Does your markup deliver the profit you think it does?

The quote says profit, but what does the number mean?

You finish a quotation, add your usual percentage and send it. The job is won. Later, the amount left after paying its direct costs is smaller than you expected. Before assuming someone overspent, check what that percentage actually measured.

A markup describes an addition to cost. A margin describes the amount left as a share of revenue. Confusing them can lead you to expect a result the quoted price never allowed for. It is a calculation problem you can investigate using one quotation, without guessing what other contractors charge.

Work through one clear example

Consider a hypothetical job with $10,000 of direct costs, excluding GST. Adding a 25% markup produces a price of $12,500. The $2,500 difference is 25% of the cost, but only 20% of the selling price. These figures assume the price is earned and the direct costs remain exactly as estimated.

For this example, divide $2,500 by $10,000 to calculate markup. Divide the same $2,500 by $12,500 to calculate the contribution margin on revenue. Neither calculation tells you what the whole business will ultimately keep. Shared operating expenses and other relevant costs still need to be considered.

Source: Business Victoria: Calculate your breakeven point, margin and markup

Check what you included in cost

Write down what the estimate covers: materials, labour, plant hire and any other direct job costs. Then identify what sits outside it. If you use a loaded labour rate, check which costs are already included before adding them again elsewhere.

Use the same cost basis throughout the comparison. A percentage applied to direct costs is not directly comparable with a percentage calculated after shared overheads. Keep GST treatment consistent too, and ask your accountant how to align this internal calculation with the business's accounts.

Check the formula before the next quotation

Open the spreadsheet or estimating system you actually use. Test a simple cost and price pair, then inspect the formula behind any field labelled margin. Do not rely on the label alone. If someone else maintains the system, ask them to explain which amount forms the denominator.

To calculate a price for a chosen contribution margin, divide the relevant cost by one minus that margin expressed as a decimal. That is a pricing calculation under stated assumptions, not a promise of profit. Actual costs, discounts and the work ultimately agreed can change the result. Check whether the resulting price makes commercial sense before offering it.

Keep a dated copy of the test quotation before changing a formula. That lets you compare the old and revised calculation and explain any change to colleagues who use the same estimating sheet.

Profit and payment are separate questions

A quote can allow a contribution and still create a cash shortage if bills fall due before the client pays. Conversely, an advance payment does not establish that a job will be profitable. Keep the estimate, expected final job result and timing of receipts as separate views.

Today, take one recent quotation and write its cost, price, markup and contribution margin on the same page. Note anything the costing excludes. If weak returns are putting pressure on the business, contact CRP about turnaround support with that quotation and its supporting costs. CRP can help coordinate the next discussion with appropriately qualified professionals.