How much markup should a trade subcontractor add to commercial bids?

There is no single correct markup for a commercial bid. The right markup is the one that covers your overhead and leaves the net profit you are aiming for, and it comes from your own numbers: divide the gross margin you need by one minus that margin. A company that needs a 26 percent gross margin has to mark its costs up by about 35 percent, not 26.

Markup and margin are not the same thing

This is the mistake that costs subcontractors the most money.

• Markup is profit as a percent of cost.
• Margin is profit as a percent of the price.

A job that costs $100,000 and sells for $125,000 has a 25 percent markup and a 20 percent margin. Same job, same dollars, two different percentages. Your profit and loss statement speaks in margin. Your estimate applies markup. If you move a number from one to the other without converting it, you underprice every bid.

The conversion

• Markup = margin ÷ (1 − margin)
• Margin = markup ÷ (1 + markup)

A few to keep in your head:

• 15 percent margin needs a 17.6 percent markup
• 20 percent margin needs a 25 percent markup
• 25 percent margin needs a 33.3 percent markup
• 30 percent margin needs a 42.9 percent markup

Find your own number in three steps

1. Overhead as a percent of revenue. Take last year's overhead: rent, office wages, insurance not tied to payroll, vehicles, software, your own salary. Divide by last year's revenue. Say it comes to 18 percent.

2. The net profit you want. After everything is paid, including you. Say 8 percent.

3. Add them and convert. You need a gross margin of 26 percent. Markup = 0.26 ÷ 0.74 = 35.1 percent.

On a job with $100,000 of direct cost, that markup gives a price of $135,135. Add 26 percent instead and you bid $126,000, which is a 20.6 percent margin. You would be $9,135 short on that one job and never see it in the estimate.

Should labor and materials carry the same markup?

Not always. Labor is where the risk is: productivity, weather, rework and other trades in the way. A material bought at a quoted price carries far less. Many subcontractors put a higher markup on labor and a lower one on large material or equipment purchases, which keeps them competitive on material-heavy jobs without giving away the labor. Whatever split you use, check that the blended margin of the whole bid still reaches the number from step 3.

When to move off your standard markup

• Go higher for small jobs (overhead per job does not shrink with the contract), tight schedules, difficult access, a general contractor who pays slowly, long retainage, or work you have not done before.
• Go lower, carefully, for repeat clients who pay on time, simple work with material doing most of the dollars, or a slow month where covering overhead beats an idle crew.

Know your floor before bid day: the price at which the job covers its direct cost and its share of overhead. Below that you are paying to work.

Markup does not fix a wrong cost

A markup can only multiply the cost it is given. If labor is priced at the base wage instead of the burdened cost, or waste is left out of materials, the markup is applied to a number that is already too low. Get the cost right first.

Check it against real jobs

Once a quarter, compare the margin you bid with the margin you made on finished jobs. If jobs keep closing three points under the estimate, the fix is in the costs or the production rates, not in a bigger markup that loses you the next bid.

Where ConstructStream fits

ConstructStream estimates show the labor cost, the material cost and the margin of every line and of the whole estimate before it goes out, so the number you are checking is margin, the same one your books report. Hide amounts covers those figures when you are showing the screen to someone else.