Margin and markup in an estimate: use the right denominator

Written by the Offertje editorial team. Examples are illustrations, not market-rate research. Reviewed November 5, 2026.

Adding 25% to your cost does not produce a 25% margin. The difference is the denominator. Markup is measured against cost; margin is measured against the selling price. Keeping that distinction visible is useful when estimating labor, materials or a complete project.

Check one estimate both ways

Suppose the costs included in your model total $800 and you sell the described work for $1,000, before sales tax. The difference is $200. Your markup is $200 ÷ $800 × 100 = 25%. Your margin is $200 ÷ $1,000 × 100 = 20%.

That $200 is not necessarily net profit. If the $800 only covers direct labor and materials, business overhead and other costs still need to be funded. Write down whether your cost figure includes travel, disposal, subcontractors, overhead allocation and other job expenses before comparing two margins.

Work backwards from a target

With markup, selling price = cost × (1 + markup). With margin, selling price = cost ÷ (1 − margin). Enter percentages as decimals in these formulas. A 25% markup on $800 gives $1,000. A 25% target margin gives $800 ÷ 0.75 = $1,066.67 after rounding.

The second figure is higher because a quarter of the final selling price must remain after the included costs. A 100% margin with a positive cost has no finite selling-price solution. Keep the target below 100% and treat the answer as a model of your inputs, not a market recommendation.

See the effect of a discount

Reduce the original $1,000 selling price by 10% and the customer pays $900 before tax. With costs unchanged at $800, only $100 remains. The contribution has fallen by half. The new margin is $100 ÷ $900 × 100, approximately 11.11%; the new markup is 12.5%.

Before offering the discount, ask whether the scope or cost also changes. A lower price for a smaller deliverable may be workable. The same job for less money can leave too little to cover the rest of the business. Sales tax should not be mistaken for extra contribution.

Carry the checked price into the job document

Use the margin and markup calculator, test reductions with the discount calculator, then put the chosen price into an itemized estimate. Recalculate when scope or costs change. The amounts here are arithmetic examples, not typical contractor rates or promised profit levels.