Markup vs Margin for Contractors —
Why Most SoCal Contractors Are
Under-Bidding Every Job

The Math That Trips Everyone Up

Let's say your costs on a job are $10,000 — labor, materials, and overhead. You add 25% to cover profit. Here's what actually happens:

• Cost: $10,000
• 25% markup: +$2,500
• Price charged: $12,500
• Gross profit: $2,500
• Gross margin: $2,500 ÷ $12,500 = 20%

You applied a 25% markup but you only have a 20% margin. If you're targeting 25% margin — the number you tell your accountant and use to pay yourself — you're actually running 5 points short on every job.

Why This Gap Matters on Real Jobs

On a $50,000 job, the difference between a 20% margin and a 25% margin is $2,500 in your pocket. If you do 10 jobs like that per year, you're leaving $25,000 on the table — not because of bad work, bad crew, or bad clients. Because of a math misunderstanding.

How to Convert Between Markup and Margin

To hit a target gross margin, use these formulas:

• To achieve 20% margin: divide your costs by 0.80
• To achieve 25% margin: divide your costs by 0.75
• To achieve 30% margin: divide your costs by 0.70
• To achieve 33% margin: divide your costs by 0.67

What Gross Margin Should You Target?

For Southern California residential contractors, general benchmarks by trade:

• General contractors (B): 20–30% gross margin is typical
• Specialty trades (C-10, C-36, C-20): 30–45% gross margin is common due to higher skill premium
• Remodeling/renovation: 25–35% gross margin

These are gross margins — before overhead and your own salary. Net margin (after all expenses) is typically 10–15% for healthy contracting businesses.

The Four Numbers Every Contractor Must Know Before Bidding

1. Direct job cost — all labor and materials for this specific job
2. Monthly overhead — fixed costs regardless of whether you're working (truck, insurance, phone, tools)
3. Overhead per job — monthly overhead divided by number of jobs per month
4. Target gross margin — the percentage you need to cover overhead AND profit

Most contractors skip steps 2 and 3. They price based on direct costs and forget that every job needs to contribute to their overhead. This is how contractors stay busy but broke.

A Simple Bidding Formula

1. Add up all direct costs (labor + materials + subs + permits)
2. Add your overhead allocation for this job
3. Add a contingency (5-10% for unknowns)
4. Divide by (1 minus your target margin) to get your bid price

This article is for informational and educational purposes. Consult a CPA for your specific business situation.