Discover what to charge and find your profit margin based on your markup percentage
In simple terms, a profit margin is the percentage of total amount charged that you will receive after overhead and constructions costs are paid. In other words, if you charge $11,000 for a project which has $9,000 in overhead and constructions costs to complete, your profit is what's remaining. ($11,000 - $9,000 = $2,000). To find the profit margin of the project, you'd simply divide your profit by the total. ($9,000/$11,000 = .1818) Now, just multiply the result by 100 (.1818 x 100) and you'll see that your profit margin is 18.18%.
While profit is the amount of profit remaining after all overhead and construction costs are paid in a project, markup is the amount you increase to any overhead or construction costs. For example, if your construction costs are $5,000, but you charge the client $5,500, your markup would be $500, or 10% ($500/$5,000 = .10). However, while your markup is 10%, your profit margin is only 9.09%. This is because your profit margin is based on the total amount you charge, not the total of amount of your expenses.
While there are no rules on how much profit you can make on any given project, it seems like most residential home builders and remodelers agree that a 20% profit margin is standard. There are many factors such as the economy, type of project, unique client requirements, and much, much more that can drastically increase or decrease a projects profit margin, so it's best to consider all factors before setting your profit margin for any given project.