In This Article
Calculating Overhead & Profit
The Mistake of Markup View all Bidding articles
Once a contractor has come up with his estimate of hard costs to complete the job, he will mark up his costs to determine the bid price. The hard costs – the money paid out for labor and materials — is marked up to cover overhead and profit.
Overhead. Overhead includes all the “soft” costs incurred by being in business that are not associated with a specific job – for example, trucks, tools, and equipment; office expenses, bookkeeping and accounting; advertising, training, legal, insurance, and other costs of being in business. If a contractor does not charge enough to cover his overhead, he won’t be in business for long.
Profit. The other component of markup is net profit, often referred to simply as “profit.” Net profit is the amount left for the owner after paying all hard and soft costs to complete the job (gross profit net profit plus overhead). If the company owner works part-time on the job site, his labor cost while swinging a hammer is treated as a hard cost of that job. If he works in the office and pays himself a salary, his office pay would be counted as overhead. If the job is profitable, the owners would earn profits in addition to any wages paid to them by their company.
CALCULATING OVERHEAD AND PROFIT
Every company calculates overhead and profit a little differently. For example, some companies consider labor burden (employee benefits and taxes) as a direct job cost, some consider it overhead. Some companies mark up materials, labor, and subs. Some just mark up labor. Some assign overhead based on the time it takes to do a job, rather than the cost of the job. Some assign a line-item expense for the contractor’s management fee in lieu of “profit.”
Or they may use some combination of these pricing approaches. Whatever method is used, it’s essential for the company’s survival that they make enough money to cover all the company’s costs. The remaining net profit rewards the owner for taking on risk, and also provides money for new equipment, for working capital, and as a hedge against future losses.
Many numbers get kicked around as the “right” amount of overhead and profit. In general, large companies have higher overhead than smaller companies. In some very small companies, where the owner is on the job site every day, the owner is often primarily working for wages, with a modest additional profit if all goes well.
Because everyone calculates these percentages a little differently, profit and overhead numbers are slippery and difficult to generalize. A national survey of 54 builder/developers by NAHB (see below) showed an average net profit of about 9% on land-and-house packages. Overhead, marketing, and sales accounted for another 10% (financing is generally considered a direct cost of construction).
This is not far from the “10 and 10” sometimes thrown around for 10% overhead and 10% profit. Custom builders typically work on smaller margins of about 15% to 18% for overhead and profit on new homes, while remodeling contractors typically charge higher rates for overhead and profit. When times are tough, some contractors lower their markup (and profit) in order to attract more work with lower prices.
|
SINGLE-FAMILY HOME: COST BREAKDOWN |
||
| Sales Price Breakdown | Average | % of total |
| Finished lot | $76,591 | 23.3 |
| Construction | 222,511 | 58.9 |
| Construction loan | 6,375 | 1.7 |
| Overhead | 20,377 | 5.4 |
| Marketing | 5,297 | 1.4 |
| Sales Commission | 12,815 | 3.4 |
| Profit | 33,658 | 8.9 |
| Total Sales Price | 377,624 | 100% |
| Source: NAHB 2009 survey of home builders. Avg. house size: 2,716 sq. ft. | ||
THE MISTAKE OF MARKUP
If a builder wants to make a 20% margin (also called “gross profit) to cover overhead and profit, he has to mark up his hard costs by 25%. This little twist of math manages to confuse many people – and has probably lead to the bankruptcy of more than a few small contractors who thought they could mark up their jobs by 20% for a 20% gross profit. The math, shown below is simple. To achieve a 20% margin (for overhead and profit), you need to mark up your costs by 25% (see box below).
| SAMPLE JOB MARKUP |
| Job Costs $10,000 + 25% Markup 2,500 Total Price $12,500 |
| Markup ÷ Price = Margin $2,500 ÷ $12,500 = 20% |
The chart below shows how much a contractor has to mark up his hard costs in order to make a certain margin. Margin, or gross profit, is used to pay for a company’s overhead and to provide a net profit at the end of the year.
|
MARKUP VS. MARGIN |
|
| Markup | Margin (Gross Profit) |
| 15% | 13.0% |
| 20% | 16.7% |
| 25% | 20.0% |
| 30% | 23.0% |
| 35 | 25.9% |
| 40% | 28.6% |
| 50% | 33.0% |
| 100% | 50.0% |
| Note: To achieve the margin in the second column, a contractor must mark up its hard costs by the number in the first column. | |
See Also: General Conditions vs. Overhead
josh Berberich says
What Costs Should I Mark Up for Overhead & Profit?
I’m relatively new to Electrical estimating and have a question regarding whether or not to include direct/ indirect costs and material/sub markups to profit and overhead percentages. The way the spreadsheet is currently set up, the total bid price, which includes everything mentioned above is subject to profit and overhead increases. To me, this seems like double dipping and in the end decreasing our chances of winning a bid. What’s the best practice? Should these items be excluded from extra overhead and profit increases?
