Markup vs Margin: The Math Mistake Costing Electrical Contractors $33,000 Per Million in Revenue

There's a math mistake happening in electrical shops across America right now. It's not complicated math—just wrong math. And it's costing contractors roughly $33,000 for every million dollars in revenue.

The mistake? Confusing markup with margin.

Most contractors know they need a 20% profit. So they take their costs, add 20%, and call it a day. The problem is that's not how the math works. And by the time you realize the numbers don't add up, you've been working for nearly free.

The $33,000 Mistake

Let's run the numbers on a real job.

Your costs come to $1,000 (labor plus materials). You want 20% profit. So you add 20% markup: $1,000 + $200 = $1,200 sale price.

Looks right. Feels right. But here's what actually happened:

Your profit is $200. Your sale price is $1,200. Your actual margin? $200 ÷ $1,200 = 16.7%.

You wanted 20%. You got 16.7%. That's a 3.3 percentage point gap on every single job.

Over a year of $1 million in revenue, that gap translates to about $33,000 in missing gross profit. Enough to buy a new van. Enough to hire a part-time helper. Enough to actually take a vacation. According to the U.S. Small Business Administration, understanding your true costs is the foundation of business survival.

The confusion comes from two different calculations that sound similar but produce very different results. Markup is the percentage you add to your cost. Margin is the percentage of the final sale price that's profit.

Here's the formula to get them right:

If you want a 20% margin, you need to divide your costs by 0.80 (not multiply by 1.20).

$1,000 ÷ 0.80 = $1,250 sale price.

Now your profit is $250. Your margin is $250 ÷ $1,250 = 20%.

That extra $50 per job adds up fast.

Why Service Work Needs Higher Margins Than You Think

The margin conversation gets more complicated when you break down the different types of work.

For residential service calls—panel changes, outlet installs, fan replacements—many successful contractors target a 60% to 67% gross profit margin. That number sounds aggressive until you understand the economics.

A service call ticket might be $400. But getting that truck to that house costs money whether the job takes 30 minutes or two hours. You've got drive time, fuel, insurance, dispatch, the non-billable hour spent on the phone with the customer. All of that overhead gets spread across a relatively small revenue number.

Compare that to a commercial project bid at $100,000. Your margin might be 15% to 25%, but that $15,000-$25,000 gross profit comes from a single customer, a single site, and weeks of continuous work. The overhead-per-dollar is dramatically lower.

The mistake most electrical contractors make is applying project margins to service work. They think 20% is "fair" across the board. But a 20% margin on a $400 service call leaves maybe $80 after direct costs. Once you factor in overhead, you're working for free—or worse, losing money on every call.

Here are some rule-of-thumb targets (your actual numbers will vary by market and business model):

Residential Service & Repair: 60% - 67% Light Commercial: 25% - 40% New Construction / Projects: 15% - 25%

If your service margins are below 50%, you're likely subsidizing your customers' electrical work with your own time.

The Efficiency Blind Spot

Here's where most profit calculations fall apart completely: billable efficiency.

You pay a journeyman for 40 hours a week. How many of those hours are actually spent turning a wrench on a job you can bill for?

Track yours—most owners overestimate it. You might find it's 25-30 hours, not the 35+ you assumed.

Where do the rest go? Driving to the supply house because someone forgot a specific breaker. Sitting in traffic. Loading the van in the morning. Waiting for the customer to answer the door. Paperwork. Lunch. The morning meeting that ran long.

The math changes dramatically when you account for this:

You're paying $40/hour. Add 30% labor burden (taxes, insurance, benefits) and you're at $52/hour true cost. But if your tech is only billable for 28 hours out of 40 (70% efficiency), divide by 0.70:

$52 ÷ 0.70 = $74.29 per billable hour.

Now add overhead. Say 15% of revenue goes to keeping the lights on, trucks insured, and the phone answered.

Your break-even rate is approaching $87/hour before you've made a single dollar of profit.

Meanwhile, you're billing $90/hour because that's "what everyone else charges." You thought you were making $50/hour profit ($90 - $40). In reality, you're making single digits per billed hour—sometimes basically nothing.

This is why electrical contractors work 60-hour weeks and still can't figure out where the money went. It's similar to the hidden costs that plague other trades - construction contractors losing money on proposals or plumbers wasting time on no-shows.

The Fix: Calculating Your True Labor Cost

Here's the step-by-step to get your real numbers:

Step 1: Calculate Loaded Labor Cost

Take your technician's hourly wage. Add the burden—typically 20% to 40% depending on your benefits package and state taxes.

$40/hour × 1.30 = $52/hour loaded cost

Step 2: Factor in Billable Efficiency

Track a week of actual time. How many hours were spent on work you could bill for versus everything else? Don't guess—measure it.

$52 ÷ 0.70 = $74.29 per truly billable hour

Step 3: Add Overhead and Profit

What percentage of revenue goes to overhead? Office rent, insurance, vehicle costs, marketing, software, phones—all of it. Typical range is 13% to 20% of total sales.

If you want 15% overhead coverage and 15% net profit, your direct costs need to be 70% of revenue.

Required Rate = True Billable Cost ÷ (1 − Overhead% − Target Net Profit%)

$74.29 ÷ 0.70 = $106.12 per hour to achieve your profit goal

That's a long way from $90.

Some Benchmarks to Consider

Here's what the numbers often look like for electrical contractors who are actually making money (your mileage will vary based on market, service mix, and business model):

Gross Profit Margin: 60-67% (service) — below 50% is the danger zone Net Profit Margin: 10-20% — below 10% means one bad job from trouble Overhead Ratio: 13-20% of total sales Labor Burden: 20-40% — add to base wage for true cost

The contractors hitting 15%+ net margins aren't charging dramatically more than everyone else. They've just done the math correctly and stopped subsidizing their customers.

The Audit You Should Run This Week

Pull your last 10 completed jobs. For each one, calculate:

1. What was your quoted price?
2. What were the actual material costs?
3. What were the actual labor hours (including drive time)?
4. Calculate the true labor cost using the formula above
5. What was your gross profit? What was your gross margin percentage?

Most contractors who run this exercise find 2-3 jobs that actually lost money. Jobs they thought were "okay" turn out to be disasters once the real costs are tallied.

The fix isn't to suddenly double your prices. The fix is to know your real numbers so you can make informed decisions. Maybe you stop taking certain types of work. Maybe you tighten up efficiency. Maybe you do raise prices—by 10%, not 100%—and explain to customers why you're worth it.

The electrical contractors who survive the next decade won't be the cheapest. They'll be the ones who stopped confusing markup with margin and started running a real business. While you're at it, make sure you're not missing calls that could be adding to your bottom line.

Your first step: Run the audit. Know your numbers. Stop leaving $33,000 on the table.