Many construction contractors believe they’re making a healthy profit—until the cash dries up. The root cause? A critical misunderstanding between markup and margin.
On the surface, markup and margin appear to be interchangeable. After all, both deal with profit and both involve math. But one governs your price, while the other determines your true profitability. Get them confused, and what looks like a profitable bid can quietly become a financial liability.
Most contractors mark up labor by 30%, 40% or more, thinking they’ve locked in a solid return. But that markup doesn’t translate directly into a margin. And when labor costs overrun or productivity slips, that margin can shrink dramatically—often without warning.
This is not a theoretical problem. It’s one of the leading reasons why construction companies with full pipelines and busy schedules still operate on razor-thin profits—or worse, go under.
Understanding the difference between markup and margin isn’t optional. It’s essential.
What’s the Difference Between Markup and Margin?
Let’s define them clearly:
- Markup is how much you add to your cost to determine the selling price.
- Margin is how much profit you actually keep as a percentage of your selling price.
At a glance, they sound similar. But the math tells a very different story.
A Quick Example
Say your labor cost is $1,000, and you apply a 40% markup:
\[ \text{Selling Price} = $1,000 × (1 + 0.40) = $1,400 \] \[ \text{Profit} = $1,400 – $1,000 = $400 \]Now, your actual margin is:
\[ \frac{400}{1400} = 0.2857 = \text{28.57%} \]You marked it up 40%, but only realized a 28.57% margin.
And if labor overruns or scope creep increase cost to $1,150?
\[ \text{Profit} = $1,400 – $1,150 = $250 \] \[ \text{Margin} = \frac{250}{1400} = \text{17.86%} \]You’re still billing the same amount, but you’ve nearly cut your margin in half.
Don’t Forget Fully Burdened Labor Costs
One of the most common mistakes new estimators make is using the employee’s base hourly rate instead of their fully burdened rate.
Your true labor cost isn’t just the wage. It must include:
- Payroll taxes (FICA, FUTA, SUTA)
- Workers’ compensation and liability insurance
- Health benefits and retirement contributions
- Vacation, holiday and sick leave accruals
- Training, PPE, supervision and overhead
For example:
- Base wage: $40/hour
- Fully burdened rate: $65/hour
If you markup from $40/hour thinking you’re making a 40% margin, but your actual cost is $65/hour, you’re likely losing money. Always calculate markup and margin using the fully burdened labor cost.
Rule of Thumb vs. Reality
Some estimators use a rule of thumb — adding 28% to the base wage to estimate burdened labor. While this may be close for light office staff or smaller firms, construction labor often carries a significantly higher burden. Depending on the trade, location and union involvement, fully burdened labor costs can range anywhere from 25% to 70% above the base wage.
| Labor Type | Typical Burden % |
| Office/Clerical Staff | 18–25% |
| Non-Union Field Worker | 25–35% |
| Union Field Worker | 35–55%+ |
| Prevailing Wage/Public Works | 50–70%+ |
The takeaway? Use actual data where possible. The more accurate your labor burden assumptions, the more reliable your profit projections will be.
Why It Matters
Misunderstanding margin vs. markup causes:
- Bids that look profitable but aren’t
- Thin or negative cash flow
- Unnoticed margin erosion
- False confidence in project health
Contractors go under not because of a lack of work, but because of a lack of real profit awareness.
https://www.mastt.com/blogs/top-construction-company-collapses-australia
https://www.nlrb.gov/case/18-CA-015652
Converting Between Markup and Margin
Use these formulas:
From Markup → Margin:
\[ \frac{\text{Markup}}{\text{1+Markup}} \]From Margin → Markup:
\[ \frac{\text{Margin}}{\text{1-Margin}} \]Common conversions:
| Markup | Margin |
| 20% | 16.67% |
| 25% | 20.00% |
| 33% | 25.00% |
| 40% | 28.57% |
| 50% | 33.33% |
| 100% | 50.00% |
What You Can Do
- Price to Margin, not markup.
- Track margin during the job — not just at bid time.
- Use real-time reporting to catch margin slippage.
- Educate your team — especially estimators and PMs.
- Use tools (like JobSight360) to monitor actual margin vs. expected margin.
- Always base calculations on fully burdened labor cost to avoid underestimating real expenses.
Final Thought
In construction, the difference between surviving and thriving often comes down to the details that too many overlook. Misunderstanding markup versus margin isn’t just a math error — it’s a profitability trap that silently undermines bids, erodes margins and jeopardizes long-term sustainability.
When estimators use markup without understanding its impact on margin, they risk building their bids on a false sense of profit. And when project managers don’t track actual margins against plan, small overruns turn into significant losses. This gap between what you think you’re earning and what you’re actually earning can be the difference between staying afloat and going under.
Clarity begins by recognizing the true cost of your labor, especially when it’s fully burdened. Control comes from tracking your margins as the job unfolds — not after it’s over.
Know your numbers. Teach your team. Protect your margins. Because in construction, profits aren’t promised — they’re engineered.
If you found this article valuable, stop by JobSight360.com and check out other knowledge articles designed to help you run a smarter, more profitable construction business.