General contractor markup guide

As a general contractor, you make your profit through markups. So, knowing how much to mark up your services is essential to increasing your revenue and maintaining your cash flow.

If calculating markups is a part of your business that you struggle with, you’ve come to the right place. Consider this your general contractor markup guide.

Keep reading to learn the answers to questions such as:

• What is the standard markup for contractors?
• Why do contractors mark up materials?
• How much do general contractors mark up subcontractors?

Let’s jump right in!

What is general contractor markup?

General contractor markup is the amount that a contractor charges above their direct costs.

As a general contractor, this is your profit margin or the amount left after paying all the job costs. Every contractor needs to add markups to their prices to maintain a net profit.

How much do contractors mark up material?

Knowing the right amount to mark up materials makes the difference between a profitable project and a break-even job. So, how much do contractors mark up material?

Contractors typically charge a certain percentage over cost of materials to cover the time and effort it takes to purchase, transport, and manage these materials on-site. This markup also cushions against price fluctuations and minor losses that might occur during the project. 

The industry standard for material markup varies, but the markup range is typically 7% to 20%. That said, your exact figure depends on: 

• The type of materials.
• The complexity of the job. 
• Local market conditions. 

Markup is about finding the sweet spot that ensures your business is profitable without overcharging your clients.

For now, let’s discuss the importance of general contractor markups.

Importance of markup in the construction industry

Markups are important to ensure that your business profits from every job. They’re also key when a job doesn’t go as planned, as you don’t have to pay as much from your own pocket.

A well-calculated markup leaves room for error but isn’t so inflated that it takes you out of the running for bids.

In all, markups are essential to the longevity of your business. Let’s take a look at the different types of markups.

Types of markup

The average contractor markup is broken down into several smaller types of markups. The types of general contractor percentage markups include:

• Subcontractor markup percentage: Typically a markup on the laborer’s hourly rate.
• Contractor markup on materials: Contractors must mark up all materials to compensate for the total cost of materials.
• Overhead markups: Soft costs such as administrative costs, office rent, and accounting fees.

Markup vs. profit margin

Thinking markups and profit margins are the same is a common mistake. These terms serve two distinct purposes.

Your profit margin determines the revenue that your business makes after paying the cost of services. To calculate your profit margin, you subtract the cost of goods sold from the total job cost.

Meanwhile, a markup is a difference between the price of the service minus the cost. This is all direct and indirect costs, which include labor, materials, overhead, and profit.

Now that you know what a markup is, let’s take a look at what to consider when calculating your markups.

Factors to consider when determining contractor markup

Answering “How much do contractors mark up material?” isn’t easy. 

There are several factors that you need to consider when determining your markup for each job. Some of these factors include:

• Your goal profit margin.
• What the standard markup for contractors with similar businesses is.
• Average contractor markup on labor in your area.

In particular, you should be able to answer, “What is the average markup on construction in my area?” in order to stay competitive and profit. To do so, it’s crucial for contractors to: 

• Consider regional differences when marking up.
• Compare their markup with competitors.
• Include labor and other expenses in the markup.

Here are some other important questions to ask yourself when assessing the factors that determine your markups:

• What is the typical contractor markup on materials in your area?
• What is the average markup on labor for this particular project?
• How much do general contractors mark up subcontractors doing similar jobs?

Project duration, client type, and risk factors such as the need for specific permits or insurance also weigh heavily on your markup strategy. A longer project duration may see a company set their markup to cover overhead expenses like: 

• Office expenses. 
• Team wages. 
• Maintenance of tools and equipment over time.
• Locational permits or taxes.

It’s a good idea to determine your competition’s general contractor markup on subcontractors. The same goes for finding the answer to questions like, “What percentage do contractors mark up subcontractors?”

Let’s talk about how to calculate markups for your business success.

How to calculate contractor markup

There is more than one answer to “How much do contractors mark up material?” as there’s no industry standard for calculating contractor markups. 

The method your business uses depends on your overhead and other operating processes. You might also want to consider covering marketing expenses like advertising in your markup strategy.

That said, here are some basic steps you can follow to calculate your markup percentage:

1. Determine your gross profit. This is equivalent to your revenue minus your COGS (cost of goods sold).
2. Divide your gross profit margin by the cost of goods sold. This will give you a decimal point for your markup.
3. Take the decimal point markup and multiply it by 100 to get your markup percentage.

