There is a five-point error sitting in most trades estimating spreadsheets, and it comes from one small piece of arithmetic almost everyone gets wrong.
The short answer: divide cost by one minus your target margin. Do not add a markup percentage. To hit 25% margin on $50,000 of cost, divide by 0.75 and price at $66,667. Adding 25% gives $62,500, which is a 20% margin.
Same intention. $4,167 apart. Every job.
Markup is not margin
Markup is a percentage of cost. Margin is a percentage of price. They are different numbers and they are not interchangeable.
| Cost | Markup added | Price | Actual margin |
|---|---|---|---|
| $50,000 | 15% | $57,500 | 13.0% |
| $50,000 | 20% | $60,000 | 16.7% |
| $50,000 | 25% | $62,500 | 20.0% |
| $50,000 | 30% | $65,000 | 23.1% |
| $50,000 | 40% | $70,000 | 28.6% |
| $50,000 | 50% | $75,000 | 33.3% |
Read that table twice. To achieve 33% margin you need 50% markup. An owner who thinks "I add 30%, so I'm making 30%" is making 23.1%, and has been for years.
The formula:
Price = cost ÷ (1 − target margin)
To convert a margin you want into a markup you apply:
Markup = margin ÷ (1 − margin)
25% margin needs 33.3% markup. 30% margin needs 42.9% markup. 35% needs 53.8%.
Put this in your estimating template as a formula rather than a habit, and the error disappears permanently.
What margin should you actually target?
There is no single right answer, but there is a floor, and the floor is set by your own numbers rather than by what anyone else charges.
Work backwards from what the business needs.
Start with annual overhead — say $420,000. Add the net profit you want the business to make, say $180,000. That is $600,000 of gross margin the year has to produce.
If you expect to do $3,000,000 in revenue, you need to average 20% gross margin just to hit that. Which means 20% is your floor, not your target, because some jobs will underperform and some work will be taken for strategic reasons.
Target above the floor. If you need to average 20%, bid at 28 to 32%, because the gap between bid and actual is real and predictable — typically five points or more.
Bidding at the number you need to average is how you end up below it.
The win rate that should worry you
Here is the counterintuitive part, and it is the thing most owners resist hardest.
If you are winning most of what you quote, your prices are too low.
A healthy close rate for trades work sits somewhere around 30 to 50% depending on the market and how qualified your leads are. If you are closing 80%, you are not winning on service or reputation. You are the cheap option, and the customer knows it even if you do not.
Think about what a very high close rate actually means: nobody is ever surprised by your price. Being consistently the number people expect is another way of saying you are leaving money on the table on the jobs you would have won anyway.
Losing bids is not failure. Losing every bid is. The goal is to lose the right ones — the price-shoppers, the jobs that would have run thin, the customers who were only ever going to choose on cost.
Pricing to lose on purpose
Once you see it this way, deliberately over-pricing certain work becomes a tool rather than an accident.
Price high on work you do not want. A job with terrible access, a difficult customer, a type you do not do often, a site three hours away. Do not decline it — price it at what it would genuinely be worth. Sometimes they say yes, and at that price it is worth doing.
Price high when you are full. If your backlog is eight weeks, your capacity is scarce. Scarce capacity should cost more. Most contractors price identically whether they are empty or slammed, which gets it exactly backwards.
Price high on small jobs. Small jobs carry proportionally more overhead — same setup, same travel, same paperwork, less revenue to spread it across. A flat minimum charge is not greed, it is arithmetic.
The mental shift is from "how do I win this?" to "what would make this worth doing?" — and then being genuinely willing to let it go.
What to do when you lose one
The instinct after losing a bid is to drop the price on the next one. Resist it, and get the information first.
Ask what they went with. Not to argue. To learn. "No problem — do you mind telling me roughly where we landed against the others?"
If you were 5% high, that is normal competitive variance and means nothing. If you were 40% high, either you missed something in the scope or they are comparing you against someone who is going to lose money on it. Both are worth knowing, and neither means your price was wrong.
