Why contractors choose LaraKeyAsk ten remodelers how they price and at least a few will say “10 and 10”: ten percent for overhead, ten percent for profit, so they add 20% to their costs. It sounds right. It isn’t, and the gap comes straight out of your pocket.
Markup and margin are different numbers
Markup is what you add on top of your costs, as a percentage of those costs. Margin is what’s left of the price after costs, as a percentage of the price.
Take a job with $40,000 in direct costs and a 20% markup:
- Markup: $40,000 × 20% = $8,000
- Price: $48,000
- Margin: $8,000 ÷ $48,000 = 16.7%
You wanted 20% of the price to cover overhead and profit. You got 16.7%. On a $48,000 job, that’s about $1,600 you planned to keep and won’t.
The formula you actually need
If you want a target margin, the markup is:
Markup = Margin ÷ (1 − Margin)
| Target margin | Markup you need |
|---|---|
| 15% | 17.6% |
| 20% | 25.0% |
| 25% | 33.3% |
| 30% | 42.9% |
| 35% | 53.8% |
So “10 and 10” (a 20% margin) needs a 25% markup, not 20%.
Start from your real overhead
Ten percent overhead is a guess. Many remodelers carry far more once trucks, insurance, office help, software and the owner’s own time are counted. Add up your overhead for the last 12 months and divide by revenue. That’s your real overhead percentage. Add the profit you want, and that’s your target margin.
How LaraKey helps
In LaraKey you set your desired overhead and profit once (Settings → Sales & estimating). LaraKey works out the markup you need, shows your real overhead as a share of the last 12 months’ revenue, and flags any estimate whose margin falls below the target before it goes out. The overhead calculator also shows your break-even revenue each month.