Thanks,
JB
buildingadvisor says
There are many ways to price a job — it seems to me that every contractor does it a little differently. There is a lot of variation in exactly was is considered a direct vs. an indirect cost. In general, a direct cost is one that can be associated with a particular job. An indirect cost is one that you will pay, whether or not you do any work — for example, the costs to buy/lease and insure a truck. Direct costs are marked up; indirect costs are paid for through markup.
Regarding material and sub markups, the most common approach is to enter the price you pay for materials and subs as direct costs. Then they are both subject to markup for overhead and profit. For example, if you buy a light fixture at a discount, you enter the price you pay as a direct cost, not the retail price. Otherwise, I agree that you are double dipping.
The other big variable is labor costs. For a direct cost, do you use the rate you pay your employees or fully burdened labor, the full cost of employment, which is about 30% higher on average? Fully burdened labor includes payroll taxes, worker’s comp, health insurance, retirement benefits, vacations, car insurance, etc.
The answer depends on what you are counting as overhead in your markup calculation. If you are covering labor burden costs in overhead, then you should not mark up burdened labor again for overhead — that’s double dipping. But you would still want to mark up your hourly payroll for profit. Some contractors mark up fully burdened labor for profit, but it seems to me that you would be charging profit on an overhead expense. The important thing is to account for your labor burden costs either in your direct labor costs or overhead, but not both.
Some people mark up subcontractors, labor, and materials at a different rates, but most use the same markup for all three.
At the end of the day, pricing is a balancing act between profitability and remaining competitive — which will vary a lot depending on local market conditions.
Jeffrey A Eckes says
As a professional (trained and certified) estimator, there really ARE some ‘standards’ for estimating. A good source to answer these questions is the ASPE (American Society of Professional Estimators) and their textbook for their certification course “Standard Estimating Practice” published by BNi. It’s available on Amazon (or it used to be).
To answer your specific questions; Yes, that IS double-dipping, but may be a ‘sideways’ method your company has been using to build in ‘cushion’ to the estimate. It’s NOT the right way to do that (more on that in a moment) but could be a political landmine for you until you get your feet under you better.
Direct costs that are attributive to the specific job are always included, costs that are NOT directly attributed to the specific job are overhead. This isn’t an ‘option’ or an ‘opinion’, nor are there ‘lots of different ways’ to do this. To cost correctly, this is how it’s done.
Your spreadsheet should subtotal all labor conditions, all materials conditions, all equipment conditions and all sub conditions independently. From EACH of those categories, you should then be able to apply additional profit or overhead markups independently to the SAME SUBTOTAL in parallel, then total all categories at the end. Bear in mind that markup is NOT the same as profit (see handy chart in this article) and a better way to ‘build in a cushion’ is to set it up in your spreadsheet as a ‘differential’ calculation based on any or all of the ‘subtotals’ so that you don’t add O&P on top of the already calculated O&P. I do this in the line items for my labor numbers, it accommodates ‘overtime’ requirements easily and gives you a stand-alone number that you can then show to management to either implement or not as they feel they need to.
As an estimator, your number one mission is ‘risk mitigation. As such, you should have ALL bid materials including the written scope, and you should itemize what materials you have (“Based on drawings pages E-1 through E-24 and written scope for CSI division 26”) for instance. Don’t forget to look over CSI divisions 00 (Procurement and Contracting
Requirements), 01 (General Requirements), and 02 (Existing Conditions) for conditions and instructions that may apply to your scope as well. This is where a lot of new estimators get their tuchas into a crack, and a favorite of ‘slightly less scrupulous’ designers and contractors put the more odorous conditions (so that you miss them). Remember that the contract will cite the entire scope document, not just your division.
As a final note; don’t be shy to ‘line out’ silly conditions, I once found a line charging us with flying a designer AND assistant from Chicago and put them up in a top rate hotel to inspect veneer flitches. THAT went out fast! Make a report to append to your estimate of ‘amended conditions’ and ALWAYS get your estimate appended to the contract! It will save your butt in the event of a contract dispute.
Lastly, take the ASPE course and get certified, it could DOUBLE your salary inside a few years,
Best of luck!!
ACC says
Should Builder’s Insurance Be Marked Up?
Hello,
I just received a bid from a GC to build a new house for me. In looking over the details of the bid, I noticed that the builders risk insurance policy is listed as a line item that is subject to the overhead and profit mark-ups.
I am surprised that the insurance isn’t paid for by the GC out of his “overhead” charge. Is this usual practice?
buildingadvisor says
Unfortunately, there is industry standard in construction for pricing jobs or calculating overhead and profit. Some insurance costs (such as health insurance and workers comp) may be counted as part of “labor burden,” some may be included in overhead, and some may be added as a line item. Some builders include general insurance cost as overhead, but count insurance linked to a specific job (including builders risk) as a job cost.
Whatever method is used should be reflected in the mark-up percentage. That is the more items that are included as direct costs, the lower the mark up should be.
