Many contractors assume that more jobs equal more profit, but that’s not always the case. The reality is that mismanaging overhead costs, miscalculating profit margins, and failing to account for all costs lead to financial struggles — even for companies with a full pipeline of projects.
Here’s what often happens:
- Overhead costs aren’t fully accounted for, leading to underpriced bids.
- Markup vs. margin confusion results in lower-than-expected profit.
- Cost overruns and untracked invoices cut deep into margins.
- COGS (Cost of Goods Sold) is miscalculated, making pricing inaccurate.
This guide will walk you through how to price jobs correctly, set realistic profit margins, and optimize construction finances — ensuring your company is not just busy, but truly profitable.
Breaking Down Contractor Profit: COGS, Overhead, and Net Profit
To truly understand profit margins, you need to break down three essential cost categories:
Cost of Goods Sold (COGS)
COGS represents direct job costs — expenses directly tied to building a project.
- Material Costs – Concrete, steel, lumber, fixtures, etc.
- Direct Labor – Wages for field crews working on the project.
- Equipment Costs – Rental fees, fuel, or depreciation of owned equipment.
- Subcontractors – Any specialized work subcontracted out.
- Project-Specific Permits & Fees – Job site utilities, permit fees, and inspections.
COGS varies from job to job and should be tracked separately for each project.
Overhead (Fixed Business Costs)
Overhead includes all operational costs necessary to run your business — but that are not directly tied to a specific job.
- Office Rent & Utilities – Keeping your business running.
- Admin & Management Salaries – Employees who don’t work directly on projects.
- Software & Insurance – Liability coverage, project management tools, etc.
- Marketing & Business Development – Website, advertising, client outreach.
Overhead is a percentage of total revenue and should be included in every bid.
Gross Profit vs. Net Profit
| Formula | What It Means |
| Revenue – COGS = Gross Profit | The amount left after direct job costs. |
| Gross Profit – Overhead = Net Profit | Your true profit after ALL expenses. |
For example:
- Revenue: $100,000
- COGS: $60,000
- Gross Profit: $40,000
- Overhead: $25,000
- Net Profit: $15,000 (15%)
If overhead isn’t properly allocated in bids, you may win projects but lose money. Planyard automatically tracks overhead and COGS in real time, ensuring your estimates remain accurate.
Understanding Construction Margins
A construction margin is the percentage of revenue left after covering costs, indicating a contractor’s actual profitability.
Gross Profit Margin
This shows how much profit remains after covering direct project costs (COGS) and helps assess project-level profitability before factoring in overhead.
Example: If a project generates $100,000 in revenue and COGS is $70,000, the gross margin is:
Net Profit Margin
Net profit margin accounts for both direct costs (COGS) and overhead expenses, showing the contractor’s true take-home profit.
Example: If a project generates $100,000 in revenue and COGS is $70,000, the gross margin is:
Industry Benchmarks for Construction Margins
| Construction Type | Typical Gross Margin | Typical Net Margin |
| Residential | 25% – 35% | 8% – 15% |
| Commercial | 20% – 30% | 5% – 12% |
| Specialty Subcontractors | 30% – 40% | 10% – 25% |
Key takeaway: Higher gross margins don’t always mean high profitability — net margins are what truly determine financial health. Contractors must ensure that overhead is accurately accounted for in bids to maintain strong margins.
The #1 Pricing Mistake That Shrinks Profit Margins
Most contractors mistakenly believe that marking up job costs by 20% equals a 20% profit margin. That’s incorrect!
Markup vs. Margin
Example of the wrong calculation:
- Job Cost: $10,000
- Adding 20% markup ($2,000)
- Total price: $12,000
- Actual profit margin: Only 16%, not 20%!
The Correct Formula for Setting Prices
To correctly calculate markup, use this formula:
Markup = Desired Margin / (1 – Desired Margin)
- For a 20% profit margin, markup must be 25%.
- For a 30% margin, markup should be 43%.
- For a 50% margin, markup should be 100%.
| Desired Margin | Correct Markup |
| 20% | 25% |
| 30% | 43% |
| 40% | 67% |
| 50% | 100% |
Planyard automatically calculates the correct markup to ensure you never underprice a job.
What Is a Good Profit Margin for Contractors?
Industry Benchmarks for Overhead and Profit
The National Association of Home Builders (NAHB) reports that general contractors typically follow the 10-10 Rule:
✔ 10% overhead
✔ 10% net profit
✔ 20% total markup
However, top-performing contractors operate at higher margins:
| Construction Type | Overhead % | Net Profit % | Total Markup |
| Residential | 10%-15% | 10%-20% | 20%-30% |
| Commercial | 12%-20% | 5%-15% | 17%-35% |
| Specialty Subcontractors | 15%-25% | 10%-25% | 25%-50% |
If your net profit is below 10%, your business might be at risk. Try real-time cost tracking software to ensure your pricing remains profitable.
How to Improve Construction Profit Margins
Avoid Underpricing Bids
Many contractors set bids too low just to secure projects, only to realize later that they barely cover costs. Instead, focus on analyzing past project data, factoring in overhead accurately, and applying the correct markup formulas to ensure bids remain competitive without sacrificing profit.
Track Overhead Accurately
Overhead is often underestimated, leading to hidden costs that shrink margins. Instead of using a rough percentage, track real overhead expenses per project and allocate them correctly to avoid financial surprises.
Reduce Cost Overruns
Late invoice approvals and unapproved change orders can quickly drain profits. Implement a strict approval process for invoices and change orders, ensuring that every additional cost is documented, approved, and accounted for before work progresses.
Standardize Financial Workflows
Manual tracking leads to errors, missing costs, and inconsistent reporting. Establish clear, repeatable financial processes for budgeting, cost tracking, and approvals to ensure every project follows the same structured approach — eliminating costly mistakes.
Planyard automates these processes to prevent surprises. Book a demo call with our team or try a free 14-day full-featured trial (no credit card required).
How Planyard Helps Contractors Stay Profitable
Most contractors struggle with financial tracking because they rely on spreadsheets and manual accounting.
How Planyard Solves This Problem:
- Real-Time Budget Tracking – Prevents cost overruns and tracks every dollar.
- Automated Profit Margin Calculations – Ensures accurate markup and pricing.
- Subcontractor & Invoice Management – Eliminates overbilling and unexpected expenses.
- Standardized Approval Workflows – Stops unauthorized spending before it happens.
- Cloud-Based Access – Manage project finances from anywhere.
Planyard customers report saving 3–4 days per project and reducing cost overruns by 30%.
Final Thoughts: How to Build a More Profitable Construction Business
By accurately calculating COGS, overhead, and markup, tracking real-time costs, and leveraging software like Planyard, you can:
✔ Increase profitability without increasing workload
✔ Eliminate financial risks and cost overruns
✔ Gain full control over job costs and margins