Introduction

Ask 10 contractors what profit margin they should aim for, and you'll get 10 different answers. Some are making 8% and barely surviving. Others are consistently hitting 30%+ and building wealth.

The difference? Understanding what healthy margins look like for your trade, knowing how to calculate them correctly, and implementing strategies to protect them in competitive bidding situations.

Here's the truth: Most contractors underprice their work. They confuse markup with margin, forget to include overhead, or slash prices to win bids—then wonder why they're working 60-hour weeks and still struggling to pay bills.

This comprehensive guide will teach you the difference between markup and margin, industry standard profit margins by trade and project type, how to calculate true costs including overhead, regional variations in pricing and margins, and how to increase margins without losing bids.

Understanding Markup vs. Margin (Most Contractors Get This Wrong)

Before we dive into target margins, let's clear up the most common confusion in contractor pricing.

What Is Markup?

Markup is the percentage you ADD to your costs to arrive at your selling price.

Formula: Selling Price = Cost × (1 + Markup %)

Example:

  • Project cost: $10,000
  • Markup: 25%
  • Selling price: $10,000 × 1.25 = $12,500
  • Profit: $2,500

What Is Margin?

Margin is the percentage of revenue that becomes profit.

Formula: Margin % = (Profit ÷ Revenue) × 100

Example (using same numbers):

  • Selling price (revenue): $12,500
  • Costs: $10,000
  • Profit: $2,500
  • Margin: ($2,500 ÷ $12,500) × 100 = 20%

The Critical Difference

Notice: A 25% markup does NOT equal a 25% margin. It equals a 20% margin.

This is where many contractors go wrong. They think "I'm adding 25% to my costs, so I'm making 25% profit"—but they're actually making 20%.

Calculating Your True Costs (Don't Forget Overhead)

To calculate an accurate margin, you must know your TOTAL costs—not just direct job costs.

Direct Costs (Job-Specific)

These are costs directly tied to a specific project:

Materials:

  • Raw materials (lumber, concrete, drywall, etc.)
  • Fixtures and finishes
  • Delivery fees
  • Waste factor (typically 5-10%)

Labor:

  • Worker wages or subcontractor fees
  • Payroll taxes (7.65% FICA)
  • Workers' compensation insurance (5-15% of payroll)

Indirect Costs (Overhead)

These are business costs not tied to a specific project but necessary to operate:

Fixed Overhead:

  • Office rent or mortgage
  • Utilities
  • Business insurance
  • Software subscriptions
  • Vehicle payments

Variable Overhead:

  • Marketing and advertising
  • Fuel and vehicle maintenance
  • Tools and equipment depreciation
  • Professional services (accountant, lawyer)

For detailed guidance on creating accurate estimates that include all costs, try our free construction calculator tool.

Industry Standard Profit Margins by Trade

Profit margins vary significantly by trade, market, and project type. Here are realistic benchmarks based on industry data from 2024-2025.

Residential Construction Trades

General Contractors (Residential Remodeling)

  • Target margin: 20-30%
  • Average margin: 18-22%
  • Top performers: 30-40%
  • Notes: Higher margins possible on design-build projects

Custom Home Builders

  • Target margin: 25-35%
  • Average margin: 20-25%
  • Top performers: 35-45%
  • Notes: Luxury custom homes command highest margins

Roofing Contractors

  • Target margin: 25-35%
  • Average margin: 22-28%
  • Top performers: 35-45%
  • Notes: Insurance work often yields higher margins

HVAC Contractors

  • Target margin: 30-40%
  • Average margin: 25-32%
  • Top performers: 40-50%
  • Notes: Residential replacement units have highest margins

Plumbing Contractors

  • Target margin: 30-40%
  • Average margin: 28-35%
  • Top performers: 40-50%
  • Notes: Service and repair work yields highest margins

Electrical Contractors

  • Target margin: 25-35%
  • Average margin: 22-30%
  • Top performers: 35-45%
  • Notes: Residential service work higher margin than commercial

Key Insights

  • Residential margins are higher than commercial: Residential customers value quality/service over pure price
  • Service and repair work yields highest margins: Emergency service can achieve 40-50% margins
  • Specialized work commands premium margins: The more specialized your niche, the higher margins you can command
  • Top performers earn 50-100% higher margins: Better estimating, premium positioning, efficient operations

To learn how to win bids while maintaining these healthy margins, read our guide on proven strategies to win construction bids.

Regional Variations in Contractor Margins

Profit margins aren't just determined by trade—they vary significantly by location due to competition, cost of living, and market dynamics.