In a cost-plus job , it’s critical that you pay attention to what is an is not a direct, billable cost subject to markup, and what is paid for out of overhead. In a fixed-price contract, your main concern is the final price tag. How the contractor calculated his price is mainly his concern.
In cost-plus work, look out for cost items that are marked up twice, either intentionally or through sloppy cost accounting.
Chuck Ursini says
Can Builder Add Profit to Overhead?
Can a contractor split up the 15% markup charges and first add 5% overhead and then add another 10% for profit causing an extra charge up and over the agreed upon 15% amount.
Job Cost $150,000.00
5% Overhead $7,500.00
Subtotal $157,5oo,00
10% Profit $15,750.00
Total Cost $173,250.00
15% of $150,000.00 would be $22,500.00
By using his method of first adding the 5% and then adding another 10% adds another $750.00 to total.
Is this actually legal?
buildingadvisor says
Construction pricing is not governed by criminal law so it is not “illegal” to price a job this way — or any way.
It is, however, not standard practice unless the contract specifically states that the markup and profit will be calculated in this way. Some would consider it “double dipping” to add a profit percentage to the markup.
It’s similar to the issue of whether overhead and profit is added to labor costs that are already marked up. For example, let’s say a carpenter is paid $25 an hour but billed out at $50 including labor burden and markup. Is it fair to add markup on top of already marked-up labor costs? I don’t think so, but it’s often done this way on cost-plus jobs.
The bottom line is that pricing policy is a matter of negotiation between you and the contractor. If you are happy with the workmanship and overall job performance, then paying an extra 0.5% is pretty minor and probably not worth disputing. Many jobs have cost overruns far in excess of this, so you might consider this a small price to pay for a job well done and for maintaining a good relationship with the contractor. This may come in handy if you there are callbacks or you wish to hire the contractor again.
Val says
Can Contractor Add Overhead & Profit To Bid at End of Job?
Is it legal for the contractor to not disclose his overhead and profit until the job is complete and then add it to the bid?
buildingadvisor says
If a contractor gave you a fixed-price bid in a written contract, and the contract did not state clearly that overhead and profit would be added later, then I can’t think of a situation where it would be appropriate to surprise you with this added expense at the end of the job. Even if the contract was just a simple one-page proposal, this still constitutes a legally binding contract that the parties must follow.
Disputes over the final cost of a job are common due to cost overruns, but these are usually related to changes to the work, hidden conditions, allowances, material price changes, or other “contingencies” that were not anticipated at the start of the job. It’s always best if any added costs are discussed and billed when they occur – not all at once at the end of the job.
The cost should NOT be adjusted during or at the end of the job because the contractor realizes that he underbid the job or forgot to add overhead and markup.
You ask whether this is “legal”? That would be a good question for your state’s consumer affairs division or attorney general’s office – or a lawyer (which I am not). State laws about remodeling and construction contracts vary, but some may consider this a prohibited “bait and switch” tactic.
Most construction disputes are resolved by negotiation or, worst case, by civil litigation as a breach of contract. If the contractor cannot justify why this cost was added at the end of the job, then you have the option of withholding the added charge until the dispute is resolved. It’s always a good idea to contact a lawyer before taking this step so you don’t expose yourself to a mechanic’s lien or other legal action by the contractor.
Val says
Thank you for your answer Steve!
The undisclosed overhead charge, at the end of the job, was 200% plus 8% profit.
Plus $4,500 for forgotten materials invoices.
I did type 200 correctly. We did contact a lawyer and consumer protection division in our state.
buildingadvisor says
Wow, that’s off the charts. Don’t know the background and all the details, but 200% markup for overhead is crazy and makes this sound more like a ploy to keep the bid low and then overcharge you. Total markup (materials and labor) in new construction is typically in the range of 15 to 20%. Remodeling markup is often higher – as high as 50% in some high-end markets, but typically more in the 20 to 30% range. What exactly is counted as a direct cost and marked up varies, so it’s worth paying attention to the details, especially in cost-plus contracts.
Christine Joyce says
I wish to prevent another catastrophe hiring a contractor to build an 850 sf house and 2-car carport. Just received a contract which appears hugely detailed work to be done. Inclusive plans, permits, etc. No itemized costs estimates; am concerned the ‘profit’ may be too high for our comfort. How can I shield myself from unfair high cost for this project. My prior experience, the contractor never itemized on this degree cost of a project. But, he seriously injured us taking $25k and not doing a bit of work for one year, claimed he bought materials which we never saw nor the receipt. Please help advise best you can.
buildingadvisor says
If I understand you correctly, you have received a bid for your project with a great deal of detail about the building plans, permits, and other details — a good start! However, you did not receive an itemization of costs.
If you have a fixed-price contract, then it is not customary to provide a very detailed, itemized cost estimate to the owner. The contractor is agreeing to complete all the work described in the plans and specification for the agreed to lump sum. Many contractors provide a rough cost breakdown by phases of work, as is required by lenders to establish draw schedules.
