How contractors can calculate margin by job and for the business, and protect it from labor overruns, change orders and overhead creep.
| Measure | Formula |
|---|---|
| Gross profit (job) | Contract revenue minus direct job costs |
| Gross margin | Gross profit divided by revenue, times 100 |
| Net profit (business) | Total gross profit minus overhead |
| Net margin | Net profit divided by total revenue, times 100 |
| Price for a target margin | Total cost divided by (1 minus target margin) |
Direct job costs include field labor with labor burden, materials, equipment, subcontractors, permits and job-specific expenses. Overhead covers costs that are not tied to one job. Our profit margin calculator and labor burden calculator help with the math.
Illustrative figures for one job:
| Item | Amount |
|---|---|
| Contract price | $80,000 |
| Field labor including burden | $24,000 |
| Materials | $22,000 |
| Equipment and subcontractors | $14,000 |
| Total direct cost | $60,000 |
| Gross profit | $20,000 |
| Gross margin | 25% |
If the business carries overhead equal to 15% of revenue, the net margin on similar jobs would be about 10%. If labor runs 20% over estimate on this job, gross profit falls by $4,800, cutting gross margin to 19%.
Markup is profit as a share of cost; margin is profit as a share of price. A 25% markup on $60,000 of cost gives a $75,000 price and a 20% margin, not 25%. Many contractors lose money by adding a markup and believing it is their margin. Decide the margin you need to cover overhead and profit, then calculate the price from cost using the formula above.
| Cause | What happens |
|---|---|
| Labor overruns | More hours than estimated because of rework, waiting, poor planning or underestimating |
| Unbilled change orders | Extra work done without written approval or billing |
| Material waste and price increases | Costs rise between bid and purchase |
| Inaccurate time tracking | Hours charged to the wrong job hide which jobs lose money |
| Overtime | Premium pay to recover a schedule |
| Callbacks and warranty work | Unpaid return visits |
| Overhead creep | Office, vehicle and software costs growing faster than revenue |
Our construction estimating guide covers the full process.
Labor is usually the most variable cost on a job. Tracking hours by job, phase and task shows where time goes and makes it possible to correct course while the job is still running. Crews can clock in on site by job and cost code, and managers can compare actual hours with the estimate each week. The post on job costing with time tracking explains the approach.
A business with healthy job margins can still lose money if overhead grows unchecked. Knowing your overhead rate lets you set the minimum margin each bid must carry.
After each job, compare estimated and actual costs for labor, materials, equipment and subcontractors. Note what caused overruns and feed the lessons into the next estimate. Over time, this closes the gap between bid and reality. Track margin by job type and client: some kinds of work or customers may consistently earn more than others, which should guide where you bid. Our guide on growing a construction business discusses choosing the right work.
Profit on paper does not always mean cash in the bank. Retainage, slow payments and up-front material purchases can squeeze cash even on profitable jobs. Bill progress payments on time, follow up on overdue invoices, negotiate deposits where possible and track retainage so it is collected at close-out. Healthy margins give you room to absorb delays, but cash planning keeps the business running while you wait to be paid.
EZTime helps contractors see labor costs by job in real time. Crews clock in on site with the mobile app, hours are tagged to jobs and tasks, and managers can compare actual hours with estimates before overruns grow. Approved hours flow to payroll. See EZTime for construction.
Foremen and crew leads control much of the labor on a job. Share the estimated hours for each phase with them before work starts and review progress weekly. When crews know the budget, they can flag problems early, such as missing materials or design issues, before hours run over.
Gross margin is revenue minus direct job costs, divided by revenue. Net margin subtracts overhead as well.
Markup is profit as a share of cost; margin is profit as a share of price. A 25% markup gives a 20% margin.
It varies widely by trade, market and project type. Track your own margins by job type and compare over time.
Common causes are labor overruns, unbilled change orders, rising material costs, rework and inaccurate time tracking.
Estimate from real data, price for margin, track labor by job and task, manage change orders in writing and review every finished job.
Yes. Payroll taxes, workers’ compensation, insurance and benefits are part of the true cost of field labor.
Weekly for labor on active jobs and in full at the end of each job, with a business-wide review monthly or quarterly.
EZTime tags hours by job, client and role and shows real-time labor costing on the schedule, so estimates can be checked against actual hours. For a team of 15, EZTime starts at about $30 a month ($2 per employee).