Markup vs margin,
the difference that decides what you earn.

Markup is the percentage added to cost to reach a selling price. Margin is profit as a percentage of that selling price. To convert, markup = margin ÷ (1 − margin), and margin = markup ÷ (1 + markup). A 20 per cent margin needs a 25 per cent markup, and a 20 per cent markup delivers only a 16.7 per cent margin.

They describe the same dollars from two directions. Because the selling price is always larger than the cost, the same profit is always a smaller percentage of the price than of the cost. A job that costs $100,000 and sells for $120,000 carries a 20 per cent markup and a 16.7 per cent margin. Both statements are true at once; they answer different questions.

• Markup = (price − cost) ÷ cost. It is measured against cost, which is why estimates are built with it.
• Margin = (price − cost) ÷ price. It is measured against revenue, which is why a business is measured with it.
• Price from a markup = cost × (1 + markup).
• Price from a margin = cost ÷ (1 − margin).

Within the wider discipline covered in the estimating reference, markup is the working tool and margin is the measuring tool. An estimator quotes with markup; an accountant, a bank and a business plan all speak in margin. To run the numbers on your own cost, use the margin and markup calculator.

The trap is mechanical. A builder decides the business needs to keep 20 per cent of revenue, then adds 20 per cent to cost because the two words sound like the same thing. The quote goes out at a 16.7 per cent margin, and 3.3 points of revenue are gone on every job priced that way. No single job looks wrong, no invoice is incorrect and no client underpaid, which is why the error survives. It is a structural underpricing of the whole order book, and it grows with volume rather than being diluted by it.

In practice it shows up in three places. A builder tells the bank or the accountant a target margin, then sets the same number in the estimating software's markup field. A field labelled only “profit %” is read one way by the person typing and applied the other way by the software. And a quick price given on site is worked as cost plus a percentage, while the business plan was written in margin. The ten-second test is to put a cost of $100,000 and your percentage into the software and see whether the price comes back at $125,000 (a 20 per cent margin) or $120,000 (a 20 per cent markup).

Margin is the last number applied and the first number decided. In the estimating workflow it goes on after the full cost base is assembled, the measured work priced from the cost database, the trade packages, and preliminaries, the cost of running the job itself. Everything under the margin line is a prediction of cost; the margin line is not a prediction at all. It is a decision about what the business must earn, which is why it belongs to the business rather than to any individual estimate. The estimate's job is to get the cost base right; the margin's job is to get the business paid.

Illustrative figures only, not a benchmark. A builder assembles a GST-exclusive cost base of $500,000 for a new home, covering trade packages, materials, preliminaries and contingency. The business's policy, worked from its overheads and target profit, is a 20 per cent margin.

Priced with a 20 per cent markup (the mistake)

• Price ex GST: $500,000 × 1.20 = $600,000.
• Gross profit: $100,000, which is a 16.7 per cent margin.
• GST at 10 per cent: $60,000. Price to the client: $660,000.

Priced to a 20 per cent margin (the policy)

• Price ex GST: $500,000 ÷ 0.80 = $625,000, which is a 25 per cent markup.
• Gross profit: $125,000, which is a 20.0 per cent margin.
• GST at 10 per cent: $62,500. Price to the client: $687,500.

The difference is $25,000 ex GST on one job, produced entirely by which side of the conversion the builder stood on. Follow it one step further. If overheads run at 12 per cent of revenue in this illustration, the markup version leaves $28,000 of net profit after a $72,000 overhead share, and the margin version leaves $50,000 after $75,000. Three and a third points of margin became nearly 80 per cent more net profit, because the overheads were paid either way.

Why the margin is calculated ex GST

Margin is calculated on GST-exclusive figures because GST is not the builder's money. For a GST-registered builder, the GST on the price is collected for the ATO and the GST paid on inputs is generally claimed back as credits, so both sides of the calculation are held ex GST. Run the margin on the client price instead and the numbers mislead in both directions. $125,000 of gross profit against $687,500 reads as 18.2 per cent, which understates the job. Treat the whole $687,500 as revenue and the gap to cost reads as a 27.3 per cent margin, which counts $62,500 of the ATO's money as profit. This is general education, not tax advice. GST treatment for a particular business and contract is a question for its accountant, with the ATO as the primary source, and the 10 per cent rate should be confirmed against current ATO guidance.

Clients often notice that the builder's price for an item, an oven, a tile or a set of tapware, is higher than the price they can see in a showroom or online, and ask to supply it themselves. That is owner-supplied or client direct supply: the client buys the item and the builder installs it, or arranges for it to be installed. The question underneath is what the builder's markup on a supplied item was paying for.

What the markup on a supply item recovers

When a builder supplies an item, the markup on it recovers more than profit on the item. It pays for choosing and ordering the right product, checking it on delivery, storing and protecting it on site, coordinating the trade that fits it, programming the job around its lead time, and dealing with it when it arrives damaged, late or wrong. It also carries that item's share of the business's overheads. When the client supplies the item directly, the markup leaves the contract, but most of that work and some of that risk do not.

A simple illustration. A $30,000 supply package the builder would price at a 25 per cent markup sells for $37,500 ex GST, a gross profit of $7,500 and a 20 per cent margin on that package. If the client supplies it directly, the contract price falls by $37,500 and the builder's gross profit falls by $7,500. The builder's site manager still has to receive the goods, chase the missing part and hold the installer's day open.

How builders handle it

• Price coordination and attendance as their own lines, rather than recovering them only inside supply markup, so the work stays paid for whoever supplies the item.
• Write down, in the contract or a signed variation, who supplies the item, who installs it, who bears the risk of late, damaged or incorrect supply, and how any delay it causes is treated.
• Be clear about the warranty boundary. The builder installs the item; the client's supplier stands behind the item itself. A defect that sits on the line between the two is easier to resolve when the line was drawn before the work started.
• Where the contract allows it, apply a handling or coordination charge to client supplied items. Whether that is permitted, and how it must be disclosed, depends on the contract and on the domestic building rules in your state or territory.