Track it. Bid value, result, and where you landed if you find out. After twenty bids you have a real picture of your market rather than a feeling shaped by the last painful loss.
The discount trap
Somebody asks for 10% off. It feels small.
At 25% margin, a 10% discount does not cost you 10% of your profit. It costs you 40% of it.
| Full price | 10% off | |
|---|---|---|
| Price | $66,667 | $60,000 |
| Cost | $50,000 | $50,000 |
| Gross margin | $16,667 | $10,000 |
| Margin % | 25.0% | 16.7% |
The cost does not move. The entire discount comes straight out of margin. To make the same gross profit at the discounted price, you would need to sell 1.67 jobs instead of one.
When someone asks for a discount, that is the number to have in your head. Not "can I afford 10%" but "am I willing to work two-thirds again as hard for the same money."
If you need to concede something, concede scope rather than price. Remove something. A lower price for less work protects the margin; a lower price for the same work does not.
Putting it into the template
Four changes, and you can make all of them today:
- Replace markup with the margin formula.
Price = cost ÷ (1 − margin). - Use your real overhead rate in the cost side. If that number is wrong, everything downstream is wrong.
- Use real production hours, not remembered ones.
- Set a target margin above your floor, and write down what the floor is so you know when you are below it.
None of that requires new software or a consultant. It requires an hour with the spreadsheet you already have, and the willingness to send out a price that feels higher than the one you sent last week.
That last part is the hard bit. It is also the entire difference between a busy year and a profitable one.
Raising prices without losing the base
The calculation says your price is too low. Doing something about it is the part that stalls, because raising prices feels like a decision you make once, publicly, and then have to live with.
It is not. It is a sequence.
Raise on new quotes only, starting now. You are not going back to existing customers or signed contracts. The change applies to work you have not quoted yet, which means there is no confrontation to have with anybody.
Move in steps you can evaluate. Three to five points at a time, held long enough to read the result — twenty quotes is usually enough to see a pattern. A twelve-point jump gives you a result you cannot interpret, because you will never know whether it was the price or the month.
Watch win rate, not reactions. Someone will tell you that you are too expensive. That happens at every price level and it is not data. The data is: of the last twenty quotes, how many closed, and at what margin. If win rate held, raise again. If it fell from 50% to 45% while margin rose five points, you are making more money on less work — which is usually the goal.
Expect to lose a particular kind of customer. The ones who leave first chose you on price, and they are disproportionately the ones who negotiate mid-job, dispute the final invoice and pay slowly. Losing them is part of the benefit, not a cost of it.
Change what the quote looks like at the same time. A higher number on the same one-line quote is just a higher number. A higher number with a clear scope, a stated schedule and explicit exclusions reads as a more professional business — which is what justifies it.
Most contractors who do this properly find the ceiling sits several points above where they assumed it was.
The 10 Numbers I Check Every Monday
One page. Ten minutes, every Monday. Every number has a line next to it that tells you when to act.
Get the sheet — freeCommon questions
What is the difference between markup and margin?
Markup is a percentage of cost. Margin is a percentage of price. Adding 25 percent markup to $50,000 gives $62,500, which is a 20 percent margin, not 25. To get a 25 percent margin you divide cost by 0.75. The gap is roughly five points on every job, and it is the most common arithmetic error in trades estimating.
Is it bad to lose a bid?
Losing bids is normal and necessary. A close rate of 30 to 50 percent is healthy for most trades work. Winning 80 percent of what you quote means you are the cheap option, whether or not you intended to be, and you are leaving money on every job you would have won at a higher price.
Should I ever give a discount?
Reduce scope rather than price. At 25 percent margin, a 10 percent discount removes 40 percent of your profit on that job — you would need to sell 1.67 jobs to make the same money. If a customer needs a lower number, take something out of the job so the margin survives.