Here’s a number that should disturb every builder reading this: nearly one in three builders still don’t understand the difference between markup and margin.
That’s not my opinion. That’s industry data. And it explains a lot about why so many builders are busy but broke.
I’ve been coaching residential builders since 2004 and this is still the most common financial mistake I see. Builders who think they’re making a 25% profit because they marked up by 25%. They’re not. They’re making 20%. On a million-dollar project, that’s a $50,000 difference. On ten projects? You’ve just lost half a million dollars you thought you had.
Let’s clear this up once and for all.
Markup vs Margin, The Simple Explanation
Markup is what you add on top of your costs. Margin is what you keep from the total price.
Say your costs on a job are $800,000 and you mark up by 25%. Your contract price is $1,000,000. Most builders look at that and think they’re making 25%. They’re not.
Your margin, the actual profit as a percentage of the total contract, is 20%. Because $200,000 divided by $1,000,000 is 20%, not 25%.
That gap between what you think you’re making and what you’re actually making? That’s where builders go broke. Slowly, quietly, one job at a time.
The Industry Standard
Professional builders building custom homes should be marking up their cost of goods sold by 33.33%. That equates to a 25% gross profit margin. That’s the benchmark. From that 25% gross margin, you pay your fixed overheads, your office, your admin staff, your insurances, your vehicle costs, your own salary, and what’s left is your net profit. The target is 10% net after drawing a market salary.
If you’re not hitting those numbers, the problem almost always starts here, in how you’re pricing the job in the first place.
Why This Matters More Than You Think
Turnover is vanity. Profit is sanity.
I see builders doing $3 million, $5 million, $8 million in revenue and still taking home less than they’d earn working for someone else. They’ve got the trucks, the team, the office, the stress, and a margin so thin that one bad job wipes out a year’s profit.
The problem isn’t that they’re not busy. The problem is they’re not making money. And it starts with not understanding the basic mechanics of how pricing works.
Here’s what happens in practice. A builder costs a job at $750,000. Adds a 20% markup. Quotes $900,000. Thinks he’s making $150,000. Feels good about it. But from that $150,000 he still has to cover all fixed overheads. When you back those out, the actual net profit might be $30,000 to $50,000, on a project that took nine months of his life, tied up his team, and consumed every ounce of his energy.
That’s not a business. That’s a job with extra stress.
How to Fix It
Step one is knowing your numbers. Not roughly. Exactly. You need to know your cost of goods sold on every project. You need to know your fixed overhead costs, monthly and annually. You need to know your breakeven point. And you need to price from there, not from gut feel.
Step two is applying the right markup. 33.33% markup gives you 25% gross margin. That’s your starting point. Some projects and market segments may warrant more. Very few should warrant less.
Step three, and this is where most builders fall down, is tracking actuals against your quote throughout the project. Not at the end. During. Weekly. Because if your costs are drifting and you don’t know until the job’s finished, it’s too late to do anything about it.
Your job costing system is not a nice-to-have. It’s the thing that tells you whether you’re actually making money or just creating the illusion of it.
The Hard Truth
You don’t have a revenue problem. You have a margin problem.
Plenty of builders have all the work they can handle. What they don’t have is profit. And in most cases, it comes back to this, they never properly understood the difference between markup and margin, so they’ve been underpricing every job for years and wondering why the bank account doesn’t reflect how hard they work.
Make no mistake, you deserve to make a profit. A healthy one. You’re carrying risk, managing complexity, employing people, and delivering something that will stand for 50 years. The least you should be doing is pricing the work properly.
If your margins aren’t where they should be and you want to fix it, book a free strategy session. This is exactly what we work on with builders every single day.
Kurt Hegetschweiler is the founder of Builders Coach and author of the internationally best-selling Million Dollar Builder. He has coached thousands of residential builders since 2004.
