1. Markup is applied to cost
Markup expresses profit or another addition as a percentage of the cost base. If cost is 100 and you apply a 20% markup, the addition is 20 and the selling price becomes 120.
The basic formula is: Selling Price = Cost × (1 + Markup). A 20% markup on cost therefore produces a margin that is less than 20% of the selling price.
2. Margin is measured against selling price
Gross margin expresses the gross profit as a percentage of the selling price. If cost is 100 and the target margin is 20%, the selling price is not 120. It must be 125, because the 25 profit is 20% of 125.
The basic formula is: Selling Price = Cost ÷ (1 − Margin). This difference becomes significant on large tenders.
| Cost | Method | Percentage | Selling price | Gross profit |
|---|---|---|---|---|
| 100 | Markup | 20% | 120 | 20 |
| 100 | Margin | 20% | 125 | 25 |
| 1,000,000 | Markup | 15% | 1,150,000 | 150,000 |
| 1,000,000 | Margin | 15% | 1,176,470.59 | 176,470.59 |
3. Overhead is a cost-recovery concept
Overhead is not automatically profit. It represents indirect costs that cannot always be assigned cleanly to one BOQ item: management, offices, supervision, temporary facilities, commercial staff, software, insurances or other business and project support costs depending on the company's accounting method.
Some companies distribute overhead into unit rates; others add project overhead separately. Either approach can work if the cost base is defined and the same cost is not recovered twice.
4. Be clear about percentage bases
A percentage must always have a base. 'Add 10% overhead and 10% profit' is incomplete until the calculation order is defined. If profit is applied after overhead, the result is different from applying both independently to direct cost.
Build the tender summary so reviewers can see direct cost, project indirects, overhead, contingency and profit as separate lines where possible. This makes scenario analysis much easier.
5. Common pricing mistakes
The most common problems are using margin and markup interchangeably, applying the same indirect cost twice, adding VAT into a comparison where the tender basis is VAT-exclusive, and applying a global percentage to costs that already include the same allowance.
The solution is not a more complicated formula. It is a consistent pricing policy with named percentages, defined bases and a transparent calculation sequence.