Markup vs margin: pricing custom fabrication work
- Written by
- Ben Scott
- Topic
- Quoting
- Date
- Read
- 5 min
The difference between markup and margin, both formulas, a conversion table and a costed canopy job, so your quotes earn what you think they do.
You've costed a canopy job at $10,000. You add 30%, send the quote at $13,000, and pencil it in as a job that makes 30%. It makes 23.1%. That's the markup vs margin mix-up, and if every quote goes out that way, every job earns less than the number in your head.
The difference is what you divide the profit by. Markup is profit as a percentage of your cost. Margin is profit as a percentage of the price.
- Markup:
(price − cost) ÷ cost - Margin:
(price − cost) ÷ price
On the canopy, the profit is $13,000 − $10,000 = $3,000. Divided by the $10,000 cost, that's a 30% markup. Divided by the $13,000 price, it's a 23.1% margin. Same job, same $3,000. On any job that makes money, the margin comes out lower than the markup, because you're dividing by the bigger number.
Markup vs margin: which one to price with
Markup is the quick one at the bench: cost times 1.3 and you've got a price. Margin is the one in your profit and loss report, where gross profit is shown as a share of sales. So when you decide the workshop needs 30 cents of every sales dollar left over after job costs, that's a 30% margin, and a 30% markup won't get you there.
You can price with either, as long as you convert:
- Markup to margin:
margin = markup ÷ (1 + markup) - Margin to markup:
markup = margin ÷ (1 − margin)
A 30% markup is 0.3 ÷ 1.3, which is a 23.1% margin. A 30% margin needs 0.3 ÷ 0.7, which is a 42.9% markup. On the $10,000 canopy, that's the difference between a $13,000 price and a $14,286 one: $1,286 on a single job.
Do the sums ex. GST. The $13,000 canopy is $14,300 inc. GST, but the extra $1,300 goes to the ATO. Compare the inc. GST price with your ex. GST cost and the job looks like a 30.1% margin ($4,300 ÷ $14,300), which is wrong for a different reason.
Common markups and the margin they give
The table converts the usual markups and shows what each one does to the $10,000 canopy. Margins are rounded to one decimal place.
| Markup | Price on $10,000 of cost | Margin |
|---|---|---|
| 10% | $11,000 | 9.1% |
| 15% | $11,500 | 13.0% |
| 20% | $12,000 | 16.7% |
| 25% | $12,500 | 20.0% |
| 30% | $13,000 | 23.1% |
| 35% | $13,500 | 25.9% |
| 40% | $14,000 | 28.6% |
| 50% | $15,000 | 33.3% |
| 75% | $17,500 | 42.9% |
| 100% | $20,000 | 50.0% |
The gap widens as the numbers climb. At 10% the two figures are close. At 100% markup, double your cost, the margin is 50%. Keep a copy wherever you price jobs, or put the conversion in your quoting spreadsheet so the margin sits next to every price you send.
Job costing: cost every job the same way
There are two halves to how to price fabrication work: a complete cost, and a margin you've chosen on purpose. The formulas cover the second half. Job costing is the first, and a margin worked out on a cost that's missing the powder coat is smaller than it looks.
This is the $10,000 canopy broken down. Every figure is an example to show the method, not a benchmark, so use your own.
| Cost line | Example (ex. GST) |
|---|---|
| Aluminium sheet, extrusion and hardware | $4,200 |
| Consumables: wire, gas, discs, rivets, sealant | $350 |
| Powder coat (sent out) | $1,050 |
| Labour: 40 hours at $80 an hour | $3,200 |
| Overheads: 40 hours at $30 an hour | $1,200 |
| Total cost | $10,000 |
The aluminium is hard to forget. These lines are easier to leave out:
- Consumables. Wire, gas, discs and sealant are small on one job and add up over a year. Put an allowance on every job instead of zero.
- Outsourced work. Powder coat, laser cutting, folding: use the supplier's price, plus the freight or the trip to drop it off.
- Labour at what an hour costs you. That's the wage plus super, leave and workers comp, spread over the hours you can bill rather than the hours you pay. Cleaning up, quoting and waiting on parts are paid hours nobody buys.
- Overheads. Rent, power, insurance, vehicles, software, the accountant. Add up a year of them and divide by the hours you bill in a year, and you have an overhead rate per labour hour.
Then decide whether overheads sit in the job cost, as they do here, or come out of the margin. If they're in the cost, what's left is profit. If they're not, the margin has to pay the rent before it pays you. Either way works. Mixing the two doesn't, because a 25% margin means something different depending on how the job was costed.
Once the costs and margin are settled, put them in your price list, so most quotes are a lookup rather than a calculation. How to improve your quoting process has more on building one.
Labour is where custom canopies slip
Materials come off an invoice. Labour hours come out of your head, and on custom work they're the weakest number in the quote. A one-off canopy means new drawings, fit-up you haven't done before, and parts that get made twice.
Run the canopy again. It was quoted at 40 hours and takes 52. At $110 an hour for labour and overheads together, those 12 hours cost $1,320. Profit drops from $3,000 to $1,680, and the margin from 23.1% to 12.9%. The customer still pays $13,000.
The fix is to track actual hours against quoted hours on every job:
- Give every job a number and book time to it, even roughly, on a whiteboard, a timesheet or an app.
- At handover, compare actual hours with quoted, split by stage if you can: fabrication, fit-up, wiring, fitting.
- When a type of build keeps running over, change the hours in your price list, not just on the next quote.
It takes a few minutes a job. Three or four months of that and you'll know which builds you quote well and which ones you've been underpricing, and the margin on your quotes will start to match the margin you bank.
Talk to Ben about quoting your range.