However, the contractor’s overhead and markup are built into the fixed bid and typically not revealed to the customer (any more than a car dealer will tell you what his overhead and profit are on a new car). However, if this is a cost-plus contract, then the percentage of markup for overhead and profit (or a lump sum fee) will be spelled out in the contract.
Rather than focus on how much profit the contractor is making, you need to decide if the contract price is fair for the work to be completed. The easiest way to establish this is to get competing bids from qualified contractors. If you are hiring a contractor that you don’t trust from the outset, then you need to keep looking for someone you feel is trustworthy
William D says
Is It Legal for Contractor To Mark Up His Labor Twice?
Great thread, thank you.
I just found out that my contractor has 20% overhead and profit in his hourly rate. He is also charging me an additional 20% when he gives me an invoice with hard costs and labor combined. I believe this is double-dipping and not sure if legal in the US.
For instance, he charges $60/hr labor which include labor+taxes+benefits+overhead+profit. He then charges 20% on the total invoice which includes materials.
I think that is illegal.
buildingadvisor says
This does sound like a form of double-dipping, a general term that refers to getting paid twice for the same work. The practice may be unethical, but not necessarily illegal unless it violates a specific law or the terms of the contract. There is no law regulating how much contractors can mark up their work or how they can determine prices.
I am assuming that this is a cost-plus contract where you receive invoices detailing all costs and showing the mark-up you have agreed to pay. If
your contractor has agreed to mark up all materials and labor, including his own, by 20%, then he may be violating the terms of the contract. You would be on solid footing in contesting these charges and, hopefully, the contractor will agree.
How contractors bill for their own time on cost-plus jobs is a common area of dispute and is often not spelled out clearly in the contract. However, unless the contract specifically states that the contractor will be marking up his own labor twice, then it is doubtful that any court would support his right to do so. Of course, suing is rarely a practical or cost-effective option. Negotiate first and see if the contractor will acknowledge the problem in his billing.
If not, you may need to withhold funds at the end of the job, and formally dispute the charges. A lawyer’s input can be very helpful is you go this route. You don’t want to expose yourself to liens or other legal actions on the part of the contractor. Also, a formal lawyer’s letter can sometimes produce results.
Tim Kearns says
Overhead and Markup on EVERYTHING?
Hi
We’re building a house in British Columbia and our builder is charging us 14% OH on everything. Although we’ve signed the contract, which doesn’t specify “everything”, only “materials and labor”, we’re having heartburn on paying 14% on hard costs such as appliances, decking materials that we source through a colleague and demolition that we’ve sourced and negotiated.
Is it acceptable for us to go back to the builder on this and challenge these OH costs? We’re completely fine paying the OH on all labor and materials used in the build.
Thanks, Tim
buildingadvisor says
The language “materials and labor” typically includes all “hard” construction costs attributable to the specific job, but generally does not include the “soft” costs of running the business, such as office help, insurance, equipment, advertising, legal, etc. Some things fall in a gray area and should be decided before the job whether they will be billable to the job (and marked up) or considered part of the builder’s overhead. An example of this is the owner’s time meeting with clients to discuss job progress and changes.
Whether a contractor is entitled to mark up material and subcontractors hired by the owner is a separate question. Again, this is best determine before the job begins and included, in writing, as part of the contract.
In my experience, most contractors do not ask for markup on materials or labor hired directly by the owner with no involvement of the contractor. For example, if the contractor sends the owner to his lighting supplier to pick out a fixture, the contractor will typically charge markup. If the owner buys a fixture on his own at a home center, no markup is usually paid.
Similarly, if the owner says, I’m going to use a separate company for demolition, and my cousin, a cabinetmaker, for the kitchen cabinets, it’s rare that the contractor will try to collect a share.
The problem with these arrangements is unclear responsibility if there are problems. This results in finger-pointing with no easy resolution. For example, the contractor may be unwilling to come back to fix sticking cabinet doors on cabinets he did not provide. The cousin may say it’s due to faulty installation; the contractor may say it’s due to poorly built cabinets.
Similarly the contractor may say the demolition contractor you used did substandard work that is causing him to raise his price. Also, the contractor may have difficulty coordinating with tradespeople supplied by the owner. This can lead to delays, miscommunications, and extra work for the contractor.
To avoid these kinds of problems, some contractors either:
1) Don’t allow the owner to provide labor or materials
2) Add markup to owner-supplied labor and materials and then take ownership of the completed job.
Whatever the solution, it should be made ahead of time. If these issues arise in the middle of a project, you will need to negotiate. My position would be, “I’ll consider paying a markup on labor and materials I provide, but only if you take full responsibility for the materials, workmanship, and warranty of these portions of the job.”
You can read more on the topic at this link.
Kathleen Doyle says
How Much Should Contractor Mark Up Carpenter’s Labor?
Is there a allowable percentage in British Columbia for a general contractor to mark up their employees wages? We are paying 65.00/hour and he is paying them 20.00 along with a 65.00 wage per hour for himself along with 15% on materials.
