Contractor Markup – What are you really paying?

Contractor markup is a given on any project. Your bid or negotiated contract will include a percentage for overhead and profit. And if you’ve requested a cost breakdown you’ll likely see it called out as a line item.

What you probably won’t see is the markup already baked into every subcontractor’s number. Or, what the general contractor paid for bulk materials pulled from inventory to use on your job.

Understanding how markup layers through a project gives you a much clearer picture of what you’re actually paying for, and a stronger foundation for negotiation.

Nobody expects a contractor to work for free. If they did, they wouldn’t stay in business long. But informed owners get better contracts.

What’s Included in Construction Overhead?

A contractor’s overhead is essentially a percentage of their operating expenses allocated to your project. These are indirect costs — not specific to your job, but part of the cost of running the business. Items that typically get marked up as overhead include:

• Project management
• Superintendents and general foremen
• Estimating and engineering
• Coordination, expediting, and purchasing
• Detailing and shop drawings
• Legal expenses and accounting
• Data processing and administrative expenses
• Governmental approvals
• Auto and umbrella insurance
• Owned and rented equipment costs
• Cost for use of tools

Overhead vs. General Conditions — Not the Same Thing

Overhead is not the same as General Conditions, and the distinction matters. General Conditions are costs specific to your project and include items such as:

• Dumpsters
• Portable toilets
• Small tools and consumables
• Project dedicated staff
• Project-specific equipment rentals
• Drinking water
• Cleanup
• Temporary utilities
• Temporary protection

These items are essential to completing the work but are not part of the scope defined in the contract documents. They carry their own markup percentage, separate from overhead.

How Contractor Markup Layers Through a Project

Here’s where it gets important. A contractor’s overhead and profit is applied to the total cost of your project — let’s say 10% overhead plus 5% fee, for a total markup of 15%. But that 15% is calculated on top of costs that already include each subcontractor’s own markup.

Every subcontractor hired by the general contractor (GC) marks up their own work before the number ever reaches the GC. Subcontractor markup varies by trade and can run upwards of 25% depending on the type of work. Whether it’s union or non-union labor also makes a big difference. The prime contractor then adds their overhead and profit on top of that — so as an owner, you’re paying markup on markup.

To summarize how it stacks:

• Each subcontractor marks up their own labor and materials
• The general contractor marks up work performed by their own employees
• The general contractor then applies overhead and profit to the combined total — their own work plus all subcontractor costs

Don’t Pay for Contractor Markup Twice

Overhead and profit are largely unavoidable, and layered subcontractor markup comes with the territory. But these costs are negotiable — and your contract language is where you protect yourself.

10 Provisions Worth Including in Your Contract:

1. Cash discounts on materials should be passed back to you, not kept as additional contractor profit. Use them to pad your contingency.
2. Rebates and refunds from surplus materials or returns belong to you. If your contract doesn’t say so, they become additional contractor profit.
3. Small tools purchased by the contractor for your project should be turned over to you at completion. You paid for them.
4. No overhead and profit on sales or use tax. This gets overlooked and it adds up — make sure your contract excludes it explicitly.
5. No sales tax on labor. Labor is not a taxable good. Your contractor should not be charging it.
6. Changed work fees should not include overhead you’re already paying under the original contract. Especially if the change is executed within the original schedule and doesn’t extend the project duration.
7. Change order pricing should be provided within a specified timeframe. This should be agreed to before the changed work begins. Never let work proceed without a signed change order.
8. Ask for backup on billable labor rates. The difference between what workers are actually paid and the rate billed to you can include hidden markup. Request documentation.
9. Include audit rights in your contract — the right to examine the contractor’s records to verify the accuracy of pricing data used in change proposals.
10. Consider a guaranteed maximum price (GMP) contract where any cost overruns within the contracted scope are the contractor’s responsibility, not yours.

None of these provisions are adversarial — they’re just good contract practice. A reputable contractor won’t have issues with reasonable transparency. And anyone who does is worth a second look before you sign.