I cringe when I hear of contractors leaving money on the table by adding overhead and profit to their job costs. Don’t do it. Let’s take a look.

As an example, you know that your overhead costs average 32% of your total revenue, and you want a 10% profit. That means your average job costs are 58% of your total revenue.

You just estimated a job with total job costs of \$1,000. You arrive at your sales price by adding overhead and profit to the job costs:

\$1,000 + 32% overhead (\$1,000 X .32 = \$320) = \$1,320
\$1,320 + 10% profit (\$1,320 X .10 = \$132) = \$1,452

Now, job costs of 58%, overhead at 32% and profit at 10% means you should be using a 1.72 markup times cost to get to the sales price for your work. (For more on how to calculate your markup, read the book Markup & Profit; A Contractor’s Guide, or watch the videos.) If you prefer to use margins, you have a Gross Margin of 42%.

Markup of 1.72: \$1,000 X 1.72 = \$1,720
Margin of 42%: \$1,000 / (1 – .42) = \$1,724

This means for the same job, you now have an additional \$270, or \$270 per thousand dollars of job costs.

Why? Because your gross profit (overhead + profit) of 42% is 42% of TOTAL REVENUE. If you use those figures and add them to your job costs, you are treating them as 42% of JOB COSTS – and they aren’t. You short yourself.

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Wes Partin
April 9, 2018 5:42 am

I’d like to add my 2 cents here, realizing it’s been 2 years since the discussion’s last post. Has anyone ever considered only figuring to cover your overhead based on labor hours and marking up for profit based on the entire cost? Most companies budget so many crews with so many people for the entire year. Let’s say you have 3 crews of 3 men that’s 9 labor hours per crew hour and you’re working 2000 hours per year, totaling 18,000 labor hours. You know you need \$200,000 to pay your supervision, rent, lights, etc for overhead just to keep… Read more »

Devon Stone
May 22, 2018 9:01 am

Wes – There is a lot of calculation and figuring going on there, which means there is a lot of opportunity for mistakes. My biggest concern is your statement “You’ll win more work” – that means your price will be lower using this method. If you’re doing the same work regardless of how you calculate the price, but one method gives you a lower price, maybe you aren’t charging enough to cover the entire cost of the job, pay your overhead expenses and make a reasonable profit? Job cost times markup equals sales price is by far the easiest method… Read more »

Wes Partin
May 22, 2018 6:46 pm

Devon, I see you missed my point, which was too offer a way to take guesswork out of overhead recuperation. After reading some of the questions and a couple comparisons from commenters I thought bringing up another and more plausible theory for overhead calculation that is more dependable and creates a better bid situation. It’s easy to say that someone isn’t charging enough until they lose jobs because, in a competitive market, they start “charging enough” and the market won’t allow it. The notion behind overhead recuperation is to keep the doors open. Profit is for expansion. The reality is… Read more »

Bud Steinle
March 12, 2016 11:30 am

OK I’ve been applying the markup based on my sales projections for the year I read the book markup and profit I use, the question I have: What if I have a job where the labor is 2000 and the materials are 15,000? The split between labor and materials usually isn’t that lopsided but in some situations it is. Would I still apply my 1.6 mark up, which is what I figured from my total sales projections, putting me at a price of 27,200 That means I’m making 10,200 on a job where I only spent 2000 in labor and… Read more »

Bud Steinle
March 14, 2016 11:17 am

Ok so I’m guessing I already know your answer and I appreciate your response. I have another scenario I’d like to get you perspective on. Say for instance I have 2 jobs, both flooring Job 1 has an expensive hard wood at \$6.00 a sq foot Job 2 has a cheap hardwood at \$2.50 a sq ft Both jobs are 1000 sq ft and identical It’s takes 2 guys (at \$20 per hour) to do this job in 20 hours So for each job it cost me \$800 in labor Job 1 total job cost are \$6800 Job 2 total… Read more »

Zoran Vrhovnik
June 29, 2016 6:02 pm

You need to put under consideration that if you miss-cut or damage the material, you need to be able to afford replacing it also. That is why the more expensive material will show bigger mark up.

kaine
August 3, 2016 8:29 am

is it illegal to pay prelims through the job then cut them on the end

Sarah
February 13, 2016 2:46 am

Ok…I know this is probably a stupid question but for the life of me I’m struggling to figure it out. If I have an overhead percentage of 104% + profit of 10% (so gross margin of 114%), how can I get the denominator to work in your sales price calculation? Thanks

