The markup charged by small contractors on residential and commercial jobs takes into consideration all costs such as materials, labor, insurance, in-house crew, subcontractor fees and necessary permits. Many factors determine the actual markup, which can include reputation, materials availability, time of year and customer requirements. Busy locations with fewer contractors generally have to pay more, reflecting typical competitive forces.
According to the construction-cost website, Get-A-Quote.net, small contractors generally book a markup of about 20 percent. Typical administrative expense, which allocates for office space, utilities, supplies and support staff, comes in at 8 percent percent, while net profit begins at 8 percent. Contingencies, at roughly 2 percent, allow for unforeseen events that can vary depending on the type of business. Small contractors who lay kitchen tiles will usually allocate less for this category than for roofers. Specialized jobs that require unique skills or materials typically result in higher margins.
Contract vs. Net Markup
Small contractors may seek to net 20 percent of the contract price, which is the equivalent of a 25 percent markup. For job expenses of $10,000, a contractor would add $2,500 for a customer contract totaling $12,500. The contractor would then take home 20 percent of the final amount, which is $2,500. Strong competition, however, may yield a $12,000 bill and $2,000 profit, which amounts to 20 percent of expenses.
Time and Materials Contracts
Contractors often seek "time and materials" contracts that include labor expenses and markups on all other costs, such as subcontractors and materials. They can then present fixed-price agreements to their customers, guaranteeing that a detailed outline of work will be completed. Any additional modifications requested by the client would result in further costs added to the total contracted amount. While this protects contractors, they may not have as much incentive to work efficiently.
Some small contractors offer preset fees in which they guarantee that a job will be completed with no cost overruns. This gives them a strong incentive to get the job done on time and within budget, but it can lead them to compromise on project quality and supplies. As with all contracts, reputation and references offer a measure of peace and security to customers.