Markup vs. margin: how to price a job so it pays

To price a job so it pays, you need two things: the true cost of the job, and a clear idea of how much profit you want from it. Many owners get the first part almost right and then lose money on the second, because "add 30%" can mean two very different things. This guide covers the true cost of a job, markup versus margin, and setting your own hourly rate. All the figures below are made-up examples, not client numbers.

What a job really costs

The cost of a job is more than the materials you buy for it. Before you think about profit, add up everything the job uses:

• Labor. The hours each person spends on the job, times what each hour costs you. Include your own time, even if you do not pay yourself a set wage. If you leave yourself out, the price only works as long as you work for free.
• Materials and supplies. What you buy for this job, plus a fair share of the supplies you use up along the way.
• Other job costs. Fuel to get there, dump fees, equipment rentals, parking, and delivery app or platform fees.
• A share of overhead. The costs that keep the business open whether or not you have a job that day, such as insurance, your phone, software, the vehicle payment, and rent if you have a shop.

Here is an example. A job takes you and a helper ten hours each, and your labor cost is $40 an hour for each of you, so labor is $800. Materials are $300, fuel and a dump fee add $100, and the job's share of overhead is $200. The true cost of the job is $1,400.

Markup and margin are not the same number

Both words describe profit as a percentage, but they measure it against different things.

• Markup is profit compared with your cost.
• Margin is profit compared with the price the customer pays.

Take the $1,400 job. If you want a 30% margin, profit has to be 30% of the price. The price is the cost divided by 0.70: $1,400 divided by 0.70 is $2,000. Your profit is $600, and $600 is 30% of $2,000.

Now say you add a 30% markup instead. Thirty percent of $1,400 is $420, so the price is $1,820. Your profit is $420, and $420 is only about 23.1% of $1,820. Same job, same "30%", and $180 less profit.

That gap is where the money goes. If you decided you need a 30% margin to cover slow months and growth, but you price by adding 30% to cost, every job comes in short. The gap also grows as the percentage grows. A 50% markup is a 33.3% margin, and a 100% markup, doubling your cost, is a 50% margin. A margin can never reach 100%, because that would mean the job cost nothing.

Pick one way of thinking and use it every time.

Spreading overhead across your jobs

Overhead is the cost owners forget most often, because it does not show up on any one job. A simple way to include it is to divide your monthly overhead by the number of jobs you do in a typical month.

In the example, overhead is $4,000 a month and the business does about 20 jobs a month, so each job carries $200 of overhead. Use a normal month, not your busiest one, or the share will be too small when work slows down.

The numbers you use here are only as good as your records. Monthly bookkeeping shows what your overhead and your jobs really cost, so you are not guessing.

If the business is mostly you: setting your own hourly rate

When you are the main worker, the hardest number is the cost of your own hour. Start from the income you want to take home from the business in a year, then divide it by the hours you can actually bill.

Billable hours are fewer than working hours. Driving, quotes, supply runs, messages, and paperwork take time no customer pays for. Say you want $50,000 a year, you plan to work 48 weeks, and about 30 hours a week are spent on paid work. That is 1,440 billable hours, and $50,000 divided by 1,440 is about $35 an hour. If you had divided by a full 40 hours a week, you would have landed near $26 and come up short every week.

Keep business expenses out of this number, because they are already in overhead, and counting them twice would overprice your work. Taxes depend on your situation, so talk them over with whoever prepares your return.

Try the job pricing calculator

Our free job pricing calculator does the math above for you. You enter labor lines, including your own hours, materials, other job costs, and overhead, either as an amount per job or as monthly overhead and jobs per month. Then you choose the margin you want. It shows the total cost, the price to charge, your profit in dollars, and the markup that price works out to, side by side.

If you think in markup, you can switch to it and see the margin it gives you. You can also load an example: a recurring house cleaning, a small remodel, or a food truck catering order. The examples are sample numbers, not client figures or industry standards. The calculation happens in your browser, and nothing you enter is stored.

Let's talk about your prices

Pricing gets easier when the numbers behind it are real. If you would like to look at what your jobs cost and whether your prices cover them, send us a message in English or Spanish, and we can talk it through.

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Written by the team at Choice Business Advisors, a bookkeeping, tax, and advisory firm based in Utah serving small businesses across the United States in English and Spanish.