What Is a Good Profit Margin on a Job for a Contractor

Say a re roof prices at $12,000, and the direct costs on it are $4,200 in materials, $2,700 in crew labor, $600 for the dumpster, permit and disposal, and $500 to the gutter sub. Add those: 4,200 plus 2,700 plus 600 plus 500 equals $8,000 of direct cost.

Gross profit on that job is 12,000 minus 8,000, or $4,000. Gross margin is the gross profit divided by the price: 4,000 divided by 12,000 equals 0.333, so 33.3 percent. That's the money the job contributes toward everything you pay for whether or not the phone rings, and toward your own pay at the end.

The one rule that keeps this honest is a clean line between direct costs and overhead. If the truck payment gets charged to a job one week and swallowed by the office the next, your margins bounce around for reasons that have nothing to do with the work. Set the line once and keep the internal cost sheet separate from the customer estimate so the two stop contaminating each other.

Markup measures profit against your cost, and margin measures it against your price. Same job, same $4,000 of profit, two different denominators.

• Margin: 4,000 divided by 12,000 equals 0.333, so 33.3 percent.
• Markup: 4,000 divided by 8,000 equals 0.50, so 50 percent.

Here's where it costs money. An owner decides he wants 33 percent, takes his $8,000 of cost, and multiplies by 1.33. That prices the job at $10,640. Gross profit is 10,640 minus 8,000, or $2,640. The actual margin is 2,640 divided by 10,640, which equals 0.248, so 24.8 percent. He wanted 33.3 and got 24.8.

The gap on that single job is 12,000 minus 10,640, or $1,360. Run 40 jobs a year that way and 40 multiplied by 1,360 equals $54,400 gone, on a business that never once looked unprofitable on the job board. This is the quiet one. Nobody catches it because the jobs still make money, and the markup and margin difference only shows up when you compare the year to the plan.

Markup equals your target margin divided by one minus that margin. Work it once and keep the table on the wall.

The shortcut skips the table: divide your direct cost by one minus your target margin. For a 33.3 percent margin on $8,000 of cost, 8,000 divided by 0.6667 equals $12,000, which is exactly where the first example landed. Check one recent job against this and you'll know within a minute whether you've been pricing on markup while talking about margin.

Overhead is the cost of being open. The SBA calls this class of spending fixed costs, meaning costs that do not change with the increase or decrease in production or services. That covers rent, general liability and workers comp, the office manager, the trucks and fuel you're carrying off the job, software, and your own pay for the office days when you're off the tools.

Say your overhead runs $150,000 a year and you complete 60 jobs at an average of $12,000, so $720,000 in revenue. Two ways to spread it:

• Flat per job: 150,000 divided by 60 equals $2,500 of overhead on every job.
• Share of revenue: 150,000 divided by 720,000 equals 0.208, so 20.8 percent of each job's price. On a $12,000 job that's 12,000 multiplied by 0.208, which comes back to $2,500.

They agree here because every job is the same size. They stop agreeing the moment your work varies. On a $30,000 commercial job, the flat split still charges $2,500 while the revenue share charges 30,000 multiplied by 0.208, or $6,250. If your job sizes swing, use the revenue share, since a big job does tie up more of your office, your scheduling and your cash. Then compare estimated and actual costs after the job closes so the overhead number gets corrected by reality once a quarter.

Marketing usually hides inside overhead, which is how a business ends up selling jobs that pay for the crew and the office while quietly paying nothing for the ad account. Pull it out and give it its own line. Google uses the same shape of division for its cost per conversion column, which it describes as calculated by dividing your total cost by the number in your Conversions column. Do that with jobs in the denominator.

Say you spend $6,000 a month on marketing, so $72,000 a year, and it helps produce all 60 jobs. Marketing cost per job is 72,000 divided by 60, or $1,200. Now stack the whole job:

• Price: $12,000
• Direct cost: $8,000
• Gross profit: $4,000, a 33.3 percent gross margin
• Overhead per job: $2,500
• Marketing per job: $1,200
• Net profit per job: 4,000 minus 2,500 minus 1,200 equals $300
• Net margin: 300 divided by 12,000 equals 0.025, so 2.5 percent

Check it across the year. Revenue $720,000, direct costs 60 multiplied by 8,000 equals $480,000, overhead $150,000, marketing $72,000. That leaves $18,000, and 60 jobs at $300 each is the same $18,000. A 33.3 percent gross margin turned into 2.5 percent net, and the business owner has been telling people he runs at a third.

This is also why return on ad spend flatters a channel. Google's Target ROAS example puts the goal at $5 USD worth of sales for each $1 USD you spend on ads, which reads as a 500 percent return. At a 33.3 percent gross margin, that $5 of sales carries 5 multiplied by 0.333, or $1.67 of gross profit. Take out the dollar you spent and the channel left you 67 cents before a single overhead item. Run the same division on gross profit and you'll see channels differently, which is the whole reason to pair this with your cost per lead and break even cost per lead.

Now for the question in the title. In this example a job has to produce 2,500 plus 1,200, or $3,700 in gross profit, before it earns you anything. At a $12,000 price that's 3,700 divided by 12,000, which equals 0.308, so a 30.8 percent gross margin is dead even. The SBA defines that point as the point at which total cost and total revenue are equal, meaning there is no loss or gain for your small business. Every point of margin above 30.8 is yours.

So price for the net margin you want. Add direct cost, overhead per job and marketing per job: 8,000 plus 2,500 plus 1,200 equals $11,700. Divide that by one minus your target net margin. For 10 percent, 11,700 divided by 0.90 equals $13,000. At $13,000 the gross profit is $5,000, a 38.5 percent gross margin, and the net is 13,000 minus 11,700, or $1,300, which is 10 percent of the price.

Look at what that costs the customer. The price moved from $12,000 to $13,000, which is 1,000 divided by 12,000, or 8.3 percent. Net profit per job moved from $300 to $1,300. Across 60 jobs that's 60 multiplied by 1,300, or $78,000, against the $18,000 you were making, a $60,000 swing from an 8.3 percent price change. Published benchmarks for contractor margins circulate constantly and most of them trace back to survey panels that never publish their method, so skip them and use the number your own overhead demands.

Take the last job you finished, write down the price, list the direct costs honestly including the sub invoices, and divide. Then add your overhead per job and your marketing per job and see what's actually left. The job profit calculator handles the margin and markup conversion and the overhead split so you can test a price before you send it, and the walkthrough for it shows where each field comes from on a normal job sheet. If the answer surprises you, run your cost per lead next, since both sit together in the free tools and the marketing line is usually the one nobody has ever divided.