To effectively calculate the markup based on costs, measure the impact of markup on sales and analyze the profitability of a project after markup. To do this: 

• Review material costs regularly. 
• Negotiate markups with suppliers. 
• Factor in potential risks and uncertainties.

Only after you’ve followed these steps can you determine the final price after markup.

Factors that affect contractor markup percentage

While you can simply calculate your markup percentage, there are still a few factors that you must consider to get an accurate markup.

Factors that affect your contractor markup percentage include:

• Your intended profit margin.
• The type of project you work on.
• The number of subcontractors you hire.

Let’s look at some common mistakes people make when figuring out how much to mark up labor and materials.

Common mistakes to avoid when determining markup

Most business owners end up learning the most from their mistakes. However, it’s still better to avoid mistakes when possible, especially when it comes to contractor markup.

To help you spot mistakes, here are some things to look for when determining markups.

For one, make sure that you have a good grasp on what is standard markup for contractors in your industry. For example, if you run a painting business, you shouldn’t base your markup standards on those of drywalling businesses.

To prevent mistakes that lead to losses, carefully evaluate material costs before adding markup and consider unique factors influencing markup. For example, material availability and type of contract often go forgotten, but acknowledging them plays a pivotal role in hitting your profit margin target.

Also, you should avoid having your markup as its own line on your invoice. Customers don’t like to pay more than they think is necessary and may not understand the markup. This could lead to you having to chase payment. 

If necessary, explain the markup to your customer beforehand — client transparency is essential. When you quote clients after considering the markup, it’s beneficial to specify the costs you’re marking up and why. This fosters trust and results in a better customer experience.

Another tip is to stay away from too many specialty materials. Overreliance on them will likely require you to adjust prices based on market demand as your vendors inflate prices due to high demand or scarcity. On the other hand, you can achieve an economy of scale with standard materials, meaning your business can apply a standard industry markup and stay within competitive bidding norms.

That said, while you want to be competitive, avoid markups that are too low. This leads to you possibly losing money if something goes wrong. On the other hand, an overly high markup scares off many potential customers.

Should you let customers know your markup?

It’s up to you to decide if you want your customers to know your exact markup. Transparency builds trust, but when it comes to markups, the waters are murky. It’s not necessary to detail your markup to customers, as the focus should be on the value you provide rather than the numbers behind the scenes. 

However, it’s crucial to be prepared to explain your pricing structure if asked. If customers are curious about your pricing, emphasize the quality and reliability they get for their investment. Reiterate your team’s hard work and any warranty and guarantees you’ve offered. 

Now let’s look at some tips for calculating markups to maximize your profit.

Tips for maximizing profit with markup

The number one tip for maximizing profit with markup is to have a thorough understanding of your business. Know your expenses well and use them as a baseline for calculating your markup and profit margin.

Research is crucial to figure out how much to mark up materials, as well as how much subcontractors typically make in your area. Preparation is key to maximizing profit.

Here are a few other ways to maximize profit with markup: 

• Stay flexible. If the markup you first calculated isn’t working anymore, recalculate it to best benefit your business.
• If your customers are concerned about your markup, offer to minimize expenses by using more affordable materials.
• Make sure that your subcontractors understand everything about your payment terms from the beginning to avoid any future disputes.

Key takeaways

If you’ve ever created a quote and asked, “How much should I mark up materials?” you’ve found the answer in this blog.

To recap, there’s no ceiling to how much a general contractor can make, but it’s all dependent on your markup. 

To ensure a healthy bottom line, you must consistently: 

• Assess the fairness of the markup.
• Account for unexpected expenses in the markup.
• Adjust your approach to recommend a markup strategy to maximize profit.

Contractor markups can be tricky to calculate, but once you master the formula that best fits your business, you should notice an increase in your profits.

General contractor markup FAQs

What is the average markup for a general contractor?

Most general contractors use a markup of between 15-20%. However, contractor markups largely depend on the project and average costs in the area.

What is the margin for general contractors?

General contractor profit margins vary greatly and range from 8-35%. To determine the profit margin for your business, it’s important to look closely at your overhead costs.

How do I know if I’m pricing my jobs right?

Whether you’re pricing your jobs right comes down to one simple thing: Are you making a profit acceptable to your goals?

If the answer is yes, then you’re pricing your jobs perfectly. If not, you may need to revisit your markups as they may be too high or too low.

Want to price every job right, every time? Check out this general contractor pricing guide.

Image credit: Ivan Samkov via Pexels