Why a markup has to be calculated
Markup has one job: pay for everything that isn’t in the estimate and leave a profit. A number picked because “that’s what everyone uses” either leaves money on the table or loses bids for no reason, depending on how much overhead you carry. Two contractors with identical jobs can need very different markups because one runs a lean office and the other has a yard, a fleet and three estimators.
The fix is to start from your own annual overhead and the volume of work you expect to spread it across.
How the calculator works
You enter your annual overhead line by line, the direct job cost you expect this year (labor, material, equipment and subcontracts on all jobs combined) and the net profit you want as a percentage of revenue.
- Overhead rate = annual overhead ÷ annual direct cost.
- Break-even revenue = direct cost + overhead. At this volume you cover everything and make nothing.
- Break-even markup = overhead ÷ direct cost. It’s the same number as the overhead rate, because markup is measured on cost.
- Required revenue = (direct cost + overhead) ÷ (1 − target net profit %). Profit is a share of revenue, so it has to be grossed up, not just added.
- Required markup = required revenue ÷ direct cost − 1.
- Required margin = required markup ÷ (1 + required markup).
The markup vs. margin table shows what net profit you’d actually keep at common markups, given your overhead.
A worked example
A specialty contractor expects $2,400,000 of direct cost this year and carries $403,000 of overhead:
| Overhead item | Per year |
|---|---|
| Office staff salaries and burden | $145,000 |
| Owner salary | $110,000 |
| Vehicles, fuel and maintenance | $42,000 |
| Office and yard rent | $36,000 |
| Insurance not charged to jobs | $24,000 |
| Software, phones and IT | $14,000 |
| Accounting, legal and licenses | $12,000 |
| Small tools and shop supplies | $11,000 |
| Marketing and bidding costs | $9,000 |
| Total | $403,000 |
Overhead is $403,000 ÷ $2,400,000 = 16.79% of direct cost. That’s the break-even markup: bid every job at 16.79% over cost and the company covers its bills with nothing left.
To keep 8% net profit, revenue has to reach $2,803,000 ÷ 0.92 = $3,046,739. That is $646,739 over direct cost, a 26.95% markup, or a 21.23% margin. On the next bid, every $1,000 of direct cost should be priced at about $1,269.47.
The table shows why the gap matters. At a 20% markup, this contractor keeps 2.67% net. At 25% it keeps 6.57%. The owner who thinks “we mark up 25%, so we make 25%” is actually earning under 7%.
A markup that covers overhead only at your best-case volume is a guess. Run the numbers at the volume you’re confident you’ll win.
Mistakes that throw the number off
- Counting job costs as overhead. Superintendents, site trailers and job-specific equipment belong in the estimate. Leave them in overhead and you’ll double-count them, marking up a cost that’s already priced.
- Leaving out the owner’s salary. If the owner draws a salary, it’s overhead. Profit is what’s left after the owner is paid for their work.
- Using last year’s revenue as this year’s volume. Use direct cost you expect to perform, and be conservative. Overhead is fixed, volume isn’t.
- Adding profit on top of cost. An 8% profit target on revenue needs more than 8% on cost. The calculator grosses it up for you.
Using the result
Apply the required markup to the full direct cost of each estimate, including subcontracts, unless your contract sets different markups for self-performed and subcontracted work. For labor rates, build the cost side with the labor burden calculator. For jobsite overhead that belongs inside the estimate, use the general conditions estimator. When you price extra work mid-project, the change order calculator applies overhead and profit the way most contracts require.