Use cost for the amount you expect the job to consume, price for the amount the customer agrees to pay, and gross profit for the difference. These calculations are useful only when the cost estimate is complete and the target is chosen deliberately.
Three formulas to keep separate
- Gross profit: price − cost.
- Markup: (price − cost) ÷ cost.
- Gross margin: (price − cost) ÷ price.
Markup measures profit against what the work costs you. Margin measures profit as a share of the selling price. Because their denominators differ, the same percentage cannot represent both at once. If you have a target margin, calculate price as cost ÷ (1 − margin). If you have a target markup, calculate price as cost × (1 + markup).
A simple example
Suppose a fictional bathroom update has an estimated cost of $10,000. A 25% markup adds $2,500, producing a $12,500 price. The resulting gross margin is $2,500 ÷ $12,500, or 20%.
A 25% margin on that same $10,000 cost requires a different calculation: $10,000 ÷ 0.75 = $13,333.333… . Because the calculator rounds upward to the next cent, the price is $13,333.34. Gross profit is $3,333.34, and dividing that by the rounded price gives approximately 25%. The markup is about 33.33%.
| Target | Price calculation | Price | Gross margin |
|---|---|---|---|
| 25% markup | $10,000 × 1.25 | $12,500.00 | 20% |
| 25% margin | $10,000 ÷ 0.75 | $13,333.34 | 25% |
Choose the target before calculating
Start with a cost estimate that accounts for the work in scope: labor, materials, subcontractors, disposal, equipment, and other job costs that apply to your operation. State what is excluded or uncertain. An omitted cost makes either formula look more profitable than the job may turn out to be.
Then decide which measure you use to plan prices. If you set a gross-margin target, use the margin formula consistently. If your business works from a markup, use that target consistently and understand the margin it produces. Neither percentage is a universal recommended rate. The right target depends on the contractor's costs, workload, risk, market, and business decisions.
For multiple lines of work, you can calculate a total price from total cost and the chosen target, then review whether individual line prices still make sense. Rounding each line separately may make the final total differ by a few cents. Decide how you will round and compare the rounded quote with the unrounded calculation.
Try the markup and margin calculator with your own inputs. Treat the result as arithmetic, not as a recommendation to charge a particular rate. Examples on this page are fictional, and this guide is not tax, accounting, or legal advice.
Frequently asked questions
Can a 25% markup produce a 25% margin?
No. A 25% markup means profit is one quarter of cost. On a $10,000 cost, that produces $2,500 profit and a $12,500 price, so the margin is 20%. To get 25% margin, use cost divided by 0.75.
Does gross margin equal take-home income?
No. Gross profit is price minus the job costs included in the estimate. It does not automatically account for every company expense, tax, owner draw, financing cost, or future obligation. Choose cost categories consistently and get qualified tax or accounting advice for those questions.
Should every contractor use the same target?
No. This guide explains how the math works; it does not prescribe a pricing rate. Choose and review targets using your own business information.