Markup starts with cost
Markup describes how much you add to a cost to arrive at a selling price. If an item costs £100 and you apply a 25% markup, the selling price is £125. The calculation is straightforward: cost multiplied by one plus the markup rate.
Markup is convenient when pricing individual materials or subcontract items because the cost is usually the number already in front of the estimator. The risk is assuming that a 25% markup means you will make a 25% gross margin. It does not.
Margin starts with selling price
Gross margin measures gross profit as a percentage of the selling price. On the £100 cost sold for £125, the gross profit is £25, but £25 is only 20% of the £125 selling price. That means a 25% markup produced a 20% gross margin.
When management targets are expressed as gross margin, the selling price has to be calculated from the required margin. For a £100 cost and a 25% target margin, the selling price is £100 divided by 0.75, which is £133.33 before any tax that applies.
Why the gap matters on real projects
The difference becomes significant as project value grows. If an estimator repeatedly uses markup percentages while management reviews performance against margin targets, quotes can look healthy at approval stage and still miss the commercial target after completion.
The same problem appears when different cost categories use different conventions. Materials might use a markup, labour might use a selling rate and subcontractors might be passed through with a project fee. That can be perfectly valid, but the final quote should still be checked as a whole against the expected gross profit and gross margin.
Choose one commercial language for reviews
Estimators can work with the method that best fits each cost type, but approval reports should convert the result into a common commercial view. Show total cost, selling price, gross profit and gross margin together. That makes it much harder to approve a quote on the basis of a misunderstood percentage.
- Total direct labour cost
- Total materials and subcontract cost
- Project-specific overhead or plant
- Quoted selling price before applicable tax
- Expected gross profit and gross margin
Use completed jobs to validate the target
A margin target is only useful if it reflects the overhead and risk of the business. Review completed-job margins alongside overhead, callbacks, write-offs and the amount of estimating effort required. If a category of work consistently delivers less than the quoted margin, investigate the estimating model before simply increasing the target percentage.