His labour is so bloated and claims they are all Journeyman which I suspect is not the case. He charges us a for a supervisor 65.00 but pays him 26.00 and he is doing most of the labour…
buildingadvisor says
In the US, there is no legal limit on how much a contractor can mark up materials or labor. I’m not familiar with the laws in Canada.
Contractors generally bill their employees out at a much higher rate than their base pay. In addition to base pay, the contractor must pay a number of costs for each worker, including payroll taxes and worker’s comp insurance, and in some cases, bonuses, vacation pay, tool/truck allowance, etc. This is referred to as “labor burden” which is often 20% to 50% of the workers base pay. So his $20/hr. workers may really cost him closer to $30/hr.
On top of that, the contractor is charging a profit, so it is not uncommon to pay $40 or more per hour for a skilled carpenter. Labor rates vary a great deal across the country so you can expect to pay more in high-price regions. Contractors often bill their own time at $50 to $100 per hour, depending on the type of work they are doing. They may charge a different rate for work on site vs. work in the office.
As an example, I recently paid a highly skilled carpenter $57.50 per hour for a remodeling job. He was also the general contractor and charges $50 per hour for administrative work. He marked up subcontractors and materials 10% — less than the average markup of 20% in this area. This was a cost-plus job with a guaranteed maximum price.
So it sounds like you are paying on the high side for carpentry labor and a little above average for your contractor’s labor. If their skill level is high and they work efficiently, you will hopefully end up with a good quality job, but not necessarily at the best price.
Assuming you are working on a cost-plus job, you should have established these rates before signing the contract. I’m not a big fan of cost-plus work as the contractor has little incentive to complete the work efficiently.
You can read more on cost-plus labor rates here.
Joe carpenter says
Yes. That $65 covers insurance benefits gas vehicle tools etc. not to mention skilled tradework they are providing.
What the carpenter base pay is none of your concern.
Scott says
Should I Pay 20% Markup on Custom Home?
I have a bid on a new custom home build where we will have purchased the lot already and paid for the design with plans the builder based his bid on. Is a 20% contractor compensation aka profit (20% of construction costs) before taxes on the bottom line of the bid a normal ask for the contractor?
buildingadvisor says
A 20% markup for overhead and profit on hard construction costs (materials, labor, and subcontractors) is pretty typical for a new custom home. However, there is no industry standard — prices vary a lot depending on regional trends, the reputation of the contractor, and how much they want/need the job.
It’s always a good idea to get at least two bids to keep people honest. You’ll often learn some useful information from multiple bids that can help you with cost control. For example, each builder may take different approaches to what is included and excluded in the bid, as well as allowances and contingencies that could affect price. They may also suggest approaches to the project, or revisions to the design that could save you money and help avoid cost overruns.
It is important to understand which costs exactly are the basis of the 20% markup. This is especially important if this is a cost-plus contract. I’m not a big fan of cost-plus for most jobs. Read why here.
Jeffrey A Eckes says
20% Markup Low for Custom Building in My Area
As a custom builder in the NY area, I will tell you that a 20% markup is low for my area. I suspect it’s low for any area. If the builder is good, and you can get all of this into a contract, he’s a find…
I wrote an article on how to hire a contractor. With the permission of this site owner, you can read it here:
https://upstatehouse.com/tips-for-choosing-the-right-contractor/
george says
Contractor Charged 50% Markup Plus Admin Costs
I hired a design-build firm to remodel a bathroom, which sits in between two bedrooms. The job involved widening doorways to 34″ and increasing their height to 8′, replacing swing doors with pocket doors and creating a no-threshold doorway to the garage. The job came in at around $80,000 if you include all new fixtures in the bathroom and tiling the shower. He charges me a 50% mark up, which I thought was high but I didn’t mind because the guy was good. I felt that I was paying top dollar for the top talent. What really rubbed me the wrong way was when he charged the mark up but then added expenses for administrative costs of processing things like a change order, or invoice. In the end I felt I was being gouged. The job was done very well and on time, but I will never use him again nor give a reference.
buildingadvisor says
A 50% markup is definitely on the high side. It should be more than adequate to cover routine administrative costs as well as all overhead and profit. But it never hurts to clarify at the outset exactly what will be included (and excluded) in the contract price and what additional costs you may have to pay. Don’t make any assumptions.
Read more on Billing for Job Supervision and Design-Build Contracts
Renee Miller says
Cost To Remodel Small Bathoom
I am remodeling a small bathroom. How much should the contractor charge for labor, overhead and profit. He is not providing any of the materials needed such as tile, cabinets, toilets, fixtures, etc.
buildingadvisor says
There are too many variables to give you a meaningful answer. It’s like asking how much it costs to buy a small car – is it a Hundai or a Porche? I can tell that, nationally, the average price to remodel a small or mid-sized three-piece bathroom (under 100 sq. ft.) is about $10,000, ranging from $5,000 to $7,000 on the low side to $15,000 or more on the high side. Roughly half that cost is labor.
