How to Set Markup as a Small Contractor

Markup is the percentage added on top of direct cost to cover overhead and profit. Direct cost is what hits the job: labor, materials, subs, equipment, disposal. Overhead is what runs the business: rent, insurance, vehicles, admin, software, marketing, owner draw. Profit is what is left. Most small US contractors learn markup by copying what the shop down the street charges. That copy-rate approach fails because every shop has a different overhead structure. The right answer is to calculate markup from your own books.

Pull your last 12 months of expenses from QuickBooks, Xero, or your shoebox. Sort each line into direct cost or overhead. Divide annual overhead by annual direct cost. If you ran $480,000 of direct cost last year and $96,000 of overhead, your overhead recovery percent is 96,000 / 480,000 = 20%. That 20% is the minimum markup just to break even before profit. Every quote needs to add at least 20% on top of direct cost.

• Direct cost: labor, materials, subs, equipment, disposal, permits.
• Overhead: rent, insurance, vehicles, admin, software, marketing, owner draw.
• Overhead recovery percent = annual overhead / annual direct cost.
• Recalculate every 6 months as the business grows.

For a small US contractor in 2026, net profit targets typically run 8 to 12% of revenue. Trades with lower asset intensity, like painting or finish carpentry, can push 12 to 15%. Trades with higher asset intensity, like grading or roofing, often settle for 6 to 10%. If overhead recovery is 20% and profit target is 10%, combined markup is 30%. Do not confuse net profit with owner draw. Owner draw belongs in overhead.

Worked example. A small bathroom remodel quote in 2026. Direct cost: labor $9,800, materials $11,200, plumbing sub $2,400, electrical sub $1,200, disposal $400. Direct total: $25,000. Apply combined markup of 30%. Price to client: $25,000 times 1.30 = $32,500. The $7,500 difference covers $5,000 of overhead at 20% recovery and $2,500 of net profit at 10%. If you had used 20% markup, the client would pay $30,000, and net profit on that job would be zero.

Markup and margin describe the same dollar gap from different angles. Markup is the percent added on top of direct cost. Margin is the percent of price that became profit. A 30% markup is a 23% margin. Clients and reviewers usually talk in margin. Trade publications usually talk in markup. Your P&L talks in margin because it starts from revenue.

Cost-plus is markup applied to actuals at the end of the job. Fixed-fee is markup applied to estimates at the start. Cost-plus shifts overrun risk to the client. Fixed-fee shifts overrun risk to the contractor. Use cost-plus when scope is uncertain. Most small US contractors should run 80% fixed-fee and 20% cost-plus.