How to price a remodeling job: overhead, markup vs margin, and the break-even that keeps a small contractor alive

Nobody in this business goes broke because they can't swing a hammer. They go broke one underpriced job at a time, and the underpricing is almost always in the same three places: a labor rate built from the wage instead of the cost, overhead guessed instead of counted, and a markup that someone thought was a margin. The rest of this page works through all three for one company with its numbers on the table, so you can swap in yours.

One limit before the math. Payroll tax, unemployment and workers' comp rates change by state, by class code and by your own claims history. The figures here are published 2026 rates used as a worked example. Confirm tax and insurance figures for your state with your accountant and your insurance agent before you set prices on them.

What a field employee really costs per hour

Start with the wage. The Bureau of Labor Statistics puts the May 2025 mean wage for carpenters working in residential building construction at $30.71 an hour, and for construction laborers in the same industry at $23.60. Across all industries the carpenter mean is $31.55 and the median is $29.12, so $30.71 is a fair middle for a remodeling crew. Your local market may sit well above or below it.

Then add everything the employer pays on top. Social Security is 6.2% of wages up to the 2026 wage base of $184,500, which no field employee here comes near, and Medicare is 1.45% with no cap. Federal unemployment tax nets to 0.6% of the first $7,000, or $42 a head, if you pay your state tax on time and your state isn't a credit reduction state. State unemployment varies too much to pick one number; the example uses 3% as a placeholder. Washington, for comparison, charges new employers 115% of their industry's average rate.

Workers' comp is where carpentry gets expensive. Washington is useful as a reference because its state fund publishes one rate per class and charges it per hour worked. The 2026 rate for class 0516, building repair, remodeling and carpentry, is $2.9469 an hour. Framing crews in class 0510 pay $4.6938. Finish carpenters in 0513 pay $2.1088. Most other states charge a rate per $100 of payroll instead, so your agent will quote it differently, but the idea is the same. Washington lets employers recover part of the premium from workers (L&I says workers pay about 24% on average), and this example ignores that, which keeps the number conservative.

Health coverage is optional for a company this size, but if you offer it, it is labor cost. KFF's 2025 survey puts the average single-coverage premium at $9,325 with workers paying $1,440, leaving $7,885 for the employer.

The last piece is time. A year has 2,080 paid hours. Take out 80 hours of paid holidays and vacation and 2,000 are worked. Not all of those can go on an invoice: supply-house runs, loading the truck, driving between jobs, callbacks and rain days. The example assumes 8 unbillable hours a week over 50 working weeks, or 400 hours, which leaves 1,600 billable hours. That is a utilization of 80% of worked hours and 76.9% of paid hours. Track your own for a month from timesheets before you trust that number; it is the single input that moves the labor rate most.

The laborer works out the same way: $49,088 of wages becomes $68,137 a year, or $42.59 per billable hour, 1.80 times the $23.60 wage. The multiplier is higher on the lower wage because comp and health are fixed dollars that don't shrink with the paycheck. A crew of two carpenters and one laborer costs $237,138 a year for 4,800 billable hours, a blended $49.40 an hour. That is the number that goes on an estimate for labor at cost. The wage never does.

The overhead budget, counted line by line

Overhead is everything the company spends that no single job causes. The example company is an owner who sells, estimates and runs jobs, plus the three-person crew above, doing $900,000 a year. Its budget below is a declared example. Replace every line with your own, from last year's books if you have them.

Two lines deserve a comment. The owner's salary is overhead. If you leave it out and call whatever is left at year end your pay, you have priced your own labor at zero and every job looks more profitable than it is. And the trucks are costed at the IRS business mileage rate of 76 cents a mile that applies from July 1, 2026 (72.5 cents before that). That rate is meant to cover owning and running the vehicle, insurance included, so there is no separate auto insurance line. If you track actual truck costs, use those instead and add the insurance back.

