How much can a contractor charge? Understanding Markup vs. Profit?!

When client’s ask me or complaint to me about my construction client’s numbers… Everyone who is getting into a construction project needs to know this:

The confusion between Markup and Profit is a common problem that we aim to clarify. It is important to note that Markup does not equate to Profit. Markup refers to the additional amount that a business charges above the direct cost to account for overhead and profit.

For instance, a remodeling contractor may reasonably have a 1.50 markup, which means that for a $20,000 estimated job cost, they will charge $30,000. Some people mistakenly assume that the contractor is making a $10,000 profit, which is not accurate. The additional $10,000 covers the overhead expenses of the business, including advertising, job supervision, office expenses, insurance, taxes, salaries, and employee expenses, among others. The typical remodeling contractor will have overhead expenses ranging from 25% to 54% of their revenue – that means every $30,000 job could have overhead expenses of $7,500 to $16,200.

Sadly, some people believe that a 20% markup or a 10% overhead and profit is the industry standard, which is not the case. As a result, they try to haggle with contractors to lower the cost of the job. However, every business must make a profit to remain viable, cover overhead expenses, and stay afloat during downtimes. Profit is what ensures the longevity of a business. Therefore, if a contractor cannot make a reasonable profit, they may not even complete the project, let alone stay in business.

It is crucial to avoid selecting a contractor based solely on price, as this can result in choosing a low-quality, unreliable, or financially unstable contractor. As the saying goes, "a fool and their money are soon parted." Just like any other business, contractors need to earn a reasonable profit to survive and thrive.