Sarah
February 13, 2016 2:48 am

and yes I know the overhead % is high! Looking at this for a different industry though.

jett
November 16, 2013 3:49 pm

“As an example, you know that your overhead costs average 32% of your total revenue, and you want a 10% profit. That means your average job costs are 58% of your total revenue. ” 32+10=42*

Johnny C.S.
December 13, 2013 9:59 pm

Total Revenue = Profit + Overhead + Average Job Costs
100%(Total Revenue) = 10%(Profit) + Overhead(32%) + Job Costs (???%)

To make 100% true, Job Costs must be 58% not 42% as you suggested. Common mistake though. As common as using profit percentage on costs instead of sales revenue.

susantha
August 15, 2009 3:25 am

Hello,

In our organization, we have Managers, Engineers, Supervisors, Foreman & Labours.
Please advice me, When i preparing a New rate for a extra work, Which categories of man power have to be include in Overhead & Profit?

November 23, 2009 7:41 pm

Great information on property insurance industry, materials, and contractor’s overhead and profit.

Rocelle
November 17, 2008 7:41 am

Hello,

I have a question. If a restoration company decided to manage the contractors that I have picked are they legally entitled to the O & P of these contractors? Even though they are already charging me an hourly managerial fee? What as the consumer do I get out of the O &P as far as guarantees of work done by the other contractors I hired since they are not their contractors?
Thanks,
Rocelle

November 14, 2008 11:48 pm

I have been using a standard markup of 30% with an established marked up labor rate to achieve the desired profit. Though I just saw a 3 tiered mark up. When you do this I see making an additional 3% though the trouble I see is what to call these three tiers, overhead, profit & ?

Thoughs.

Tom

May 8, 2007 10:38 pm

Somewhere along the way I learned a formula that has been helpful and simple for me. I can’t recall the book at this time though I have searched to double check it. Basically, you divide your direct job costs (materials, subs, labor, etc.) by 100% minus your overhead and profit mark up percentage. So for example, if your overhead and profit is 20%, you would divide your job cost (let’s say \$1000 for sake of argument) by 80%. This gives you \$1250.00. Then take that amount and multiply it by your overhead and profit percent (20%). This gives you \$250.00.… Read more »

Sonny Lykos
March 3, 2007 8:11 pm

Here’s another example: Say your overheaad and profit is 40% of total sales. The novice would think he only has to then add 40% to his cost. So let’s try that. I jobs costs – all materials, subs, and labor comes to \$1000. By adding 40% – or \$400, you arrive at a selling price of \$1400. So, using my original logic, if we multiply that \$1400 by 40% we’ll end up with that \$400. Well, 40% of \$1400 is \$560, leaving \$840. But we know that the jobs COST total was \$1000, but we only recaptured \$840 – so… Read more »

February 5, 2007 5:23 pm

Hello – I read this and can’t figure out how you arrived at 1.72 markup? Can you explain? Thank you

Shelley
September 21, 2012 7:48 pm

Hello,
I see that all of the information given here pertains to adding profit and overhead costs into a bid. Does your book cover the topic of how to figure out what your labor costs are (which would be included in job costs)? I am considering purchasing this book, but I want to make sure that my question will be covered in the book as well. Thanks!

Anna
September 10, 2012 6:49 am

Hello, My father’s home burned and we hired a contractor to complete the rebuilding. I have a few questions related to this project. The contractor is a carpenter/cabinet maker and he along with 2 of his men did most of the framing, carpentry work, etc. He was responsible for scheduling things like painter, sheetrockers, roofer, etc. however, he did not pay them directly. I paid him weekly for his/2 men labor costs. Also if he needed to pay the painter X amount, I would add that to his weekly draw. My father (has owned plumbing/electrical/heating and air company for 30+… Read more »

GENE
June 22, 2012 2:51 pm

OK–…EXAMPLE: I HAVE MATERIAL COST OF \$1,200.00 PLUS 9% TAX = 108.00==\$1308.00……I HAVE A LABOR COST OF \$600.00 PLUS 55% BUDREN COST= \$350.00 (ACCORDING TO MY ACCT.) ==\$930.00
I ADD THE TWO T0GETHER AND GET \$2,238.00=== JOB COST —
I MULTIPLY BY (15%) AND GET MY TOTAL JOB COST AND PROFIT –\$2,573.70
IS THIS PROFITABLE? REMEMBER THIS IS CONSTRUCTION..