That 24.5% lands close to the industry average. NAHB's 2026 Remodelers' Cost of Doing Business Study, covering 2024, found operating expenses of 23.6% of revenue for the average remodeler in its sample, a firm with $2.7 million of revenue. Use it as a sanity check. Your overhead is whatever your books say it is.

Markup vs margin, and why "10 and 10" fails

Margin is profit divided by the selling price. Markup is the same profit divided by cost. The dollars are identical and the percentages are not, because the bases differ. To go from a margin to the markup that produces it, divide the margin by one minus the margin.

Overhead and profit both have to come out of the selling price, so they add up as margin. The example company needs 24.5% for overhead and wants 10% net, so it needs a gross margin of 34.5% on every job. Its direct job cost for the year (materials, subs and crew labor at the burdened rate) is then $900,000 × (1 − 0.3453) = $589,236. The markup on that cost is 0.3453 ÷ 0.6547 = 52.7%.

"10 and 10" is the old rule of adding 10% for overhead and 10% for profit. Applied the usual way, compounding on cost, it is 1.10 × 1.10 = 1.21, a 21% markup. A 21% markup is a 17.4% gross margin. Run the example company's $589,236 of direct cost through it and the jobs sell for $712,975, leaving $123,739 of gross profit against $220,765 of overhead. The year ends $97,025 short. Nothing about the work was done badly. The rule assumed overhead was 10% of revenue when it was 24.5%, and then treated a markup as if it were a margin.

For comparison, NAHB's average remodeler in 2024 earned a 29.9% gross margin and a 6.3% net, the best net since 1996. At that 29.9% gross margin the example company would net 5.4%, about $48,300. Test your own pairs in the margin and markup calculator, which uses the same formulas as this page.

Two ways to recover overhead on a job

Once you know overhead is $220,765, each job has to carry its share. There are two common ways to assign it, and they disagree on individual jobs even when they agree on the year.

The percentage method spreads overhead over direct cost. Here that is $220,765 ÷ $589,236 = 37.5% of direct cost. It is simple and it is what a single markup does. The hourly method spreads overhead over billable crew hours: $220,765 ÷ 4,800 = $45.99 an hour. It ties overhead to the thing that actually consumes it, which is your crew's time and your time managing it.

Take a kitchen with $18,000 of cabinets, counters and fixtures, $9,000 of electrical and plumbing subs and 240 crew hours. Labor at the blended $49.40 is $11,857, so direct cost is $38,857. Priced at a 34.5% margin, the kitchen sells for $59,350 and carries $20,493 of gross profit. Take out its 24.5% share of overhead, $14,558, and $5,935 of net profit is left, which is 10%.

Now ask what the lowest price is that covers direct cost and overhead, the job's break-even. By the percentage method it is $38,857 ÷ (1 − 0.2453) = $51,486. By the hourly method it is $38,857 + 240 × $45.99 = $49,895. The gap exists because this kitchen is heavy on materials and subs, $162 of direct cost per crew hour against a company average of $123. A straight percentage charges it overhead for the cabinets, and on a competitive bid that can cost you the job. The reverse is also true: a demolition or framing job that is nearly all labor gets too little overhead under a percentage markup. If your jobs vary a lot in their labor share, price labor hours with overhead built in and use a lower markup on materials and subs.

Break-even for the year, with and without the crew on payroll

The annual break-even is the revenue at which gross profit exactly covers overhead: overhead divided by the gross margin ratio. At a 34.5% margin that is $220,765 ÷ 0.3453 = $639,352. Expressed in kitchens of about $45,000, it is 14.2 jobs, so the 15th job of the year is the first one that makes money. The planned $900,000 gives a 29% margin of safety, and each 10% of revenue lost takes 34.5% of the profit with it.

