How to calculate profit margin
Profit margin tells you how much of every unit of revenue you keep after the costs of doing the work. It takes two lines of arithmetic:
- Profit = price − total cost
- Profit margin = profit ÷ price × 100
Take the defaults in the calculator above. A client project is priced at 12,000. The work takes 180 hours at a cost of 26 an hour, which is 4,680, and there are 1,500 of other direct costs, so the total cost is 6,180. Profit is 12,000 − 6,180 = 5,820, and the margin is 5,820 ÷ 12,000 = 48.5%.
The calculator works in any currency. Enter amounts without tax.
Margin vs markup
Markup measures the same profit against cost instead of price: markup = profit ÷ total cost × 100. In the example, 5,820 ÷ 6,180 = 94.17%. Both numbers describe the same deal, but they are never equal, and mixing them up is one of the most common pricing mistakes.
| Markup on cost | Profit margin |
|---|---|
| 20% | 16.67% |
| 25% | 20% |
| 30% | 23.08% |
| 50% | 33.33% |
| 100% | 50% |
| 200% | 66.67% |
To convert: margin = markup ÷ (1 + markup), and markup = margin ÷ (1 − margin). A margin can never reach 100%; a markup has no upper limit.
Margin on a client project
In a product business, cost is mostly what you paid for the goods. In a service business, cost is mostly people’s time. That is why the calculator asks for hours and a cost per hour rather than one cost figure.
The cost per hour should be loaded: pay, plus the employer’s costs, plus a share of overhead, divided by the hours a person is paid for. If you don’t know yours, the hourly rate calculator works it out, and what an hour of your team actually costs explains the method.
Other direct costs are the ones that exist only because of this project: a freelancer, stock footage, printing, travel, a licence bought for the client. Rent and your own tools are overhead; they belong in the cost per hour, not here.
Selling a product instead? Set the hours to 0 and enter the product cost under other direct costs.
The price for a target margin
To reach a margin, divide the cost by what is left after the margin: price = total cost ÷ (1 − target margin). For a 30% margin on a cost of 6,180, that is 6,180 ÷ 0.7 = 8,828.57.
The common shortcut, adding 30% to cost, gives 8,034, which is a margin of only 23.08%. The gap grows with the target: adding 50% to cost gives a 33.33% margin, not 50%.
Your hour budget
For fixed-price work, the most useful number is often the hours you can spend before the margin falls to your target: hour budget = (price × (1 − target margin) − other direct costs) ÷ cost per hour. In the example: (12,000 × 0.7 − 1,500) ÷ 26 = 265.4 hours.
The quote assumed 180 hours, so there are about 85 hours of headroom before the project drops below 30%. Share that number with the team at the start and check approved hours against it every week. When extra requests start arriving, it is also the figure that tells you it is time to talk about billing for scope creep.
Gross margin is not net profit
This calculator shows a project’s gross margin: what the work leaves after its own costs. If your cost per hour already includes overhead, the result is close to profit after overhead; if it includes only pay, overhead still has to come out of it. Either way it is not net profit: tax, loan interest and costs that no project carries are not in it.
Across all clients, the same logic shows which ones actually pay for the company. Measuring contribution per client walks through it with an example.
From an estimate to the real number
A calculator gives you the margin you planned. The margin you earn depends on the hours actually spent. In PLYNTUM, people record time against tasks, managers approve timesheets (from the Core plan), and approved hours at each person’s loaded cost, plus direct expenses, are set against the project value. That is project profitability, and you see it while the project is running rather than after the invoice.
PLYNTUM is not accounting software: it keeps no ledger and files no taxes, so you keep your accounting tool for that. See how project finance works or the plans and prices.