Everything you need to know about general contractor markups

Understanding how to calculate markups is crucial for achieving financial success in the construction industry.

That’s because the market can change quickly. For example, during the peak of the COVID-19 pandemic, demand for homes boomed, which led to a subsequent demand for home builders. Still, many remember the sharp decline in housing demand following the financial crisis of 2008.

The point is, construction companies have to be ready. One of the best ways of ensuring profitability – in the good times and the bad – is to ensure the projects you’re working on are profitable. That includes baking in general contractor markups for your client contracts.

What is general contractor markup?

A general contractor markup is an additional percentage or fee a general contractor adds to the total cost of a project.

When a general contractor begins a construction project, estimated costs typically include materials, labor, subcontractor fees and other direct expenses. To cover the expenses – and make a profit – a contractor applies an additional percentage to the total estimated costs. The additional percentage is the markup.

As with expenses, markup percentages can be itemized. In construction, markups typically fall into one of these four categories.

General contractor markup on subcontractors

This markup covers the contractor’s coordination efforts and project management. It also goes toward the cost of managing that subcontractor relationship and deliverables.

General contractor markup on labor

This markup covers the supervision, management and administrative costs associated with managing a construction workforce. It can help compensate for tasks related to scheduling, hiring and training.

General contractor markup on materials

This markup helps cover the contractor’s expenses related to procuring materials and supplies.

General contractor markup on overhead expenses

This markup helps cover the general operating costs of running a construction business. Some examples can include office and equipment rentals, insurance, maintenance and salaries.

What is the average markup for general contractors?

According to the 2023 State of the Residential Construction Industry report, over 30% of builders mark up projects by 25% or more.

To understand how much of a markup is needed to achieve a certain profit margin, you first need to understand your total job costs – including indirect expenses like construction overhead.

How to calculate overhead costs:

1. Determine the cost of all materials, including lumber, concrete, fixtures, finishes and specialized equipment.
2. Estimate the labor costs by considering the number of workers needed, wage rates and project duration. Remember, this should include construction crews at the project site, as well as indirect labor such as managers and administrative staff.
3. Obtain quotes from subcontractors and factor in their labor and material costs. By establishing strong subcontractor relationships, you can typically secure pricing and availability early on in a project’s timeline.
4. Consider the rental or purchase of equipment and tools. This can include big machinery like excavators and smaller components like power tools.
5. Calculate the overhead costs associated with the project, such as construction insurance, permits, licenses, utilities and general administrative costs. Indirect costs can be hard to attribute to a project, so look into a job costing solution to help ensure accuracy.
6. Factor for a contingency to cover unforeseen circumstances or changes in project scope.

How to calculate contractor markup

Once you have the above figures, calculate the total and conduct some backward math with this formula:

(Desired Profit / (Total costs – profit)) x 100 = Markup

For example, if your project has a total cost of $500,000, and you want to achieve a profit margin of 20% – or $100,000 – you would calculate:

($100,000 / ($500,000-$100,000)) x 100 = 25%

The pros of increasing general contractor markup

Increasing your markups as a general contractor can have many benefits on overall profitability and financial success. Here are five reasons why.

Increased profit margin

By raising markups, general contractors can generate a higher profit margin on each project. This allows for greater financial resources to reinvest in the business.

Enhanced financial stability

A higher markup helps provide a safety buffer against unexpected costs and sudden market changes. It helps ensure you have enough money to cover overhead expenses and manage cash flow, even during difficult times.

Improved quality of service

With this increased financial stability, contractors can invest in workforce training, technology and quality materials to increase client satisfaction.

Enhanced risk mitigation

Markups can help cover the costs of comprehensive insurance coverage and regulatory measures, which can help minimize expensive liability risk.

Investment in business growth

With greater financial stability, contractors are more likely to invest in growth strategies, including exploring new market opportunities and expanding client contracts.

The cons of increasing general contractor markup

Although markups are standard practice in the construction industry, there are a few potential drawbacks that should be considered.

Reduced competitiveness

A higher markup can make your pricing seem less competitive compared to other businesses in the market.

Increased price resistance

House builds and renovation projects can be big-ticket expenses, so clients may be more price-sensitive if markups are high.

Impact on client relationships

Steep markup increases may strain client relationships, especially if the estimating, budgeting and billing process is not transparent.

Market saturation and demand

With a growing number of contractors in the industry, a higher markup can make it harder to secure project contracts, which may cause your sales and marketing budget to increase to try to attract more business. 

