According to the businessdictionary.com, margin is defined to be: the difference between the cost price and the selling price of a product. In other words, margin is the profit earned on a business transaction.
Margin is usually measured as a percentage of the selling price. Thus the project manager might say, “We earned 30% margin on this project.”
There are two margin calculation formulas that every project manger involved with project pricing should know.
Use Margin to Calculate Sell Price
Use this formula to calculate the selling price of a product or service when the cost and desired margin is known. For the purpose of this example, assume the hourly cost is $100 and you want to calculate a selling price with 30% margin.
Sell Price = Cost / (1 – Margin)
Sell Price = $100 / (1 – .30) = $142.85 per hour
Calculate Profit in Terms of Margin
Use this formula to determine the profit margin you earned on a project when the project cost and sell price is known. Assume that your project cost $700 and you sent a $1,000 invoice to your client. What was your profit margin?
Margin = (Sell Price – Cost) / Sell Price
Margin = ($1,000 – $700) / $1,000 = 30%