High-Margin Markets (30-40%+ achievable)

Characteristics:

  • Underserved markets (few contractors, high demand)
  • Wealthy areas (customers value quality over price)
  • Specialized work (limited competition)
  • Strong referral networks

Medium-Margin Markets (20-30% achievable)

Characteristics:

  • Balanced supply and demand
  • Mix of price-sensitive and quality-focused customers
  • Moderate competition

Low-Margin Markets (15-25% achievable)

Characteristics:

  • Saturated with contractors (high competition)
  • Price-sensitive customers
  • Commodity services (little differentiation)

Residential vs. Commercial Profit Margins

The type of customer you serve dramatically impacts achievable margins.

Residential Margins (Typically Higher)

Why residential margins are higher:

  • Less price sensitivity: Homeowners make emotional decisions
  • Fewer competitors on each bid: 2-4 quotes vs. 10-20 for commercial
  • Relationship-driven: Referrals and reputation matter more
  • Smaller projects, higher markups: Overhead costs relatively higher

Target margins:

  • Routine residential work: 25-30%
  • High-end residential: 30-40%
  • Emergency/service work: 40-50%

Commercial Margins (Typically Lower)

Why commercial margins are compressed:

  • Low-bid competitive: Many projects go to lowest qualified bidder
  • Sophisticated buyers: Commercial clients know industry pricing
  • Volume focus: Prioritize volume and efficiency over per-project margin
  • Longer payment terms: Net-30 or Net-60 ties up cash

Target margins:

  • Competitive bid commercial: 10-15%
  • Negotiated commercial: 15-25%
  • Design-build commercial: 20-30%

How to Increase Margins Without Losing Bids

The holy grail: charge more, win more. Here's how top contractors do it.

Strategy 1: Specialize and Position as the Expert

The principle: Specialists charge more than generalists because customers perceive higher value.

How to implement:

  • Choose a niche (kitchen remodels, historic restoration, eco-friendly building)
  • Build a portfolio showcasing your specialty
  • Create content demonstrating expertise
  • Get certifications specific to your niche
  • Market yourself as "the [specialty] expert in [city]"

Strategy 2: Build Trust Before Bidding

The principle: Warm leads (referrals, repeat customers) accept higher prices than cold leads.

Data:

  • Cold lead win rate: ~25% at average pricing
  • Warm referral win rate: ~60% at 10-15% premium pricing

Strategy 3: Communicate Value, Not Just Price

The principle: Customers who understand value are less price-sensitive.

How to implement:

  • Itemize everything in your bids
  • Explain your process
  • Highlight differentiators (warranties, insurance, credentials)
  • Include testimonials
  • Show before/after photos

For tools that help you create professional, value-focused bids quickly, explore our comprehensive software comparison guide.

Strategy 4: Optimize Operations to Lower Costs (Not Price)

The principle: Higher margins don't always require higher prices—sometimes lower costs achieve the same result.

How to improve efficiency:

  • Use software to bid faster
  • Buy materials in bulk
  • Standardize processes
  • Train your crew
  • Reduce waste

Strategy 5: Fire Bad Customers

The principle: Not all revenue is good revenue. Low-margin, high-hassle customers drag down your business.

Red flags of bad customers:

  • Constantly haggling on price
  • Demanding the absolute lowest bid
  • Unrealistic expectations or timelines
  • Poor communication or disrespect

Learn more about data-driven optimization strategies to systematically improve your margins.

When to Walk Away From Low-Margin Jobs

Not every bid is worth winning. Knowing when to say no protects your business.

Walk Away If:

  • The customer is only looking for the cheapest option: You'll never win unless you lowball
  • The project margin would be below 15%: Unexpected costs will wipe out thin margins
  • The scope is unclear or constantly changing: Scope creep destroys profitability
  • The customer has unrealistic expectations: You'll never satisfy them
  • You're already booked: Overtime labor costs eat margins quickly
  • The customer has a history of non-payment: No margin is worth not getting paid

Conclusion: Margin is Everything

Revenue is vanity. Profit is sanity. Margin is everything.

You can be the busiest contractor in town, running multiple crews, doing $2M in revenue—and still be broke if your margins are thin.

Or you can be selective, strategic, and margin-focused—doing $500K in revenue at 35% margins and banking $175K in profit.

The choice is yours.

Key Takeaways

  • Know the difference between markup and margin (don't confuse the two)
  • Include ALL costs (direct + overhead) when calculating margin
  • Target 20-30% margins for residential, 10-20% for commercial
  • Top performers achieve 30-40%+ through specialization
  • Residential margins are higher than commercial
  • Increase margins through specialization and value communication
  • Walk away from low-margin work
  • Track margins on every project

Your Action Plan

This week:

  • Calculate your current average margin
  • Identify your overhead rate
  • Build a true hourly cost model

This month:

  • Set a minimum acceptable margin
  • Track margin on every new bid
  • Review margins monthly and adjust pricing