How a PC or PS allowance interacts

Many items clients want to supply sit in the contract as prime cost items or provisional sums. If a client chooses to supply a prime cost item directly, the allowance normally comes out of the contract price, and the questions become how much comes out (the allowance alone, or the allowance plus any margin the contract attached to it) and what installation work stays in. The answer is set by the contract wording and, in several jurisdictions, by legislation that regulates how margin is treated on allowance adjustments. The classic gap is the same one that drives allowance disputes generally: an allowance described as supply only, or as supply and install, decides what the builder still owes once the client buys the item. Agree it in writing as a variation before the client places the order.

This section explains the mechanism, not the law in any state. Contract terms, any prescribed margins on allowance adjustments, and anything in a domestic building contract calculated from the contract price should be confirmed against your contract and your state's current rules.

The arithmetic is identical for a subcontractor. A trade that adds 20 per cent to its material invoices is earning a 16.7 per cent margin on those materials, not 20. Labour works the same way. A charge-out rate is a markup on the true cost of an hour (wages, on-costs, vehicle, tools and the unbillable hours around it), and the margin it delivers is smaller than the gap between the two numbers suggests. The conversion table above applies line for line.

For the builder, a trade's quote already contains that trade's margin. The builder's markup then goes on top of the quote as a cost. That is not margin on margin in any sense that matters: each business is recovering its own overheads, and the builder's markup pays for engaging, programming, supervising and standing behind the trade's work. Leaving trade packages out of the markup because they “already have margin in them” is one of the ways a priced margin quietly lands below policy.

Builders who quote off a gut markup discover their real margin at tax time, when the accountant reconciles a year of jobs into one number that nobody chose. The operators who avoid that treat margin as a policy decision, made from the overhead base and the profit the business should earn, written down, and applied to every estimate the same way. The per-job conversation is then about the cost base and the risk, never about shaving the margin to win the work. When a price has to move to win a job, they move it visibly, as a deliberate decision with a reason attached, rather than letting optimism rewrite the policy one quote at a time.

The same operators police the boundary between contingency and margin. Contingency that is never spent has a way of being silently counted as profit, which teaches the business that its margins are healthier than they are, right up until a job spends its contingency and the reported margin collapses. Keeping the two as separate lines, and reporting them separately at close-out, is a small discipline with a large payoff in honest numbers. In a soft market the discipline tightens rather than relaxes. Volume does not fix a margin problem, it multiplies it, and the builders who came through the recent contraction best were the ones who protected margin and managed capacity rather than chasing turnover, a pattern covered in building through a downturn.

Where software fits the workflow

The margin decided at estimate time only means something if the job reports against it. Traditionally the estimate lives in one file and the actuals in the accounting system, so the achieved margin is reconstructed months later, if at all. In VIABUILD the estimate becomes the job budget, and cost tracking holds actual and committed costs against it while the job runs, so the builder watches the margin move week by week instead of meeting it at tax time. The working practices behind that loop are covered in the builder cost tracking guide.

Margin itself is a commercial decision, but the numbers around it are shaped by tax and by state contract law. The points below are labelled by evidence class. They are general education, not tax or legal advice; confirm the current position with your accountant and the primary sources before relying on any of them.

• Government guidance. GST applies to most residential building work, and a GST-registered builder charges GST on the price and remits it through the business activity statement, claiming credits for GST paid on inputs. The GST a builder collects is not income and sits outside margin arithmetic. The ATO is the primary source for registration, invoicing and BAS obligations, and the treatment for a specific business belongs in a conversation with its accountant.
• Common practice. Cost databases, estimates and margin calculations are held GST-exclusive, and GST is added once, at the end, at the current rate (10 per cent at the time of writing, confirm against ATO guidance). A single GST-inclusive rate keyed into an exclusive database corrupts the cost base, and the markup then compounds the error into the price.
• Common practice. GST and calculation errors on incoming subcontractor invoices are a recurring administrative drag. An invoice that understates or omits GST distorts the recorded cost of the job, and therefore the achieved margin, until it is corrected. Builders who have been burned once tend to re-check every invoice from that trade, which is pure overhead; systematic checking of invoice arithmetic is the cheaper habit.
• Legislation. Domestic building contract legislation in each state and territory regulates how prime cost and provisional sum allowances are adjusted, and in several jurisdictions how the builder's margin may be applied to those adjustments and to variations. The rules and any prescribed percentages differ by jurisdiction and change over time, so confirm your contract and your state's current legislation rather than pricing from the mechanism alone.

Markup (a percentage added to cost to reach the price), margin (profit as a share of the selling price), gross margin (price less direct job costs), net profit (what remains after overheads), overhead recovery (the share of margin that pays for the business), cost base (the full predicted cost the markup is applied to), GST-exclusive (a price or rate before GST is added), BAS (the business activity statement through which GST is remitted), direct supply (an item the client buys and the builder installs or coordinates). Definitions for the wider vocabulary live in the construction glossary. With the margin decided as policy, the next number to hold separate from it is the allowance for identified risk, which is where contingency in residential estimating picks up.

• Australian Taxation Office , the primary source for GST registration, tax invoicing and business activity statement obligations for building businesses.
• Your state or territory's building regulator and fair trading body, for the domestic building contract rules that govern margin on variations, on prime cost and provisional sum adjustments, and on client supplied items in your jurisdiction.
• Your accountant, for how margin policy, overhead recovery and GST treatment apply to your specific business structure.