I ran my own electrical crew for three years before I realized I was calculating profit wrong. I thought I was making 30% on every job. Turns out I was making 23%. The gap almost put me out of business, and I see the same mistake from electricians every single week.
The problem comes down to two words most contractors use interchangeably: markup and margin. They are not the same thing. Confusing them will cost you real money.
Markup vs. Margin: The Difference That Costs You Thousands
Here is the simplest way to think about it. Markup is based on your cost. Margin is based on your selling price. Same job, same numbers, two completely different percentages.
Say you have $10,000 in costs on a job and you sell it for $15,000. Your markup is 50%. You added $5,000 on top of your $10,000 cost. But your margin is only 33.3%. The $5,000 profit is one-third of the $15,000 selling price.
Most electricians talk in markup but think they are earning the same percentage as profit margin. A 50% markup sounds great. Then you realize a third of every dollar coming in is profit, not half.
Why This Matters More Than You Think
If you tell yourself "I mark up 30% so I'm making 30% profit," you are overstating your earnings by about a quarter. A 30% markup is a 23.1% margin. When you are bidding tight commercial work where every point matters, the misunderstanding separates growing your business from slowly bleeding cash.
I have seen contractors bid jobs at "25% profit" using markup math, then wonder why there is nothing left in the account after materials, labor, insurance, and truck payments. The money was never there. They calculated it wrong.
How to Calculate Markup
Markup tells you how much you added on top of your cost:
Markup % = (Selling Price - Cost) / Cost x 100
If your cost is $8,000 and you sell for $10,400, your markup is ($10,400 - $8,000) / $8,000 x 100 = 30%.
How to Calculate Margin
Margin tells you what percentage of the selling price is profit:
Margin % = (Selling Price - Cost) / Selling Price x 100
Same numbers: ($10,400 - $8,000) / $10,400 x 100 = 23.1%.
Notice the only difference is the denominator. Markup divides by cost. Margin divides by selling price. One change in the formula is where thousands of dollars disappear.
Quick Reference: Markup to Margin Conversion
Print this out and tape it next to wherever you build estimates:
| Markup % | Actual Profit Margin % |
|---|---|
| 10% | 9.1% |
| 15% | 13.0% |
| 20% | 16.7% |
| 25% | 20.0% |
| 30% | 23.1% |
| 40% | 28.6% |
| 50% | 33.3% |
| 75% | 42.9% |
| 100% | 50.0% |
The gap gets wider as the numbers get bigger. At 20% markup you are off by about 3 points. At 50% markup you are off by almost 17 points. Not a rounding error. A structural problem in how you price work.
What Should You Mark Up?
Everything has a cost, and every cost needs markup. But not every category gets the same treatment.
- Materials: Most electrical contractors mark up materials 15-30%. Commodity wire and devices sit at the lower end. Specialty gear like switchgear, VFDs, or custom panels justifies higher markup because you are handling procurement, coordination, and warranty.
- Labor: Your labor rate is not what you pay your guys. It includes burden (taxes, comp, benefits, training). Then you add overhead allocation and profit on top. More on this below.
- Subcontracted work: If you sub out fire alarm, low voltage, or generator hookups, mark it up too. You are managing the scope, coordinating with the GC, and carrying the liability. 10-15% is standard.
- Equipment and rentals: Lifts, trenchers, special tools. Mark them up. You are sourcing them, transporting them, and dealing with the logistics. Do not pass these through at cost.
How to Set Your Burdened Labor Rate
Your labor rate is where most contractors leave the most money on the table. Here is how to build it properly:
- Base wage: What you pay the electrician per hour.
- Payroll burden: FICA, FUTA, SUTA, workers comp, general liability allocated per labor hour. This adds 25-40% on top of base wage.
- Benefits: Health insurance, retirement contributions, PTO, training. If you offer them, they are a cost of labor.
- Overhead allocation: Rent, trucks, tools, office staff, software, insurance. Divide your annual overhead by your total billable labor hours. This is the number most guys skip. And it is the number eating your profit.
- Profit: After all costs are covered, add your target profit margin on top. Not markup. Margin. Now you know the difference.
If your journeyman makes $35/hour, your cost per hour with burden is $52-$58. Add overhead allocation and you are at $72. Then add profit. If you are billing at $65/hour because "everyone charges the same," you are losing money on every hour he works.
What Healthy Margins Look Like for Electrical Contractors
These ranges come from industry data and years of comparing notes with other shop owners. Your numbers will vary by market, but if you are outside these ranges, something needs attention:
- Residential service work: 40-60% gross margin. You are selling speed, expertise, and convenience. The customer is not getting three bids for a tripped breaker at 9 PM.
- Commercial new construction: 15-25% gross margin. Competitive bidding compresses margins. Volume and efficiency are how you make money here.
- Time and material work: 30-40% gross margin. You have less risk than fixed-price, so the margin reflects it. You still need to cover overhead and profit.
- Design-build and negotiated work: 25-35% gross margin. Less competition, more value-add. These are the jobs you want more of.
Net profit margin, meaning what is left after everything including office overhead, owner salary, and taxes, should be 8-15% for a healthy electrical contracting business. If you are under 5% net, you are one bad job away from serious trouble. And if retention is tying up 5-10% of every invoice on top of that, your actual cash position is even worse than the margin suggests.
Why Contractors Go Broke Even When They Are Busy
This is the part nobody wants to hear. Being busy is not the same as being profitable. I have watched shops with a full backlog close their doors because they never tracked what jobs cost versus what they estimated.
Every job has three numbers worth tracking:
- What you estimated the costs you expected when you priced the job.
- What you sold it for the contract amount.
- What it cost real labor hours, material spend, change order impact.
If you are not comparing number one to number three on every single job, you are flying blind. Your panel rough-in estimate is 20% low. Your apprentice-to-journeyman ratio assumptions are wrong. You are not capturing all the material you buy for a job. You will not know until you look.
You will not fix what you do not measure. The contractors who survive long-term close out every job, compare estimated vs. actual costs, and feed the data back into their next estimate.
Track It or Lose It
This is why we built cost tracking into Faraday. Every estimate flows into a job. As you log labor hours and material costs, you see in real time whether you are on budget or bleeding money. No spreadsheets, no guessing at the end of the job. When you close out, you get a clear picture of estimated vs. actual, broken down by labor, materials, and margin.
If you are still running your numbers in a spreadsheet or keeping track in your head, you are leaving money on the table. The math does not lie, but you have to do it.
Try Faraday free and see what your jobs are making. Not what you think they are making.