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Gross margin

Gross margin is the share of the price left after the direct cost of the job, usually shown as a percentage: price minus COGS, divided by price.

Example

A job priced at $2,000 with $1,200 of direct cost has a gross margin of $800, or 40%.

Also called gross profit margin, or just margin.

Open the markup calculator

What it means in practice

Gross margin is price minus COGS, divided by price. It is the number that tells you whether the work is worth doing, because overhead and profit both have to come out of it.

It is not markup. Markup is measured against your cost, margin against your price, and confusing the two is the most common way a job that looked fine ends up losing money.

Markup against margin on the same jobA fifty percent markup on a cost of one thousand gives a price of fifteen hundred and a margin of thirty three percent. A fifty percent margin gives a price of two thousand.FIFTY PER CENT OF WHATThe same job, the same cost of 1,000.00, priced twiceCOSTPROFIT50% markup on cost500 on 1,500 is a 33% margincost 1,000500.00= 1,500.0050% margin on price1,000 on 2,000 is a 100% markupcost 1,0001,000.00= 2,000.00Markup is measured against what the job cost you. Margin is measured against what you charged.A 50 percent markup is a 33 percent margin. Quote one thinking it is the other and a third of the profit isgone.
One cost of 1,000, priced twice. Fifty percent of the cost and fifty percent of the price are two different amounts of money, which is where a quote quietly loses its profit.

Where it shows up on the paperwork

Margin is a number you carry into your prices rather than one you print. It shows up on the estimator as the difference between what a job costs you and what you charge for it.

What goes wrong

  • Confusing it with markup, which is the same money measured against a different base.
  • Including overhead in the cost, which makes every job look worse than it is.
  • Setting one target margin for materials and labor when the two carry very different risk.

Common questions

What is the difference between margin and markup?

Markup is measured against your cost, margin against your price. A 50% markup gives a 33% margin. Confusing the two is how a job that looked fine ends up thin.

What gross margin should a trade business aim for?

It varies too much by trade to give one figure, and anyone quoting a single number is guessing. What matters is that the margin covers your overhead per hour with something left, which the cost estimator shows as you price.

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