When should general contractors adjust their markup?

Many different scenarios can signal the need for contractors to increase markups.

Complex or high-risk projects

Projects that involve complex designs, technical challenges or higher safety risk may require an increased markup to account for the added expertise, safety measures and specialized skills required to complete the jobs.

When market conditions change

Supply and demand imbalances can cause markup hikes, especially when there is a surge in demand for construction services or a shortage of contractors due to market conditions.  

When supplying unique expertise or specialization

If a general contractor offers niche services that are in high demand, their services commonly receive markups.

Increased overhead expenses

If a general contractor experiences a significant rise in overhead expenses – such as insurance premiums – it may be necessary to increase markups to cover these costs.

Projects with special circumstances

Some construction projects may require additional resources, coordination or specialized equipment to complete. Markups can cover the additional investments needed to acquire these things.

Similarly, there are also instances where it may be necessary for contractors to scale back markup percentages.

Highly competitive markets

If industry competitors are offering substantially lower pricing to secure projects, markups may need to be adjusted to compete with project estimates.

Economic downturns

A decrease in demand for construction services may lead to increased price sensitivity among clients.

Client relationship factors

For some clients, extra effort toward cost optimization may be required to maintain long-term relationships and gain referrals.

Discussing markup changes with clients

When talking about markup costs with clients, it’s important to be transparent with your communications to lessen the risk of disputes. Here are a few tips in how to handle the conversation.

Maintain professionalism

As in any professional situation, it’s important to be respectful and avoid confrontation, which can happen when there are disagreements about pricing. Construction software can help in maintaining professionalism by providing a hub for emails, proposals, invoices and reports within a centralized system.

Choose the right time

It’s best to have all conversations about pricing during the early stages of a project so expectations can be set among everyone involved. Provide itemized estimates at the project’s onset so nothing seems like a surprise later on. If pricing does change, explain the reasons why in an itemized way.

Communicate value

Clearly explain the value your team is bringing to the project. This can help clients understand the benefits they’re receiving in return for pricing, and why accounting for your expertise, quality of work and experience is worth the cost.

Offer alternatives

If a client has concerns about pricing, be prepared with alternatives. For example, if market conditions require a sudden change in the pricing for stone siding, offer other siding options. By seeing how pricing changes affect project scope, clients can better decide how they’d like to move forward.

Listen and address concerns

Remember, this is a business relationship, but everyone involved is a person. Be receptive to concerns and questions. Respond to them quickly to help limit confusion and dissatisfaction.

Document agreements

Ensure every project you’re working on has a clearly defined contract involved. This should include agreed-upon pricing and project scope, as well as how changes in pricing should be handled. Construction software can help here, enabling contractors to establish document control for contracts by creating, sharing and storing them digitally alongside other project information.

Improve your business efficiency with Buildertrend

Managing markups, project budgets and even client invoicing are critical components of effectively running a construction business. Buildertrend’s proven construction software uses financial features to ensure accuracy in these areas while keeping the rest of your project on track, too. Here’s how.

1. Accurate estimating: Buildertrend provides tools to create detailed and accurate construction estimates. Contractors can input material costs, labor rates, subcontractor fees and other project-specific expenses, accounting for markups where needed. The software allows for easy adjustment of quantities and pricing, which can help contractors establish markup needs that meet desired profit margins.
2. Generating budgets: With Buildertrend, contractors can create comprehensive project budgets based on estimated costs. Break down expenses into different cost categories, such as materials, subcontractors and overhead. By monitoring budget progress alongside actual expenses throughout a project – and incorporating change order features to account for pricing changes along the way – you can cover expenses while hitting revenue goals.
3. Invoicing clients: Buildertrend streamlines the invoicing process, ensuring accurate and timely invoicing to clients. Contractors can generate professional invoices directly from the software, incorporating project-specific details and cost breakdowns. This helps ensure transparency and consistency in the billing process.
4. Managing documents: Buildertrend offers an easy way to handle construction document management, with a centralized tool to house all aspects of project information. This provides a hub of information that all parties involved in the project can reference and helps answer questions and concerns on pricing.

By leveraging Buildertrend’s construction finance software features, contractors can manage their financial needs, including markups for services and projects.

Learn more about the different ways Buildertrend can support your financial stability and success today.

General contractor markup FAQs

Get answers to the most common questions about general contractor markups.