Margin vs markup: price a fixed-price project correctly
A worked $60,000 cost example shows why a 25% markup gives a 20% margin, and how to apply your margin to a simulated cost percentile.
The denominator changes the price
For a hypothetical project that costs $60,000, a 25% markup produces a $75,000 quote. The $15,000 profit is 25% of cost, but only 20% of revenue. To retain 25% of revenue, the quote must be $80,000. This is arithmetic, not a recommendation about which margin your business should earn.
| Rule | Calculation | Price | Margin |
|---|---|---|---|
| 25% markup | 60,000 × 1.25 | $75,000 | 20% |
| 25% margin | 60,000 ÷ 0.75 | $80,000 | 25% |
Use a cost basis you can explain
A correct formula cannot rescue an incomplete cost estimate. List labor, subcontractors, project-specific expenses and any overhead allocation included in your decision. Use the same basis when comparing bids. In BidVariance, overhead is a fixed project allocation; it is not a percentage added automatically. Avoid including the same expense in both a task burn rate and overhead.
For uncertain work, replace the single cost with a chosen cost percentile. Suppose your illustrative simulation reports P50 cost of $60,000 and P80 cost of $72,000. At a 25% target margin, the corresponding quotes are $80,000 and $96,000. They target the same margin with different modeled confidence. Neither number estimates whether a customer will accept the quote.
Missing the target is different from losing money
At a $96,000 quote, you meet a 25% margin when cost is at most $72,000. You break even when cost is $96,000. A realized cost of $80,000 misses the margin target but still leaves $16,000, or about 16.7% of revenue. The probability of loss therefore cannot be read directly from the P80 label attached to the pricing basis.
A repeatable quote review
- Agree which costs the model includes.
- Choose the margin as a share of revenue.
- Choose the confidence at which you want to meet that margin.
- Divide the corresponding cost percentile by one minus the margin.
- Check the actual probability of loss at the resulting price separately.
Try these inputs in the minimum bid price calculator. The reverse-pricing formula documents the model. For the next decision, read how P50 and P80 change your quote.