You Marked It Up 40%. You Kept 28%.

Markup and margin are two different numbers. The gap between them is the most expensive vocabulary mistake in the trades, and it takes about five minutes to fix for good.

Ask a shop owner what he makes on a job and you’ll usually hear some version of the same answer: “We mark everything up 40.”

Now ask what his margin is.

Same answer. “40.”

Here’s the thing: those are two different numbers. And the gap between them isn’t some small rounding error. It’s real money, leaving quietly, that can knock your business off track and even affect your lifestyle at home.

To drill the point home right from the start, here’s the conversion chart.

The conversion chart

Margin never catches up to markup. Print this and tape it on your fridge, your desk, your truck, anywhere you build quotes.

Notice the bottom row. “We doubled our money” is a 50% margin, not a 100% one. Markup always sounds bigger than the margin it delivers, which is exactly why the confusion survives.

As I walk through the math behind these figures and what this mistake costs, start getting in the habit of pricing and quoting everything by your target margin. Margin is the number that matters. Your bank statements and your P&L are shaped by your margins. Whether you get approved for that loan is based on your margins. What your company is worth, and what it could one day sell for, is driven by your margins. Not markup.

Two words, two denominators

Markup is measured against your cost. Margin is measured against your price. That’s the entire difference, and it’s everything.

Say your cost on a job (equipment, materials, direct labor) comes to $10,000. You add your standard 40% markup and quote $14,000.

Your gross profit is $4,000. But margin asks a different question: what percentage of the price did you keep?

$4,000 ÷ $14,000 = 28.6%

You marked it up 40%. You kept 28.6%. Nothing went wrong on the job. The math was just measuring against the wrong number the whole time.

So how do I price for an actual 40% margin? Don’t multiply by 1.40. Divide by 0.60. The formula is Price = Cost ÷ (1 − Target Margin). In this example: Price = $10,000 ÷ (1 − 0.40)

$10,000 ÷ 0.60 = $16,667, which is a 66.7% markup

To keep 40%, you have to mark up almost 67. Most owners hearing that for the first time assume it’s a typo. Run it on a napkin: $6,667 profit ÷ $16,667 price = 40%. It holds every time.

Divide, don’t multiply.

This isn’t a problem for just the trades or new owners. I’ve watched people with finance degrees, owners in their first year, and owners 10+ years into the industry mix these numbers up. Honestly, a big part of the problem is simply how similar the words sound. Some people think, “there can’t be that big of a difference, right?” Until you see what the difference costs.

What the gap actually costs

Let’s say an owner is having a great year. Demand is strong, the crew is closing, and the schedule is full. The company is on track to do $2 million in service business, and the firm has a philosophy of marking everything up 40%. The owner is making plans for the business, and for his own lifestyle, assuming a year at a 40% margin that will cover the investments the business needs and his take home pay. The bad news: the company is actually running at a 28.6% margin. That difference, 11.4 points of revenue, is about $228,000 a year he believes is in the price and isn’t. Suddenly the payment arrangements with vendors stop working, payroll starts to feel uncertain, and to top it all off he has to head home and tell his spouse the Hawaii trip during the holidays can’t happen.

And that missing $228,000 explains a stat that should bother everyone in this industry. Benchmarks say contractors should be netting 15 to 20% from their work. Platform data from ServiceTitan, the biggest software player in the trades, shows most shops running under 10%, and plenty at 2 or 3%.

The reality is that pricing mistake set the business up for some genuinely tough times. And this is a problem you won’t spot after one or two jobs. Maybe you’re thinking you’d never go a full year without noticing, like the owner above. Plenty of companies I have seen went a few months, sometimes the better part of a year, without catching the disconnect between their pricing and what was showing up on the P&L. At scale, that little bit of time is all it takes to start a money crunch that flows through the business and eventually hits your personal bank account too.

Your margin has two jobs: cover overhead first, then pay you. When you’re quietly short of what you planned for, guess which job doesn’t get done.

If your real number surprises you, don’t reprice everything overnight. Next quote you build, use the divide rule, watch what changes, and go from there. Pricing is a steering wheel, not a light switch.

Common Questions

Is a 40% markup the same as a 40% margin?

No. A 40% markup produces a 28.6% gross margin. Markup is a percentage of cost; margin is a percentage of price.

How do I convert markup to margin?

Margin = Markup ÷ (1 + Markup). A 30% markup: 0.30 ÷ 1.30 = 23.1% margin.

How do I price a job to hit a target margin?

Price = Cost ÷ (1 − Target Margin). For a 35% margin: cost ÷ 0.65.

What gross margin should a contractor target?

It varies by trade: roughly 50-55% blended for HVAC and plumbing service work, and 65-67% for electrical, to land in that 15 to 20% net range. Install and service margins differ too, which is its own conversation for a future issue.

If you read this and thought, “I honestly don’t know what my real margin is,” that’s exactly the kind of thing our assessment digs into. No pitch. Just your numbers, and what they’re telling you.

Next issue: your $28 an hour tech doesn’t cost $28. By the time payroll taxes, insurance, the truck, and the hours he can’t bill are counted, he’s a $41 an hour employee, and if your rate card was built on $28, we’ve already found your next leak. That one’s called Fully Loaded Labor Cost. It’s live now.

Jason Rousseau, Foundational CFO Group