One key variable is the area of the county, since labor can vary from $50/hr. in low-cost areas like the Midwest to over $100/hr. in the Northeast and West Coast. Also profit margins tend to be higher in high-cost areas.
Other important factors are the quality of the fixtures and finishes, changes to the size or layout of the room, and any repair work needed to the structure. If you are just swapping out the fixtures and cabinets in the same location and adding a new floor, then the cost will be on the low end. If you are moving the fixtures around, upgrading to high-end fixtures, moving a wall, and adding a new window, then you will spend a lot more.
If you are hiring a contractor for labor only, then he will probably not be responsible for product problems unless they are due to faulty installation. Since he is not buying the materials or marking them up, he will not be responsible for their performance.
It’s always a good idea to get more than one estimate. On this type of job, you might find a pretty wide range of prices due to variations in labor costs and profit margins.
Best of luck with your new bathroom!
Carol Zegarski says
No more than 15% [for overhead and profit]. Anything else and it’s too much to pay.
Stephen says
I have no earthly clue how you arrived at that number or where you pulled it from? Back in 2012, NAHB did a national survey. Average margins were 26.8%, Average overheads were just under 25%. This yielded the average contractor just 3% net profit. Smart contractors, those in the top 25%, charged 16% higher margins.
Here is the source:
http://eyeonhousing.org/2013/02/how-much-does-the-average-remodeler-earn-in-a-year/
The study was updated in 2017 with similar findings
http://eyeonhousing.org/2017/03/how-much-do-residential-remodelers-earn-in-a-year/
gavin says
It just depends on who you hire. I work with 20% and my clients love me. If you want someone for less and less honest, go ahead and go for the 15% guy.
Gerard C says
I got to say “I love this conversation thread”! It’s interesting to see that other contractors out there have similar situations. Thank you all for the explanation on markup and margin. Does any contractor have recommendations for bidding software on how to create an easy bid?
It’s hard to make a line-by-line estimate when customers want detailed explanation on where costs are coming from? Many don’t understand the markup and/or overhead expenses we need to add to be able to cover all necessary expenses to finish the job and make some profit.
Like many here explained, it is not just the labor and materials. There are also overhead expenses that we need to cover to finish the job. Office rental, office staff, insurances, worker’s comp, machinery, fencing, toilets, etc.
I’ll appreciate comments on this.
Jos says
As a tilesetter I know that prices can differ much, I ask $75 per square meter for labour, adhesive, grout and silicone on a well-prepared floor. I know that it can vary up to $120/sq. m.by some tilesetters who have too much work and just give a silly price in order to scare the work away. If it is accepted… money for jam.
Is that good practice? You get what the fool will pay.
Don’t be the fool, get as many quotes as possible . And overhead is just another way of ripping people off.
[Note: Posted from New Zealand}
buildingadvisor says
It’s certainly true that some contractors will just throw out a high number if they don’t need the work or don’t want the job for some reason. Another reason to always get more than one bid!
jim says
“Overhead is just another way of ripping people off”. And you’re a tilesetter? With a business?
Chris Baten says
Maybe some of the high margin chargers might need to learn to budget better?
Nordia says
Effect of Small Estimating Errors on Profit?
How do small errors within the unit-rate calculations affect a job’s overhead and profit?
buildingadvisor says
A lot of variables affect the answer to your question. If the error is small and the item is a small part of the total job, then the impact will be modest. If the unit price applies to a large portion of the entire job, then an error of, say, 10% could significantly erode your overhead and profit. The problem is two-fold:
1) You are marking up a lower number than your real direct costs, so overhead and profit are reduced
2) You are spending more on direct costs than expected, reducing your overhead and profit further.
If the error is large enough you can lose all your profit or end up taking a loss on the job. Here’s a simple example:
Let’s say you bid a 20-square roof at $270/sq. and you add 10% for overhead and 10% for profit. You end up bidding $6,480, including $540 for overhead and $540 for profit.
But the actual hard costs on the job come in at $300/sq. so you should have bid $7,200, with $600 for overhead and $600 for profit.
If you do the math, you’ll see that you end up with only $480 ($6,480 – $6,000) for overhead and profit. So you end up with 0 profit and are $120 short on your overhead. So you’ve lost money on the job when you take your overhead into account as you should, as overhead are real costs needed to keep your business afloat.
Mike says
Should Contractor Reveal Markup to Customer?
Should you reveal your markup if a customer asks? If they want a breakdown of the costs, should you identify your markup? I’m a remodeler charging 30% markup and my customer is asking for the breakdown. I really need to know this. Thanks.
buildingadvisor says
On cost-plus work (time and materials), it is customary to show your customer all your costs for materials and subs as well as your markup for overhead and profit.