Steve M
June 7, 2012 3:40 pm

Look up the Eichleay formula. Simple and recognized by many US courts when calculating OH&P for owner-caused delays.

Jim
April 14, 2012 3:07 am

First off it is as much simpler process. If your Average Net Profit per Job is 30% then your Actual Job Cost(including whatever amounts you want to) is 70%. Simple math will get you the sales price if you know what your Cost is: .70(Cost)= Sales Price. Using your figures above: 1000/.60 = \$1666 — Thus no fancy 1.72 formulas are needed.

ken
December 22, 2011 2:35 am

Constructus Say
Bid to high = “no job”
Bid low = Good news “You got the job” Bad news “you got the job”

Mike B
December 23, 2011 12:07 am

Ken,

Very good observation. I concur!

shamsher Singh
December 6, 2011 6:14 am

I want to find out the rate analyses with over head for road and bridge work in excel formet. please send me reply

jason mcfaun
November 27, 2011 8:29 pm

I own a small H.V.A.C instillation business in massachusetts . It is just me and my partner we are each own 50 percent 0f the company . So are you saying that are hourly labor rate which is 60 an hour for each of us the total being 120 an hour for the two of us . Should be figured in to are overhead ? I generally mark my stock up 26 percent and put another couple of hundred or more depending on the size of the job . I am getting the feeling by reading what you had to… Read more »

September 7, 2011 12:22 pm

Hi There from SA

I was wondering whether you could perhaps assist me with some advise on our costings as well…

We usually calculate our customer jobs as follow:

total material costs x 45% x 65% = your selling rate which most of the times results to a 2.2 material factor. Is this correct?

Lou
September 1, 2011 6:53 pm

Estimating overhead does take planning. I’m not sure about a “little” planning. Basically what you are doing is planning your company. Perhaps Markup and Profit; A Contractor’s guide would help with that? A couple of things to watch out for in particular situations: 1. If you are starting a business, because you know the field and you know what “you” can accomplish in the field, but don’t be so sure that your workers can do the work as quick or efficiently as you. You need to aim lower than your standard. After all, if you have the confidence in starting… Read more »

Steven B
August 31, 2011 5:57 am

Is there such a thing as ‘industry standard’ overhead costs on separate trades i.e. painters, or finish carpentry, or concrete polishing or plumbers? Could it be so simple to have a standard to work by until company history established it’s own ‘standards’.???

Lou
August 30, 2011 10:08 pm

None of this makes any sense to me as a successful contractor. In the first place you have no idea what your overhead costs are going to be, but to start you would need to establish what your past overhead costs were. All that does is give you a basis for estimating what your overhead costs will be. For example, lets say one year you do a million dollars worth of billable work and the next year you do 2 million dollars worth of billable work. Your actual overhead costs for doing the one million dollars isn’t going to double… Read more »

July 17, 2011 1:51 pm

Hi All, Greetings from across the pond…(UK) I am researching building Contractors rates and OHP. We are working on a methodology to reduce building costs, while maintaining quality and profitability for Small,Medium Enterprises (SME). I was curious after reading most of your posts that you do not seem to have a nationally recognised definition of estimating practice. ( or am I wrong here?) In the UK we have a code of estimating practice – which is quite comprehensive and shows the way to “build up” rates. It seems we have a universal problem on both sides of the Atlantic that… Read more »

June 28, 2011 2:00 pm

I charge my customer my labor rate cost, my fixed cost is \$55.63 per hr. and my overhead per 4 man working 8 hr a day,5 days per week and 4 weeks per month pays my overhead. Which makes my overhead cost at 2.14 per hr. Am I doing this correctly and, what should be the cost of my labor rate that I am charge my customer?

Bill
June 13, 2011 2:18 pm

any help would be greatly appreciated! I read the comment number 3 from Sonny and it makes complete sense. but let’s say the company you work for takes 25% from the total invoice and you want 25% profit from your job. how do you calculate both the markup and the discount to where at the end both parties get 25%. let’s say a fridge replacement costs \$1,000 – I want 25% for my time and delivery/installation and I need to include 25% discount that the company is going to take from the final invoice. adding discounts doesnt work for me… Read more »

Steve
May 18, 2011 12:22 am

It’s funny how you contractors can justify paying O&P on total revenue. Which by definition already has O&P added to it. So, a 20% O&P on total revenue is really a 25% O&P. A 40% O&P is really 67%. Be honest and stop playing games with people’s money. Tell the customer the truth!