That calculation quietly assumes crew labor goes away when the work does. It doesn't if you keep your people on payroll through a slow quarter, and good crews are worth keeping. Treat the $237,138 crew cost as fixed along with overhead and only materials and subs stay variable, at 39.1% of revenue. Break-even rises to $457,902 of fixed cost ÷ 0.6088 = $752,163. The margin of safety falls to 16.4%, and a 10% drop in revenue now wipes out 61% of the year's profit. That is the number to know before you hire a fourth field employee on the strength of a good spring. Put your own figures into the break-even calculator both ways.

What a 15% labor overrun does to the profit

Go back to the $59,350 kitchen. The estimate said 240 crew hours. The walls were out of plumb, the old subfloor was soft and the job took 276, which is 15% more. The price doesn't move. The extra 36 hours at $49.40 add $1,779 of cost.

A 15% miss on one cost line took 30% of the job's profit. That ratio is the reason labor is the line to estimate most carefully: labor overruns come straight out of a net margin that is only 10% to begin with. And if your calendar is full, it gets worse. Those 36 hours are hours you can't sell on the next job, and each one was supposed to recover $45.99 of overhead, so another $1,656 of overhead goes unrecovered somewhere else in the year.

Catching up with overtime doesn't make it cheaper. The crew's average wage is $28.34. At time and a half, plus Social Security, Medicare and the 3% state tax on the higher pay, plus Washington's per-hour comp, an overtime hour costs about $49.98, and 36 of them come to $1,799. The overtime calculator shows how the federal rule works out for a given week.

Change orders and discounts come out of profit first

Change orders are where margins leak one small favor at a time. Say the homeowner adds under-cabinet lighting and a relocated outlet: 12 crew hours and $800 of material, $1,393 of direct cost. Priced at the company's 34.5% margin it sells for $2,127. Priced at "cost plus 10%" it sells for $1,532. The $595 difference is more than the $552 of overhead those 12 hours were supposed to carry. Put the change-order markup in the contract, write every change up before the work starts, and get the signature on the same day.

Discounts work the same way. Knock 5% off the $59,350 kitchen to close the deal and the price drops by $2,968. None of that comes out of cost. It all comes out of the $5,935 of net profit, so a 5% discount gives away half of the job's profit.

Cash flow: deposits, draws and retainage

A job can be profitable and still leave you short of cash, because you buy materials and meet payroll before the customer pays. How long you carry that gap depends partly on state law.

In California, the CSLB says the down payment on a home improvement contract cannot be more than $1,000 or 10% of the contract price, whichever is less, and that later payments cannot run ahead of the value of work performed. It also says there is no exception for special-order materials. On the $59,350 kitchen, 10% would be $5,935, so the cap is $1,000. If the $18,000 of cabinets and counters is ordered in week one, the contractor carries $17,000 of it until the first progress payment. The cure is a draw schedule tied to finished, verifiable stages (demolition complete, rough-in inspected, cabinets set) and a line of credit sized to your largest material order.

Texas has a different pinch. Under section 53.101 of the Texas Property Code, the owner must hold back 10% of the contract price while the work is in progress and for 30 days after it is complete. On the same kitchen that is $5,935, exactly the job's planned net profit. In other words, the profit on a Texas job is still in the owner's account a month after you've moved to the next job. Plan the cash for it, and send the final invoice the day the work is done so the 30 days start counting.

Rules on deposits, progress payments and retainage differ in every state, and some states have none for residential work. Look up yours with the state licensing board before you write a payment schedule into a contract.

A pricing routine you can run on every estimate

Once a year, from your books: total overhead including your own salary, total direct cost, and billable crew hours from timesheets. Those three numbers give you an overhead ratio, a recovery rate per hour and the gross margin you need. Once a year, from payroll and your insurance agent: the burdened cost of each field employee per billable hour.

On every estimate: count crew hours honestly, multiply by the burdened rate, add materials and subs, and divide by one minus the target margin. Compare the result against the job's break-even price. If a customer or a competitor pushes you below that line, you are paying to do the work.

After every job: compare estimated hours to actual hours. The kitchen above shows what a 15% miss costs, and the only way to stop repeating one is to see it in your own numbers.