You quote a job, add what you think of as your profit, and the invoice looks healthy. Months later the bank balance disagrees. For a lot of contractors the leak is not fraud or a bad customer — it is a single misunderstanding about two percentages that look identical and are not.
Why this matters right now
If you price by adding a percentage to your cost, you are using markup. If you assume that percentage is also what you keep, you are reading it as margin. The two are different, and the gap quietly compounds across every quote you send this year.
The two percentages, side by side
Markup is measured against cost. Margin is measured against the price the customer pays. Add 20% to $6,000 of cost and the price is $7,200. Your profit is $1,200 — but $1,200 is only 16.7% of the $7,200 the customer paid. The 20% markup produced a 16.7% margin, not a 20% one.
To actually keep 20%, you divide cost by 0.80: $6,000 ÷ 0.80 = $7,500. That is a 25% markup. In other words, a 20% margin needs a 25% markup, every time.
What the gap does over a year
On one job the difference is a few hundred dollars. Across $500,000 of billed work, the difference between believing you hold a 20% margin and actually holding it is several points of revenue — real money that never shows up as a single visible mistake.
How to stop it
Decide the margin the business needs, then price with cost ÷ (1 − margin). Keep a conversion in your head: 20% margin = 25% markup, 25% margin = 33% markup, 30% margin = about 43% markup. Check the margin again after any rounding.
Frequently asked questions
Is a 20% markup the same as a 20% margin?
No. A 20% markup on cost produces about a 16.7% margin. To keep a 20% margin you need a 25% markup.
How do I turn a target margin into a price?
Divide cost by (1 minus the margin). For a 20% margin on $6,000 of cost, price is $6,000 / 0.80 = $7,500.
Why does the difference matter so much?
Because it repeats on every quote. Across a year of work, a few points of margin lost to the mix-up adds up to real money.
What to do next
Method: arithmetic checked against worked examples. See the Markup vs. Margin guide for the full table.