Review regularly – Material and labour costs move fast. A quote from six months ago might already be out of date.
• Check actual vs forecast – Compare what you thought you’d make to what actually landed in the bank. If margins are slipping, adjust your pricing.

Key Actionable Tip

Run a margin check on your last three jobs.

Don’t just look at what you quoted. Look at what actually hit your bank once materials, labour, overheads, and retentions were taken out.

Compare the margin you planned to the margin you achieved.

Chances are, the numbers won’t match — and that’s your biggest pricing lesson. You’ll see where costs crept in, where you underpriced, and what needs to change in your quoting.

Do this once and you’ll immediately spot whether markup vs margin is costing you profit. Do it regularly, and you’ll build pricing discipline that protects your business long term.

FAQ: Markup vs Margin in Construction

1. What’s a good margin for construction businesses?

Margins vary, but many small-to-medium contractors aim for 20–30% gross margin to cover overheads and still leave a net profit.

2. Should I use the same margin for every type of job?

Not always. High-risk or specialist work may need higher margins. Low-risk, repeat work might be priced slightly tighter. The key is to know your numbers and adjust consciously.

Closing Thoughts

Most construction business owners fall into the markup vs margin trap at some point. The good news is, once you see the difference and price properly, you protect your profit and take control of your business.

Turnover keeps you busy. Margin keeps you in business.

If you’re not sure whether your pricing model is giving you the margins you need, let’s find out. Take our free finance function assessment - it’ll show you where your numbers are strong and where you’re leaving money on the table.