Cost is three layers, and most bids only count two
A job cost has direct cost, allocated overhead, and then profit sits on top. Direct cost is the part everyone gets right: materials, the hours your crew puts in, the subs, the rental, the dumpster. Allocated overhead is the share of everything the business spends that cannot be charged to any single job — the truck payments, general liability, the phone, the accountant, the software, and the hours you spend estimating jobs you do not win. Profit is what is left after both.
The failure mode is not exotic. A contractor prices at direct cost plus a comfortable-looking percentage, wins plenty of work, stays busy all year, and ends up with a bank balance that does not match the volume. The overhead was always being paid; it was just being paid out of the profit rather than being billed. Recovering it means dividing annual overhead by the hours you can actually sell in a year and applying that rate to the hours in the job.
Billable hours per year is the number that decides everything
Overhead per hour is annual overhead divided by billable field hours per year, and the denominator is where the optimism lives. A one-person operation working full weeks does not sell 2,080 hours. Estimating, invoicing, driving between sites, chasing materials, warranty callbacks and slow weeks all come out of that total, and the honest figure for a lot of small trade businesses lands somewhere well under it. If you assume more billable hours than you sell, your overhead rate is too low, every bid quietly underprices, and the shortfall only shows up at year end.
The other honest input is the burdened labor rate. That is not the wage. It is the wage plus payroll taxes, workers compensation, any benefits, and the paid hours that are not productive. A $28 wage often costs the business somewhere in the high thirties or low forties once burden is on it, and the exact loading depends on your state, your trade, your experience rating and your benefit package. Work out the burdened cost of an employee before you use a rate here, because guessing it low has the same effect as guessing billable hours high.
Markup is not margin, and the gap gets wide fast
Margin is profit divided by price. Markup is profit divided by cost. They describe the same dollars from different ends, and confusing them is the most expensive arithmetic error in the trades.
| Markup on cost | Resulting gross margin |
|---|---|
| 10% | 9.1% |
| 20% | 16.7% |
| 25% | 20.0% |
| 50% | 33.3% |
| 66.7% | 40.0% |
| 100% | 50.0% |
To hit a target margin, price equals cost divided by one minus the margin. A 40 percent margin on a $10,000 cost is a $16,667 price, which is a 66.7 percent markup, not a 40 percent one. Price it at cost plus 40 percent and you get $14,000 and a 28.6 percent margin. On that one job the difference is $2,667, and it repeats on every job you bid the same way. The calculator above shows both numbers side by side for exactly this reason. If you want to work the same relationship on a single item rather than a whole job, the margin calculator does it per unit with selling fees taken out first.
Where contingency belongs and where it does not
Contingency is for uncertainty in the work, not for uncertainty in your estimating. A renovation opening up a wall in an old building has real unknowns and a contingency line is honest. A new-build deck on a clear site does not, and padding it is just a hidden price increase that makes you less competitive without making you more profitable. Keep contingency as its own visible line so you can see whether you consumed it, because a contingency that is never spent is a signal that your base numbers are already conservative, and one that is always overrun is a signal that your scope definition is loose.
The related discipline is what happens when the scope changes. Absorbing added work into the original price is the single fastest way to turn a profitable job into a break-even one. Price the addition properly with the change order pricing calculator rather than folding it in.
What this calculator will not do for you
It prices a job. It does not tell you whether the market will pay that price, whether your production rates are realistic, or whether you are competitive against someone with lower overhead. It also does not model taxes, and gross margin is not take-home pay — operating expenses that you did not classify as overhead, debt service and income tax all come afterwards. A CPA who works with contractors is the right person to set up the chart of accounts that makes your overhead figure trustworthy in the first place, because an overhead number pulled from memory produces a bid that only looks rigorous.
Nothing here is legal or tax advice. How you classify workers, what insurance and licensing your work requires, and what your contracts must contain are governed by state law and vary considerably. Those questions go to an attorney and an accountant licensed where you work.
Questions people ask
Should I mark up subcontractor cost at the same rate as my own labor?
Most contractors carry some markup on sub work, and the argument for it is that you still bear the schedule risk, the coordination time, the payment cycle and the warranty exposure even though you did not swing the hammer. The argument for carrying less is that sub work consumes fewer of your overhead hours than self-performed work does. There is no correct universal number and it varies by trade and by market. What is not defensible is passing sub cost through at zero, because the coordination is real work and it is unpaid if you do not price it. If you use this calculator with a low margin, check that the margin still covers your time on the sub-heavy portion.
My competitor bids the same jobs 15 percent lower. What are they doing differently?
Usually one of four things. They have lower overhead, often because they have no shop, no office staff, or an older truck that is paid off. They have higher production rates on that specific work because they do it constantly. They are not recovering overhead at all and do not yet know it. Or their scope is narrower than yours and the difference will surface as change orders. The first two are legitimate competitive advantages and the answer is to either match the efficiency or compete on something else. The last two are not advantages, they are timing, and chasing that price down is how you join them.
Is gross margin the same as profit?
No. Gross margin is what is left after the cost of doing the job, including the overhead you allocated. If your overhead allocation is complete and your billable hours assumption held, the gross profit across a full year of jobs is roughly what is available for owner compensation, taxes, debt service and reinvestment. If your allocation missed categories, or you sold fewer hours than you assumed, the real figure is lower. The reconciliation belongs on your annual financials rather than in a bid calculator.
What overhead figure should I use if I have never tracked it?
Pull twelve months of bank and card statements and sort every outflow into two piles: chargeable to a specific job, and not. The second pile is your overhead, and it usually surprises people. Include a value for the hours you spend on estimating, invoicing, chasing payment and buying materials, because those are real costs even when nobody sends you an invoice for them. Do it once properly and update it annually. A rough figure derived this way beats a precise-looking number that came from a forum post about what other contractors use.
Does this handle time and materials work?
Indirectly. On a time and materials job you are billing a rate rather than a price, so the useful output here is the total cost line: divide it by the job hours and you have the break-even hourly rate you must exceed. Then apply the margin arithmetic to that rate rather than to the job. The trap on T and M work is that material markup and hourly rate are often negotiated separately, so overhead can end up recovered on the labor line only, which underprices material-heavy jobs. The shop labor estimate calculator approaches the same problem from the hourly side.