On a fixed-bid contract, most contractors do not disclose their markup, but some do. There’s no right and wrong – it’s really a matter of your business philosophy and the market you are in. In general, the people who disclose their markup are doing high-end work for professional clients who (hopefully) recognize the reality of markup – that if you don’t charge enough for overhead and profit, you can’t stay in business. They are often doing work by referral and are marketing their business more on quality than on low price. If you know you are not the low bidder, you can try to explain to the customer that the low bidder is not always the best choice as he may cut corners, use inferior materials or workmanship, or raise the final price with “extras” that were left out of the bid.
It is also common to disclose the cost breakdown in a negotiated bid, in which case you are typically the only bidder.
In a more competitive market, where you are competing with other bidders, contractors are less likely to disclose their markup, but may show some price breakdown on larger jobs such as framing, windows and doors, insulation, etc. The customer doesn’t really need to know your pricing formula as they can compare bids – they price they are going to pay – and make their choice.
Disclosing your markup can help build trust or lead to bickering over price, depending on the individual client. You need to decide whether it will help or hurt your cause to disclose the information in this case. If they want to haggle on price, then it might be a lost cause whether you tell them your mark-up or not.
phillip buller says
Average Margin on New Home
What is the average Builder’s margin charged on a new home construction?
buildingadvisor says
Custom builders typically work on a gross margin of 15-18%, which translates to a markup of about 20-25%. Large developers often have higher overhead and higher margins to cover the overhead. These numbers can vary a lot, however, depending on what the contractor counts as overhead vs. direct costs – for example, his own supervision time.
Sounds like you know the difference between margin vs. markup, but this topic is source of confusion for many contractors and customers.
Ben says
Easy Formula for Margin
It’s quite easy to manipulate the margin with the following formula:
Start with 1.0 and subtract the desired margin (.2 in the case of 20%) Take that number (.8) and divide into the cost of construction and you will get a sales price with a 20% margin.
Example #1
1.0 – .2 = .8 (.2 =20%)
Cost Of Construction = $100,000
$100,000/.8= $125,000
Margin = $25,000
$25,000 equals 20% margin on a sales price of $125,000
Example #2
1.0 – .25 = .75 (.25=25%)
Cost of Construction = $100,000
$100,000/.75= $133,333.33
Margin = $33,333.33
$33,333,33 equals a 25% margin on a $133,333.33 Sales Price
A whole lot of folks confuse markup with margin. It’s a costly mistake
Patrick Walton says
Perfect math Ben, and the best method.
Paula says
This is a great article and one I have struggled with. I have always listed out the cost, allowances etc…and have shown my profit/overhead to the customer, which freaks people out. Does anyone have a sample of what they give to their customer for the proposal?
NwWoodworker says
Hard to Justify Markup to Customer
The main problem I have encountered as an independent contractor focused on finish work, is trying to justify costs, and the overhead it really takes to get the job done properly. Many clients don’t understand the cost of sandpaper, glue, and other disposables. More important are the costs to purchase tools and to maintain the tools you use for any particular job. Also, the time required to source and transport materials, and milling.
To account for the unknown variables, I typically add 25% to my overall labor cost, based on “contingency” and “markup” (unknown variables of the labor and materials required in a typical remodel).
Another important factor to consider, particularly if you are doing fine finish work, is the risk involved. I have done quite a few jobs where the piece of wood is unique, and picked out by the client (typically live edge slab-work). When there is no room for error, I tend to mark-up my work more.
As an independent contractor, I’m not the cheapest option around – but I take the care to perform my work well, and that is what keeps me working. People respect craftsmanship, whether they think they do or not.
Brooks Dawson says
Jack,
When does anybody get anything at cost. There is always a markup even when somebody says they are selling it at cost. Remember the higher the risk, the better the reward. Contractors take a lot of risk if things go wrong. You know the saying “Hope for the Best, but prepare for the Worst.” Twenty percent seems high to some people but that is reasonable in construction in most States. In retail you can get charged from 200% up to 1500% by the time the product goes from manufacture to showroom floor.
Jack Cross says
Funny Math to Inflate Price
I fully understand your explanation of how 125,000 will get you at full 20% markup. But, this is still a bunch of contractor bologna. Why do you get to add the money you will be receiving to the total in order for the amount not to equal 20%? Any business owner could do this funny math to receive a desired larger percentage.
michael says
Jack
Next time you go to the grocery store and you’re standing in front of the teller, tell them you don’t want to pay retail — that you want it at their cost and let’s see how hungry you’ll be. Markup is not some flippant process to extort money from someone. Its the lifeblood that keeps a business in business. Why do you feel that contractors are somehow ripping you off if they employ the same standard and principles as all other businesses? Everything you have ever bought has had markup. I’m sure you don’t argue with the gas attendant every time you fill up your vehicle about their markups!
Scott says
Michael’s comments above to Jack truly represent reality, amen.
Unfortunately, many people such as Jack have probably had a bad experience with a less-than-honest contractor, especially those who selected a contractor simply based on low bid – what they thought was to be the lowest cost. Like the old contractor told his clients, “The 3 most important things to most people always seem to be a good schedule, good quality work, and a good price.” After a long pause, he asked, “Well, so which two do you want?”
