How to Price a Job So You Don't Lose Money (Overhead, Profit & Markup Explained)

More contractors go out of business from underpricing than from a lack of work. It's a strange pattern until you understand why: a contractor can be busy every week, completing job after job, and still be quietly losing money on each one, because the number they bid never actually covered what the job cost to run.

The confusion almost always starts in the same place: markup and profit margin are not the same number, and treating them as if they are is one of the most common, and most expensive, mistakes in construction pricing.

The Mistake That Costs Contractors the Most Money

Here's the math that trips up a huge share of contractors. If your direct costs (materials, labor, subcontractors) total $100,000 and you apply a 20% markup, your price is $120,000. It feels like a 20% profit. It isn't.

Profit margin is calculated against the final price, not against cost. $20,000 in profit on a $120,000 sale price is a 16.7% margin, not 20%. To actually achieve a 20% margin, you'd need to apply a 25% markup, not 20%.

| Desired Margin | Required Markup | |---|---| | 10% | 11.1% | | 20% | 25% | | 30% | 42.9% | | 50% | 100% |

This gap compounds across every job you bid. On a $100,000 job, the difference between thinking you have a 20% margin and actually having 16.7% is $3,300 you never realized you were leaving on the table, on that job alone.

Overhead and Markup Are Not the Same Thing Either

A second common confusion: overhead and markup get used interchangeably, but they're different concepts that both need to be accounted for separately.

Overhead is the actual cost of running your business: office rent, admin salaries, insurance, vehicles, software, marketing, all the costs that exist whether or not you currently have a job on the books.

Markup is the percentage you add to a specific job's direct costs to arrive at your selling price, and it needs to cover both your overhead allocation and your target profit, not just profit alone.

A contractor with real overhead running at 25% of revenue who applies a "20% markup" thinking that number represents profit is actually pricing at a loss before profit even enters the calculation, because the markup hasn't even covered overhead yet.

What Contractor Overhead Actually Runs

Industry data suggests contractor overhead typically runs 25% to 45% of revenue, not the 10% figure some older rules of thumb suggest. The commonly cited "10 and 10 rule" (10% overhead, 10% profit, 20% total markup), popularized by some industry sources, works for a narrow set of circumstances, like standardized insurance restoration pricing or highly competitive commercial bids where volume compensates for thin margins. For most contractors, using a flat 10% overhead figure means quietly paying real overhead costs out of pocket rather than recovering them through pricing.

Calculating Your Actual Overhead Rate

The reliable approach starts with your real numbers, not an industry rule of thumb copied from another contractor with a different cost structure:

1. Total your actual overhead expenses over a representative period (a full year is best, to smooth out seasonal variation): rent, admin payroll, insurance, software, marketing, vehicles, and other costs not tied to a specific job.
2. Divide by your total direct job costs (materials, labor, subcontractors) for that same period to get your overhead rate as a percentage of costs. If overhead is $300,000 and direct job costs are $1,500,000, your overhead rate is 20%.
3. Apply that overhead rate to every job estimate, before adding your target profit margin on top.
4. Add your target profit margin, using the margin-to-markup conversion, not a flat percentage assumed to equal profit directly.

Building the Full Price

Using the margin method, the formula is:

Sell Price = Total Direct Costs / (1 − Desired Margin %)

Start with a detailed takeoff of every material and labor hour, priced accurately, not estimated from memory. Add your calculated overhead rate. Then divide by (1 minus your target margin) to arrive at your final sell price. This produces a price that actually delivers the margin you intended, rather than one that only looks like it does on paper.

Change Orders Deserve a Different Markup

One detail experienced contractors apply that newer ones frequently miss: change order work should carry a higher markup than your original bid, typically 15 to 25 percentage points higher. If your standard job markup is 25%, change order markup in the 40% to 50% range is common and justified, for real reasons:

• There's no competitive pressure. The client has already chosen you; you're not competing against other bids for this specific piece of work.
• Disruption has a real cost. Change orders interrupt planned workflow and sequencing, and that inefficiency is a legitimate cost to price for, not an inconvenience to absorb.
• Small change orders carry disproportionate overhead. A $2,000 change order requires nearly as much administrative processing as a $20,000 one, so the overhead recovery per dollar needs to be higher to actually cover that fixed processing cost.

Consistency Is What Actually Protects Your Margin

The biggest risk in contractor pricing isn't using the "wrong" markup number. It's using a different, inconsistent approach on every job, guessing at overhead recovery one month and forgetting it the next. That inconsistency means you have no reliable way to know which jobs actually made money until well after the fact, when it's too late to adjust.

Build a standard markup into your estimating process, based on your real, calculated overhead and target margin, and apply it consistently across every job. Revisit the underlying overhead percentage quarterly, since overhead costs shift as your business grows or contracts, and a markup calculated on last year's overhead can quietly underprice this year's jobs.

The Bottom Line

Being busy is not the same as being profitable, and the gap between the two is almost always hiding in the difference between markup and margin, and in an overhead rate that was estimated once and never revisited. Pricing a job correctly means starting with an accurate takeoff, applying your real overhead rate, and converting your target margin into the correct markup, every time, not just when you remember to.

Correct pricing starts with an accurate takeoff. If your estimates have been built on assumptions rather than a real, line-by-line cost breakdown, that's the piece most worth fixing before your next bid.