What markup should contractors use?
Labor typically gets marked up 1.5x to 2x your actual cost. If you pay a crew member $25 per hour, you’re billing that labor at $37.50 to $50 per hour. Materials usually get marked up 20% to 40% depending on the product and how much procurement work is involved.
But these are just starting points. Your actual markup needs to cover overhead that doesn’t get billed to specific jobs. Insurance, truck payments, office costs, marketing, licenses, your own salary when you’re not on a job site. Add those up and divide by your annual billable hours or revenue to know what overhead percentage you need to cover.
A contractor with low overhead can work on thinner margins. Someone running three crews with an office and admin staff needs higher markup to cover those fixed costs. The market also matters. Competitive bidding on commercial work often forces lower margins than residential remodels where you’re the only person the client talked to.
The problem is most contractors don’t know their actual costs well enough to set markup intelligently. You think labor cost $3,200 on a job but you’re not accounting for the two callbacks, the prep time, or the afternoon your lead guy spent picking up materials. Real cost was $4,100. Price the next job at what you thought the last one cost and you’re leaving money on the table or worse, losing it.
Contractors who track job costs properly know their real expenses and can set markup that covers overhead and generates actual profit. Guessing at markup based on industry averages works until you realize you’re consistently underbidding because your actual costs are higher than you assumed.
Net profit after all costs should land somewhere between 10% and 20% for most construction businesses. Lower than 10% and you’re working too hard for too little. Higher than 20% either means you’re in a specialty niche with less competition or you’re about to get undercut by someone willing to work for less.
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