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Builder margin vs markup calculator

Cost to price at a chosen margin or markup, the profit in dollars, what the other measure works out to, and the price with GST.

Two words for two different numbers

Markup is profit measured against cost. Margin is profit measured against price. They describe the same dollars from opposite ends, and because the price is always bigger than the cost, the margin percentage is always smaller than the markup percentage for the same job. Confusing them is the most expensive arithmetic error in building, because a builder who wants a 20 percent margin and multiplies the cost by 1.2 has quietly given away a sixth of the profit before the job starts.

price for a margin = cost ÷ (1 − margin)    price for a markup = cost × (1 + markup)
margin = markup ÷ (1 + markup)    markup = margin ÷ (1 − margin)

Markup on costMargin on price$100,000 job sells forProfit
10%9.1%$110,000$10,000
15%13.0%$115,000$15,000
20%16.7%$120,000$20,000
25%20.0%$125,000$25,000
30%23.1%$130,000$30,000
50%33.3%$150,000$50,000

Read the table either way. To earn a 20 percent margin you must mark up by 25 percent. A 20 percent markup earns a 16.7 percent margin.

Gross is not net

The margin on a job is gross profit. Out of it come the overheads, which are every cost that is not on a job: the office, the software, the ute and its fuel, insurances, the phone, the accountant, supervision that is not charged to the job, and the owner's own wage. A small builder with $2 million of turnover and $300,000 of overheads needs a 15 percent gross margin just to break even, and everything above that is net profit. That is why margins that sound comfortable in a quote often turn into a thin year, and why the percentage should be set from the overheads, not from what the builder down the road charges.

What a builder allows We price every job with the divide, never the multiply, and we set the margin from the year's overheads divided by the year's expected cost of work, plus the profit we actually want. When a client asks for a discount, we take it off the margin and say so, because taking it off the cost is pretending the timber got cheaper. And we never quote a margin percentage in a meeting without knowing whether the person across the table means margin or markup.

GST

GST is charged on the whole price, so work out the ex-GST price first and then add 10 percent. The cost you enter should be ex-GST as well, since the GST on materials and subcontractors comes back as input credits. Quotes and contracts for homeowners must state the GST-inclusive price under the component pricing rules of the Australian Consumer Law; quotes between businesses are usually ex-GST with the GST shown separately.

Worked example

A renovation costs $100,000 in materials, labour and subcontractors. At a 20 percent margin the price is $100,000 ÷ 0.8 = $125,000 ex GST, $137,500 inc GST, with $25,000 gross profit. The same job at a 20 percent markup is $120,000 ex GST and $132,000 inc, with $20,000 profit and a 16.7 percent margin. If the overheads that month are $15,000, the first version leaves $10,000 net; the second leaves $5,000.

Common questions

Margin vs markup?

Markup is profit over cost, margin is profit over price. 20 percent markup is 16.7 percent margin.

How do I price for a 20 percent margin?

Divide the cost by 0.8. Never multiply by 1.2.

What margin do builders run?

Gross margins of 15 to 25 percent are commonly quoted, with net profit often only a few percent after overheads.

Is GST on the margin?

On the whole price. Add 10 percent after pricing ex GST.

General arithmetic, not financial or tax advice. Pricing, overhead recovery and GST treatment for your business are matters for your accountant.

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