Why Your Contractor’s ‘Profit’ Number Doesn’t Mean What You Think It Means
A little math for time off at home
A client reviewing their construction proposal got angry. “You’re charging 33% profit and overhead?! That’s outrageous! Industry standard is 20-25%!”
I pulled out a napkin and did the math. We were actually charging 25% margin, which requires 33% markup. Same dollars, different calculation.
“Wait, that’s the same thing though, right?”
Nope. And honestly, I don’t blame people for being confused. I’ve been doing this for years and I still have to think about it. But here’s the thing—this confusion costs restaurant owners real money because they end up negotiating the wrong number.
Look, most people use “profit” and “markup” like they’re the same word. They’re not. And the difference between 25% margin and 25% markup can be tens of thousands of dollars on your project. Let me show you why this matters and how to actually understand what you’re looking at.
The Difference (And Why It’s Confusing)
Okay, so here’s where everyone’s eyes glaze over, but stick with me because this actually makes sense once you see it.
Markup is what you add to what something costs you. Pretty straightforward. If I buy something for $100 and I add 25% markup, I sell it for $125. That extra $25 is my markup.
Simple math: $100 × 1.25 = $125
Margin is what you keep from what you sold it for. Different calculation. If I sell something for $125 and it cost me $100, my margin is 20%.
Here’s why: I made $25 on a $125 sale. So $25 ÷ $125 = 20%
See the problem? I added 25% markup but I only made 20% margin. Same transaction, different percentages depending on how you calculate it.
This is where everyone gets confused, and honestly, it’s a little sneaky how the numbers work. If you want to make 25% margin on something that costs you $100, you can’t just add 25%. You need to charge $133.33. Which means you need to add 33.33% markup.
Let me show you why. If I want to keep 25% of my selling price, that means my cost is 75% of my selling price. So $100 is 75% of what? It’s $133.33. And $133.33 minus $100 is $33.33, which is... 33.33% markup on the original $100.
I know. Your head hurts. Mine does too sometimes. But this is important because when you’re talking to contractors about “profit and overhead,” you might be talking about margin, but what you’re seeing on the contract is markup.
The Conversion (Keep This Handy)
Look, you don’t need to memorize formulas. But you should understand these common conversions because they come up all the time:
If you want your contractor to make 20% margin, they need 25% markup. If you want 25% margin, they need 33.33% markup. If you want 30% margin, they need 42.86% markup.
Going the other way: If they quote 25% markup, they’re making 20% margin. If they quote 33% markup, they’re making 25% margin. If they quote 43% markup, they’re making 30% margin.
Here’s a real example from a project. Hard costs are $400,000.
Contractor quotes 25% markup: They add $100,000. Total is $500,000. They make 20% margin.
Contractor quotes 33.33% markup: They add $133,333. Total is $533,333. They make 25% margin.
Industry standard is 20-25% margin. So in cost-plus contracts, you should expect to see 25-33% markup. If someone’s quoting you 25% markup, they’re actually on the low end making only 20% margin. If they’re quoting 33% markup, they’re making 25% margin, which is fair.
Why This Actually Matters
Here’s where this gets expensive if you don’t understand it.
You’re reviewing bids and you say “Your markup is 30%? No way. Industry standard is 20%!”
The contractor tries to explain that 30% markup is 23% margin, which is totally normal. But you don’t believe them because the numbers sound wrong.
So either you walk away from a fair deal, or you force them down to 20% markup, which is only 16.67% margin. And now they’re going to cut corners somewhere to make up for it, or they’re going to be looking for ways to add costs through change orders, or they’re just going to go out of business halfway through your project.
None of those outcomes are good for you.
Or here’s another scenario. You get three bids:
Contractor A: $500,000 fixed price (you can’t see their margin) Contractor B: Cost-plus with 25% markup (making 20% margin) Contractor C: Cost-plus with 33% markup (making 25% margin)
You think Contractor B is cheaper because 25% looks lower than 33%. But if you actually run the numbers, Contractor C might have lower hard costs and end up costing you the same or less than Contractor B, even with higher markup.
You can’t compare these bids unless you convert everything to margin and look at total cost.
The Transparency Thing
Here’s what’s weird about cost-plus contracts. They’re actually more honest, but they feel more expensive.
With a fixed-price contract, I just tell you the total. $500,000. You say okay or not okay. You never see that I built in 25% margin. You never see what I’m paying trades. You never see material costs. It’s just a number.
With cost-plus, you see everything. Every trade bid. Every material receipt. Exactly what markup I’m applying. You can verify that costs are real. You can track where money goes. You can make informed decisions about changes.
But because you can see my 33% markup, it feels like I’m taking more. Even though it’s the same 25% margin I would have hidden in a fixed-price contract.
The irony is that transparency makes people more suspicious, not less.
Here’s what you should actually care about: Is the total cost within your budget? Are the hard costs competitive? Is the margin industry standard? Are you getting good value?
Don’t get hung up on whether the markup percentage looks big. Focus on whether the total picture makes sense.
How to Actually Evaluate This Stuff
Step one: Ask what you’re looking at. “When you say 25% profit and overhead, is that margin on the total contract or markup on your costs?” Get clarity upfront.
Step two: Convert everything to margin so you can compare apples to apples. Use the conversions I showed you earlier.
Step three: Don’t just look at the markup percentage. Look at the hard costs. Are trade bids reasonable? Are material costs in line with what things actually cost? Is everything included or are things missing? Low markup on padded costs is a worse deal than fair markup on competitive costs.
Step four: Remember what margin covers. It’s not all profit. It’s overhead, risk, and then profit. Industry standard exists because that’s what it actually takes to run a sustainable construction business.
Step five: Value the transparency. If someone’s showing you a detailed cost breakdown with their markup clearly stated, that’s a good sign. It means you can verify everything. That’s worth something.
What Fair Actually Looks Like
Industry standard for general contractors is 20-25% margin. In cost-plus terms, that’s 25-33% markup.
That margin covers roughly 12-15% for overhead, 3-5% for risk, and 5-8% actual profit.
If you see margin below 15% or markup below 17.5%, something’s wrong. Quality will suffer or surprises are coming.
If you see margin above 30% or markup above 42%, unless it’s highly specialized work, that’s probably excessive.
The right question isn’t “Can you lower your markup?” The right question is “Your markup of 33% is 25% margin, which seems fair. Can we make sure the hard costs are competitive?”
Focus on total value. Make sure you’re getting good work for a fair price, with a contractor who can actually afford to solve problems when they come up.
Look, Here’s The Thing
I don’t expect you to become an expert in construction accounting. That’s not your job. Your job is running a restaurant.
But you should understand this markup versus margin thing well enough to not get confused when you’re looking at bids. Because that confusion either costs you money or costs you quality, and either way you lose.
Industry standard is 20-25% margin. If you want that, you need to allow 25-33% markup in a cost-plus contract. Those numbers are the same thing, just calculated differently.
Don’t negotiate contractors into unprofitable margins. You’re not saving money. You’re just creating problems for yourself later.
Ask questions. Make sure you understand what numbers mean. Compare total costs, not just percentages. Focus on getting good value, not just low numbers.
And work with people who can explain this stuff clearly and don’t get defensive when you ask about it. Because if they can’t explain their pricing, that’s a red flag.
The math matters, but it’s not complicated once someone shows you how it works. Now you know. Use it wisely.
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