Contractor overhead
& profit.
Overhead typically runs 8–15% of revenue, healthy net margins land at 8–15%, and markup of 25–50% is common. The trap that quietly drains margin: a 25% markup is only a 20% margin. This guide works the math — markup vs margin, labor burden, and how a takeoff miss eats your profit.
Overhead, profit, and the words people mix up
Overhead and profit — "OH&P" on every change order — are two different things bundled into one line. Overhead is the cost of being in business that no single job pays for directly. Profit is what's left after you've covered both job costs and overhead. Get either one wrong in your pricing and the job can look profitable on paper while your bank account says otherwise.
Overhead comes in two flavors. Direct (job) overhead is tied to a specific project — site supervision, temporary facilities, project-specific insurance, the trailer. Indirect (general) overhead is the cost of the company itself — office rent, estimating staff, software, accounting, owner's salary, marketing. Direct overhead gets charged to the job; indirect overhead has to be spread across all the work you do, recovered as a percentage of revenue.
The typical numbers
Every shop is different, but here are the bands most contractors should recognize. Use them to check whether your own targets are sane, not as rules.
| Metric | Typical range | What it means |
|---|---|---|
| Overhead (% of revenue) | 8–15% | Indirect cost you must recover on every job |
| Net profit margin | 8–15% | What's left after job cost + overhead |
| Gross markup on cost | 25–50% | Added on top of cost to cover OH&P |
| Labor burden on wages | ~30–40% | Taxes, comp, insurance, benefits |
Notice that overhead and net margin can both sit around 8–15% — which means your markup has to cover both, plus a cushion for risk. That's exactly why markups of 25–50% are normal: a 35% markup might be split into roughly 20 points of overhead recovery and 15 points of profit. Skinny markups in the teens usually mean a contractor is covering overhead but barely profiting, or — worse — confusing markup with margin.
The classic markup-vs-margin mistake — with math
This is the single most expensive misunderstanding in contracting, so here's the worked math. Markup is a percentage added on top of your cost. Margin is profit as a share of the final price. They are not the same number, and treating them as the same quietly underprices every job.
Take $100,000 of job cost and apply a 25% markup:
- Price = $100,000 × 1.25 = $125,000
- Profit = $125,000 − $100,000 = $25,000
- Margin = $25,000 ÷ $125,000 = 20%, not 25%
So a 25% markup is only a 20% margin. The gap widens as the numbers grow. Now run it the other way — you want a true 20% margin. The mistake is to multiply cost by 1.2. That gives:
- Wrong: $100,000 × 1.2 = $120,000 → margin = $20,000 ÷ $120,000 = 16.7%. You just left 3.3 points on the table.
- Right: $100,000 ÷ 0.8 = $125,000 → margin = $25,000 ÷ $125,000 = 20%. Correct.
To hit a target margin, divide cost by (1 − margin). For 20%, divide by 0.8. Multiplying by 1.2 is the error that bleeds contractors slowly.
The general rule: to price for a margin of m, divide your cost by (1 − m). For a 10% margin divide by 0.9; for 30% divide by 0.7. Markup-to-margin conversions: 25% markup = 20% margin, 33% markup = 25% margin, 50% markup = 33% margin. Pin those to the wall.
Labor burden: the cost above the wage
Before you can price labor at all, you need the real cost of an hour of work — which is well above the wage on the timecard. Labor burden is everything you pay on top of base wages: payroll taxes (FICA, FUTA, SUTA), workers' compensation, general liability tied to payroll, health and retirement benefits, and paid time off. Together these commonly add 30–40% to the base wage.
Quick example: a worker at $30/hour with a 38% burden actually costs you about $41.40/hour. Estimate that job at the $30 rate and you've understated labor by over a third before you've made a single other mistake. Because labor is the biggest variable on most jobs, getting burden right is one of the highest-leverage things an estimator can do. We break the full calculation down in labor burden — the 38% gap.
How takeoff misses eat your margin
Here's the connection contractors underestimate: takeoff accuracy is a margin problem, not just an accuracy problem. Your margin is thin by design — a handful of points. A quantity miss on cost comes straight out of that thin layer, because you've already committed to the price.
Work the math on a job priced for a 10% margin. Say true cost is $100,000, so you bid $111,111 (cost ÷ 0.9) for $11,111 of profit. Now suppose your takeoff missed 5% of the quantities — concrete, conduit, drywall, whatever — so actual cost is $105,000, not $100,000:
- Price you locked in: $111,111
- Actual cost: $105,000
- Actual profit: $6,111 — down from $11,111
- You lost $5,000, roughly half your profit, to a 5% quantity miss.
That's the whole game in one line: a 5% quantity miss on a 10% margin job costs you about half the profit. Miss 10% and you're at break-even. This is why hand takeoff under deadline pressure is so dangerous — the errors don't feel large, but they land on the most fragile part of your number.
OH&P in change orders
Change orders are where OH&P gets explicit and where it's most often shortchanged. Extra work consumes the same overhead — supervision, coordination, admin — and carries the same risk as base-contract work, so it deserves the same overhead and profit. A common convention is 10% overhead and 10% profit on the cost of changes (often written "10 and 10"), though the negotiated rate varies by contract and GC.
The trap is the same markup-vs-margin error, now under time pressure mid-job. Apply the percentages correctly, base them on a real cost (which means a real takeoff of the changed scope), and don't let "it's just a small change" talk you out of the markup. Small changes priced at cost are a steady margin leak across a project. If you bid change orders on time-and-materials versus lump sum, the profit dynamics differ — worth understanding before you sign.
Where accurate takeoff fits
Every number on this page sits on top of one input: the quantities. Markup math, burden, change-order pricing — all of it assumes your cost is right, and your cost is only as right as your takeoff. That's the soft-but-real case for getting takeoff out of the danger zone. For fast material-level checks, the free Pilars calculators validate concrete, drywall, electrical, and more in seconds. For full sets, AI takeoff measures and counts every trade off your PDFs at $100 per trade, with output you review — so a 5% miss doesn't quietly eat half your profit. See it on your own plans in the live demo, or weigh the math in the ROI breakdown.
Questions contractors actually ask
What is a good profit margin for contractors?
Net profit margins of 8–15% are healthy for most contractors, though it varies by trade and project type. Overhead typically runs 8–15% of revenue, and gross markup of 25–50% is common. The right target depends on your overhead, risk, and market.
What's the difference between markup and margin?
Markup is added on top of cost; margin is the share of the final price. A 25% markup is only a 20% margin, not 25%. They diverge because markup is measured against cost and margin against price — confusing them quietly underprices jobs.
How do I price for a 20% margin?
Divide cost by 0.8, don't multiply by 1.2. On $100,000 of cost: $100,000 ÷ 0.8 = $125,000 price, which yields a true 20% margin ($25,000 of $125,000). Multiplying by 1.2 gives $120,000 — only a 16.7% margin.
What is labor burden for a contractor?
Labor burden is the cost of an employee above their base wage — payroll taxes, workers' comp, insurance, benefits, and paid time off. It commonly adds 30–40% on top of wages, so a $30/hour worker can cost $40–$42/hour fully burdened.
How much does a takeoff error cost in profit?
A lot. On a job priced for a 10% margin, a 5% quantity miss on cost wipes out roughly half the profit. If you bid the cost short, you eat the difference — so takeoff accuracy is a margin issue, not just an accuracy issue.