Markup

What is markup?

Markup is a percentage added to the cost to determine the selling price. If a contractor costs $100 per hour and you markup 25%, you bill the client $125 per hour. Markup covers your overhead, profit, and the administrative burden of managing the vendor relationship. Unlike margin, which is calculated from the selling price, markup is calculated from cost.

Markup vs margin

A 25% markup yields 20% margin. Markup uses cost as the base: $100 cost plus 25% equals $125 price. Margin uses price as the base: $25 profit on $125 price equals 20% margin. Confusing the two leads to pricing errors. A 50% markup yields 33% margin. Know which metric you are using and convert carefully when comparing or setting targets.

Setting appropriate markup rates

Consider the value added, administrative burden, and market norms. Contractors requiring significant oversight justify higher markup than those who work independently. Industry standards vary. Some professional services mark up expenses 10-15%. Others pass through at cost. Your engagement letter should specify how markups work so clients know what to expect.