The formula: markup versus margin
Markup and margin describe the same dollars of profit against two different bases. Markup measures profit against cost. Margin measures it against the selling price. Because the price is bigger than the cost, the margin percent is always smaller than the markup percent for the same job.
- Total cost = direct cost + overhead. Overhead entered as a percent is that percent of direct cost.
- Price with a markup = total cost × (1 + markup).
- Price with a margin = total cost ÷ (1 − margin).
- Margin = markup ÷ (1 + markup), and markup = margin ÷ (1 − margin). A 10% markup is a 9.09% margin; a 10% margin is an 11.11% markup.
The calculator also states overhead and profit together, against direct cost and against the price, because some estimates quote one combined figure. When a question layers the steps (overhead on cost, then profit on cost plus overhead), apply each percent to the running total, as the calculator does.
Worked example 1: overhead as a percent, profit as a markup
Direct cost is $120,000, overhead is 12% of direct cost and profit is a 10% markup. These are invented study numbers.
- Overhead = 120,000 × 0.12 = $14,400. Total cost = 120,000 + 14,400 = $134,400.
- Bid price = 134,400 × 1.10 = $147,840. Profit = 147,840 − 134,400 = $13,440.
- Margin = 13,440 ÷ 147,840 = 9.09%. Check with the formula: 0.10 ÷ 1.10 = 0.0909.
- Overhead and profit together are 14,400 + 13,440 = $27,840, which is 23.2% of direct cost and 18.83% of the price.
Check the whole chain another way: 120,000 × 1.12 × 1.10 = 147,840.
Worked example 2: overhead in dollars, profit as a margin
Direct cost is $250,000, overhead is $30,000 and the target is a 10% margin.
- Total cost = 250,000 + 30,000 = $280,000.
- Bid price = 280,000 ÷ 0.90 = $311,111.11. Profit = $31,111.11.
- Check: 311,111.11 × 0.90 = 280,000.00, and 31,111.11 ÷ 311,111.11 = 10%.
- As a markup on total cost that profit is 31,111.11 ÷ 280,000 = 11.11%.
The trap: marking up $280,000 by 10% gives $308,000, which is $3,111.11 below the price that earns a 10% margin. These are original arithmetic examples, not exam questions.
Markup and margin questions
Why is my margin lower than my markup?
Both divide the same profit, but margin divides it by the price and markup divides it by the cost. The price is the larger number, so the margin percent comes out smaller.
Should overhead go on direct cost or on the price?
Do what your estimate or the question says. This calculator puts an overhead percent on direct cost and then applies profit to cost plus overhead. If a question applies them differently, follow its order.
Where is this on the NASCLA exam?
The Bid Bond course teaches markup, margin and bid pricing in its Procurement and Contracting Requirements lesson. That is the largest of the twelve subject areas on the NASCLA outline, with 31 of the 115 scored questions.
See the NASCLA exam outline for all twelve subject areas and their question counts.