As a homebuilder, mastering the financial side of your business is as critical as your craftsmanship. Two key terms that are often confused—but are essential for profitable project pricing—are “markup” and “margin.” Knowing the difference and applying each correctly ensures you cover costs, set accurate prices, and protect your bottom line.
TL;DR headline: Markup is simply the amount of money you’re making as a % of total costs, while margin is simply the amount of money you’re making as a % of total sales. The raw dollar amount is the same…you’re just measuring the % using a different denominator.
What is Markup?
Markup is the percentage you add to your labor, materials, and other direct and indirect project costs to determine your sales price. In simpler terms, it’s how much you “mark up” the total cost to create room for profit.
Example: If building a home costs you $600,000 in labor, materials, and other project expenses, and you apply a 25% markup, the sales price becomes $750,000. This markup covers overhead expenses and ensures a profit margin.
What is Margin?
Margin, often called “profit margin” or “gross margin”, represents the percentage of the final sales price that is profit. Unlike markup, margin considers the sales price in the calculation, showing what percentage of that price is profit.
Example: Using the same $750,000 sales price, if your costs for labor, materials, and other project expenses are $600,000, your margin is 20% ($150,000 profit divided by $750,000 sales price).
Key Differences to Remember
While every business is unique, there are general industry benchmarks for markup and margin that can guide your pricing strategy. Here is what the team at Monthend is seeing across our client base:
It’s essential to revisit your goals and these benchmarks regularly to align with your actual costs and market conditions. Using Monthend’s expertise in financial reporting and job cost analysis, you can refine your pricing strategies to hit these benchmarks consistently.
1. Estimate Accurately: Start with precise job costing, considering every component of labor, materials, and other direct and indirect costs. This is where Monthend’s workflows with Buildertrend and integration with QuickBooks becomes invaluable, ensuring costs on historical projects are meticulously tracked so you can create better estimates on subsequent projects.
2. Calculate Both Markup and Margin: If you use markup to determine your sales price, verify that your margin aligns with your profit goals and industry benchmarks. Many builders make the mistake of marking up without confirming the actual margin, leading to lower-than-expected profits.
3. Track and Review Financials Regularly: Manage to your targets! Make sure you have real-time accounting so you can track what’s happening. There’s not much point in creating goals if you don’t know how you’re tracking toward them.
Pro tip: Monthend’s ongoing accounting support and job cost tools and reporting help you stay on top of project profitability so you can tell in real time how you’re tracking toward your project goals and overall company financial goals.
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