What Profit Margin Should a Contractor Target? The Real Math

Ask ten contractors what margin they target and you will get eleven answers, most of them guesses. "We do about 20%." Twenty percent of what? Gross or net? On materials, on labor, on the job total? And the sharper question: is 20% enough to pay you, cover overhead, absorb the jobs that go sideways, and still grow the company?

Margin is not a feeling. It is arithmetic, and most shops can fix their pricing in one afternoon once they see the math clearly. Here is the math.

Gross margin vs net margin: know which one you mean

Gross margin is what the job makes after direct costs. Take a $50,000 kitchen remodel. Labor, materials, and subs on that job total $32,500. Gross profit is $17,500. Gross margin is $17,500 divided by $50,000, or 35%.

Net margin is what the company keeps after everything, including overhead. That same $50,000 job, after its share of office rent, your salary, insurance, marketing, and the truck fleet, might leave $5,000. Net margin: 10%.

When contractors say "I make 30%," they usually mean gross, and they are comparing it against advice that meant net. The confusion is expensive. A shop running 30% gross margin and 25% overhead has 5% net margin. One bad job, one slow month, and the year is gone. Decide which number you are managing before you manage it.

The number that matters for pricing decisions is gross margin per job, because that is what you control at bid time. The number that matters for the business is net margin across the year, because that is what pays for everything else. Track both, and never let a conversation about "margin" proceed without naming which one.

Markup is not margin, and the difference costs real money

This is the single most common pricing error in the trades, and it hides in plain sight.

A contractor buys a faucet for $180 and sells it installed for $225. "I marked it up 25%," he says. He thinks he made 25%. He made $45 on $225, which is a 20% margin. The 5-point gap between markup and margin is invisible until you do the division, and it compounds across every line item on every job.

The formulas, side by side:

• Markup: (Price minus Cost) divided by Cost. A 25% markup on $180 cost gives $225.
• Margin: (Price minus Cost) divided by Price. On that $225 price, margin is 20%.

To hit a target margin from a known cost, use the divisor, not the multiplier:

Price = Cost divided by (1 minus Target Margin)

Want 40% margin on a task that costs you $300? Price = $300 / 0.60 = $500. Add 40% markup instead and you get $420, which keeps 28.6%. You aimed at 40 and kept 28.6, and the missing 11 points never show up as an error anywhere. They just are not there.

The target numbers, by trade and job type

There is no single right number, but there are ranges that healthy shops in each trade actually hit. Use these as the benchmark, then adjust to your own books:

• General remodeling and renovation: 35 to 45% gross margin per job. Jobs are custom, risks are high, and every bid competes on understanding, not just price.
• New construction (subcontracted trades): 25 to 35% gross. Volume and repetition bring the number down; the ones who bid at 15% are one delay from trouble.
• HVAC and plumbing service: 55 to 70% gross on repairs, 40 to 50% on installs. Service work is high margin because speed and skill are the product. Installs carry equipment cost and warranty risk.
• Specialty finish trades (paint, tile, flooring): 40 to 50% gross. Material costs are moderate; labor quality is the differentiator.
• Net margin across the company: 8 to 15% for a healthy small shop. Below 5% you are fragile. Above 15% you are doing something right and should document what it is.

Notice the pattern: the more custom and uncertain the work, the higher the gross target needs to be, because the surprises eat it. A shop doing 30% gross on remodels is not being conservative. It is being optimistic about how smoothly jobs will go.

Back into your number from your own overhead

Industry averages are a starting point. Your number comes from your books. Here is the one-afternoon exercise:

Step 1: total your annual overhead. Everything that is not a direct job cost: rent, your salary and the office payroll, insurance, vehicle costs, phones, software, marketing, licenses, accounting. Be honest. Most shops undercount this by 15 to 20% the first time.

Step 2: total your annual billable revenue. Not bids sent. Actual revenue from completed work over the last twelve months.

Step 3: divide. Overhead divided by revenue is your overhead rate. Say it is $180,000 in overhead on $1,200,000 in revenue: 15%.

Step 4: set your net target. Pick one: 10% is solid for most small shops.

Step 5: add them. 15% overhead plus 10% net target means your average gross margin across all jobs must be at least 25%. That is the floor. Every job you bid below 25% gross has to be balanced by a job above it, or the year does not work.

Most contractors find this number is higher than the margin they have been casually targeting. That gap, between the margin you need and the margin you have been bidding, is the entire point of the exercise. Now you know the size of the pricing problem in percentage points, and you can fix it deliberately instead of discovering it in December.

Where the margin actually goes

Knowing the target is half the job. The other half is knowing where the points leak between the bid and the final invoice:

Underestimated labor. The most common leak, by a wide margin. Jobs take longer than remembered, especially rough-in and finish phases. A job cost sheet that compares estimated versus actual hours per job will show you exactly how many points this costs you, per job type.

Unapproved extras. The change done on a handshake and never priced. Every one of these is margin given away for free. A change order habit, numbered and signed before the work happens, is a margin protection system wearing paperwork.

Material price movement. A bid written in March and built in June is exposed to whatever lumber and copper did in between. Estimates need validity dates, and long-lead jobs need a materials escalation clause or a faster requote.

Allowances that drift. The tile allowance was $4 per square foot and the customer picked $9. If the allowance line did not state what happens at selection, you just donated the difference.

Discounting at close. The bid was right, and then the customer hesitated, and 5% came off to get the signature. Discounts come straight out of margin, dollar for dollar. A bid with healthy margin can absorb one discount. A bid priced at the floor cannot.

Each of these leaks is fixable with a document habit: estimates with validity dates and allowance terms, change orders that get signed, and a job cost review that names which leak ate each job. The margin target tells you what to defend. The habits defend it.

The review that keeps the target real

Targets drift because costs move. Run this review quarterly:

1. Pull the last quarter of completed jobs. Gross margin on each one.
2. Flag every job under your target. Write one sentence on why: labor overrun, unpriced extra, material move, discount.
3. Count the sentences. If the same reason shows up three times, that is not a job problem. It is a system problem, and it gets a process fix, not a hope.
4. Update your overhead rate if costs changed. Insurance renewals, a new truck, a raise for your lead: these change the math, and the math changes the bids.

Fifteen minutes per job, once a quarter. That is the maintenance cost of knowing your number. Shops that skip it do not keep their old margin. They slowly spend it, one unexamined job at a time.

The bottom line on the number

Target 35 to 45% gross on custom work, 55 to 70% on service, and 8 to 15% net across the company, then replace all of it with the number your own overhead produces. Price with the divisor, not the multiplier. Protect the margin with documents, not discipline. Review quarterly, not annually.

Margin is not luck and it is not the market. It is a number you choose, a formula you apply, and habits you keep. Most of your competitors are guessing. Stop guessing and you are already ahead.

The Contractor Operating System includes a job estimator with the margin divisor built in, a job-costing tab that compares estimated versus actual on every job, and a profit dashboard that flags every job under your target margin. Set your rates once and every bid pulls from the same math. $119 launch price (list $149), works in Excel and Google Sheets.