Any lack of honesty however is certainly nothing unique to construction however! If we choose to be honest to ourselves, then we all know that there are honest people and some less-than-honest people in literally every type of business or non-business organization worldwide – for-profits, non-profits, and not-for-profits – no exceptions, period. Its always been this way, and always will be this way – Utopia has never existed, and never will in the real world.
Back to construction, reputation is everything. So choose your contractor based upon their reputation, their experience, and their qualifications rather than just low bid.
Bert says
Learn The Math, It’s Pretty Simple
You need to learn the math associated with the desired markup rather than depend upon a table like noted above.
The math is rather simple: If you desire a 20% markup (Office Overhead, Soft Cost, and net profit) you simply subtract the desired 20% from 100% and then divide the Hard Cost by the difference between the 100% and the 20% (100-20=80).
Assume a $100,000 Hard Cost and a 20% markup. What you must remember is that you are really looking for a 20% on the FINAL BID. Not a 20% on the Hard Cost.
If you just add 20% to the $100,000 the bid would be $120,000. Now to check if you are actually meeting your objective of 20% on the contract amount, multiply 20% form the bid amount of $120,000 and you get $24,000 not $20,000. So you are $4,000 short of the desired 20% of bid or contract amount. You are actually only 16.67% of the total bid of $120,000.
Lets redo this: Hard cost of $100,000, desired markup of 20% of actual bid.
100%-20% = .80
Hard cost $100,000/.80=%125,000
Check: Bid/Contract Amount = $125,000 X 20% = 25,000
$25,000/$125,000 = .20 or 20%
The total difference is $5,000. This means that if you marked up the project by just adding 20% to the hard cost, you will need to hope that you overestimated your hard cost by $5,000 if you are to actually obtain the $25,000 Markup.
Howard Moxley says
Finally, someone who understands the math of “margins vs markup”.
Another way to explain it is to say that you divide by the reciprocal of the Margin you are trying to achieve. Granted this means you had to pay attention in school. 20% = .8 (80%) 15% = .85 (85%) and so on. Just another way of stating your math.
Bradyn says
Should Larger Jobs Have Smaller Markup?
Using the markup formulas in the article, when bidding a larger job with, say, $100k job costs versus a smaller job with $15k costs, should a contractor be concerned with bidding to high and not being competitive? Adding 40% markup to $100k is obviously much more than adding 40% markup to $15k. The worry is that you outbid yourself by adding too much to larger jobs. Any insights into this line of thinking?
buildingadvisor says
You are correct that most contractors get a smaller markup on large projects such as new homes vs. smaller remodeling projects. This is partly because of the larger budgets on new homes and partly because overhead costs are usually lower on new construction. Also, in most markets, builders cannot get the same level of overhead on new homes as they do on remodels.
As for changing your markup on large vs. small remodels, some contractors do this if they need to to stay competitive. Every company handles this issue a little differently, but one way or another you must spread your markup over your volume of work so you end up recovering the required overhead and profit to operate your company.
Regardless of the markup you’d like to charge, if the marketplace won’t accept it, then it’s not going to work. The amount you can charge depends on the market you are in and your reputation and marketing skills. Some companies are successful at charging higher than average prices by marketing themselves as the “Lexus” quality of building vs. the Kia. Often these companies are not in a competitive bidding situation – they have been chosen as the sole contractor for a job.
Greg Nelson says
Finally Understand Profit Margin
This was article was so good to read because it really confirmed my own “knowingness” on the subject. Regarding the “Mistake on Mark-up” section, I will be honest, I have been doing it wrong and had no clue of this. As I have not finished high school as a teenager, I am not stupid, and think many contractors and professionals share in this idea. I believe the only reason I have not gone under is because when I finish a bid, I always add negotiating money on top of everything. But still, most jobs finish tight and I always wonder, “should I have put more money in the bid” Did I estimate this wrong? Am I calculating my mark-up wrong? Or – I wonder how my competitor did his mark-up?” I actually worked in a company in Canada once that calculated their mark-up like its explained in this mark-up but it was never explained to me why they did it. IN reading this article, I get it! This to me is one of the best sources of information on the internet for my business.
I guess, the only things that will be immediately noticeable is that if our competition does not know about how to calculate their profit margin properly, (such as I have been doing,) then our bids will be the higher most of the time. – But I would rather sign on a job KNOWING i’m going to make profit than wondering. – And yes, most of the time, we get the jobs because of a great portfolio and reputation – price is NOT always the first consideration.
Thanks,
GN
Rick says
It is the difference between mark-up or mark-down. Your mark-up from cost will never equal your mark down from retail.
If I have a $100 item and need 40% from it (or $60) I cant pay more than $60 for it.
Some are fooled by taking a $60 item and putting a 40% mark-up on it and wind up at $84. You just lost $16 in the margin.