Subcontractor pricing markup

Markup vs margin — the most expensive confusion in contracting

Every contractor has heard the words "markup" and "margin" used interchangeably, but they are not the same number. Confusing them is one of the most common reasons contractors underprice their work and wonder at the end of the year why the income statement doesn't match what they expected.

The core distinction, with real math

Start with a subcontractor cost of $100.

• 25% markup: $100 × 1.25 = $125. Profit = $25. Gross margin = $25 / $125 = 20%.
• 25% gross margin: $100 / (1 − 0.25) = $133.33. Profit = $33.33. Markup = 33.3%.

The difference on a $100 sub cost is $8.33. On a $50,000 electrical subcontract, that is $4,167 in missed gross profit. On a $500,000 mechanical job, it's $41,667.

Why this happens — the language trap

Construction estimating software and old-school bids often say "add 20%" when they mean margin. The person entering the number types 20% and gets markup instead. The confusion is baked into how the industry talks, not just how the math works. The fix is to always be explicit: "20% gross margin on subs" or "20% markup above sub cost."

Overhead recovery — what your markup must actually cover

Before choosing a markup number, you need to know your overhead rate. Overhead is all costs that are not directly job-related: office rent, trucks, insurance, accounting, estimating labor, project management staff, software, and owner's salary if the owner is not in the field.

If overhead is $300,000/year and your annual sub volume is $1,500,000, then overhead on subs is 20%. Your markup must cover that 20% plus your target profit. If you want 10% net profit:

• Required gross margin = overhead% + profit% = 20% + 10% = 30%
• Equivalent markup = 1 / (1 − 0.30) − 1 = 42.9%

Most contractors who "use 20% markup" are not covering overhead and are actually losing money on paper while generating cash — a dangerous position.

Industry norms — GC markup on subs

Markup on subcontractors varies by:

• Project size: Large commercial GCs on competitive bids may accept 8–12% markup because volume covers overhead. Smaller residential GCs need 15–25%.
• Trade complexity: A simple landscaping sub gets lower markup than a specialty glass curtain wall contractor that requires daily coordination.
• Schedule risk: If the sub's delay causes liquidated damages to the GC, the markup should reflect that risk.
• Public vs private: Public work markups are often compressed by bid competition. Negotiated private work allows more margin.

When to charge more than your standard rate

Certain subcontract situations justify higher markup:

• Coordination-heavy trades where you have daily touchpoints with the sub — HVAC, fire protection, low voltage
• Tight schedule requiring your superintendent to actively manage the sub's crew sequence
• Public-facing or high-visibility finishes where your reputation is on the line if the sub underperforms
• Unfamiliar subs where you are taking on unknown execution risk

The best contractors price based on value and risk, not just habit. A 15% markup on a reliable $200k mechanical sub you've used 20 times is reasonable. A 15% markup on an unknown $200k sub you found last week may not be enough to cover the risk.