Glossary
Gross margin
Also called: gross profit margin · margin
Gross margin is the share of each sales dollar left after the direct cost of doing that work — measured against the price, not against the cost.
A job that cost $600 and sold for $900 made $300. As a share of the $900 price that is a 33 percent margin; as a share of the $600 cost it is a 50 percent markup. Same job, same money, two different percentages, and using one where you meant the other is one of the most expensive habits in contracting.
The classic error is wanting a 40 percent margin and applying a 40 percent markup, which produces a margin of about 28.6 percent. Eleven and a half points given away on every job, and nothing in the process ever flags it — the estimate looked right and the invoice looked right.
Margin is the number to use whenever you are thinking about the health of the business: your P&L reports it, break-even is calculated from it, and any benchmark you are compared against is expressed in it. Markup is for building a price up from a known cost at the counter.
Why it matters to a contractor
Gross margin drives break-even, pricing and how much volume you could afford to lose after a price rise. It is also the figure owners most often guess high, which makes every calculation built on the guess optimistic in the same direction.
Work it out on your numbers
See also