April 8, 2011 3:11 am

I have been in concrete and excavation business for twenty six years and overhead really is a big key factor in submitting my bids and i know there is so many differnt ways of figuring overhead wheter you tack it on just to labor and to materials and labor i have played with them all but i do really like this concept of basing off of total revenue, now would you try to cover the same percentage of overhead on each job you bid or would you or do you keep a log and as you reach your break even… Read more »

April 8, 2011 3:04 am

I believe i understand how you came up with the 1.72 percent by taking 100 and dividing by your average total job cost, but why would you figure out also your margin of overhead and profit at 42 percent so would you bid price be \$1720 or \$1724 i know its only four dollars,but what is the correct bid price

April 8, 2011 2:37 am

to figure your profit should divided by .90 to get a true 10 percent to check it just work your formula backwards take your total bid price subtract your over head then your job cost and divide the profit into your bid price and see if it comes out to ten percent then try again taking your total job cost + overhead and divide it by .90 then check it

April 6, 2011 8:40 pm

We are bidding a government job and this statement has me a lttle confused.

“need to show all direct costs and then add 10% for overhead calculated off of the direct cost and then 10% for profit calculated off of the direct cost (they do not allow you to “mark-up” overhead).

Can you explain how to show this on the bid.

March 11, 2011 4:26 pm

Hi Mike I’m a contractor and like many others have not been putting in profit & overhead into the pricing but have started adding it in. I spread the costs of profit and overhead over all the items in my pricing. My question is do you have to disclose to customers during discussions of the propoal where profit/overhead are? Should it be a separate line item on the proposal? That would seem to be a serious negotiation point for the customer. Thank you.

jayne
January 4, 2011 5:13 pm

This sounds like a great book. I just ordered it for my husband. I am curious if this markup you are using of 1.72 would apply overall to subs, materials, and the gc’s own labor on the job. Where we are the standard going rate for a good carpenter working along is 40.00 per hour. So, if my husband bids a job including this hourly wage would you add that to the cost and then add on the 1.72 percent. What about subs that have their own insurance etc.? I have been observed that my husbands estimates are often right… Read more »

jayne
January 4, 2011 5:15 pm

jayne
January 5, 2011 2:11 pm

thank you Michael. I definitely agree with you. I founded and operated a nationwide herbal body care company for over 25 years. We were coast to coast dealing with corporate conglomerates, so I understand business:-). I think that the dilemma in carpentry is as most people say, there are so many not charging any mark up at all and this makes those trying to survive by running their businesses wisely look bad. The guy down the road (hypothetically speaking) that charges 40 per hour for his time and never puts a markup on materials for example. As the one that… Read more »

Non-profit
August 3, 2010 3:24 am

I understand that overhead and profit is a percentage of the whole. But overhead is based off of last years sales percentages, which includes labor, material and etc. This is where it gets to be tricky for me. Take the following simple examples: Based on 10 hrs of labor cost at \$50/hr Last years sales is the first row Bid 1 Bid 2 Material \$500 100 900 labor \$500 500 500 —— —— —– Direct \$1000 600 1400 Cost OH 10% \$125 75 175 P 10% \$125 75 175 ———————————————————– \$1250 750 1750 equals \$75/hr 65/hr 85/hr So what’s the… Read more »

Henry
January 19, 2010 2:11 am

What is the national average for “Profit & Overhaed” or is there a national average guide for the various states. For instance, what would be considered as the average Overhaed & profit rate charged by contractors in New Orleans for a remodeling or restoration construction job.

John
December 31, 2009 12:44 am

I am a small general contractor located in Snellville, GA outside Atlanta. What should the target profit margin goal be?

Thanks

John

Devon Stone
January 19, 2010 6:43 pm

John, your profit should be at least 8% of sales, preferably 10%. It doesn’t matter where you are, and remember that your profit is not your salary – your salary should be included in your overhead.

Teruaki Hiraoka
December 22, 2009 10:18 am

I am writing to request your assistance in preparing a document related to indirect costs (general requirements, markups, overheads etc. listed in the attached Excel table). We are now faced with an urgent need for information, this e-mail message to you for your kind consideration. We have prepared the attached Excel table for comparing indirect costs for large-scale construction projects. The percentages given in the “RS Means” column (highlighted with red borders) on the Excel table were selected by us from RS Means. We would like you to: (1) Check whether the percentages selected by us (mainly figures given in… Read more »

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