What is overhead and profit in construction?
Every construction business has two main money buckets: overhead and profit. Together, they determine how much you need to charge to stay in business and make money.
Overhead covers all the costs that keep your business running, even when you’re not on a job site. These expenses usually fall into two groups:
- Direct costs: Labor, materials, equipment rentals and subcontractor fees tied to projects.
- Indirect costs: Office rent, bookkeeping, business insurance, marketing, taxes and other general expenses that support your operations.
You need to factor in both direct and indirect costs to understand what it truly takes to complete a job — and what’s left over after the work is done.
Michael McSweeney, a general contractor and the California Homebuilding Foundation’s career technical education coordinator, learned that lesson early as a young painter:
“I didn’t understand what my costs were. I didn’t understand what my overhead was. I was getting 90% of the jobs I bid, and I thought I was just the world’s greatest businessman. The reality was I was undercharging for really good quality work.”
Don’t forget: your construction costs go beyond materials and wages.
“If you’re paying a guy $30 an hour, then there’s taxes, overhead, workers’ comp — all those things add up along the way,” McSweeney says. “So what does it actually cost you per hour to have a subcontractor on the job? That $30 could really be closer to $50.”
Once you know those true costs, you can calculate your profit margin — the money your business earns after you’ve covered every expense. Profit isn’t your paycheck; it’s what allows your company to grow and weather slower months.
How to calculate a typical general contractor profit margin
Your profit is what’s left after you pay for every project expense — both overhead and hard costs. Basically, it’s what your business keeps after covering the cost to get the job done.
If you’ve ever wondered how to calculate contractor profit, the math is simple once you know your numbers. Your overhead and job costs show what it takes to complete the work — your profit margin shows what you earn beyond that.
To make money as a contractor, you need to know how to calculate your net profit — what’s left after covering both job costs and overhead. (Gross profit is what you earn before expenses; net profit is what your business actually keeps.)
Keep in mind: Your profits do not automatically include your salary as the business owner. Include your salary as part of your overhead so you’re not working for free. Profit is the money that belongs to the company — what you can reinvest to grow your business or save for slower months.
Example: Formula for how to calculate profit margin for a contractor business
Here’s an example using a 10% target profit margin. Let’s say you bid $500,000 for a project — that’s your total revenue.
If your overhead is $100,000 and your job costs are $350,000, you’ll be on track for a 10% net profit.
Total revenue – overhead = job costs and profit
First, subtract overhead from total revenue:
$500,000 (your revenue) – $100,000 (your overhead) = $400,000 (your job costs and profit)
Next, subtract your job costs from that number to get your profit:
$400,000 (your job cost and profit) – $350,000 (job cost) = $50,000 (your profit)
Finally, divide profit by total revenue to get your profit margin:
$50,000 (profit) ÷ $500,000 (revenue) = .10 or 10% (profit margin)
In this case, your $50,000 profit equals 10% of total revenue. Double-check your numbers regularly to make sure your bids cover every cost — and that your profit margin stays where you want it. That 10% profit margin is a healthy goal for many contractors, depending on your costs and trade.
What’s a good profit margin for a contractor?
There’s no one-size-fits-all answer — profit margins vary by trade, project type and where you work. Many well-run contractors aim for a net profit margin between 5% and 10%, though top performers may reach higher. Actual results depend on trade, location and business model.
For example, 2024 Construction Financial Management Association (CFMA) data shows top-performing contractors earned about a 12% net income before tax. A National Association of Home Builders (NAHB) 2025 study found an average 9% net profit margin for single-family home builders in 2023.
A Turner & Townsend 2024 Construction Market Survey reported a global average profit margin of 7%, with higher results in some developing markets. In the U.S., contractor margins averaged around 5%, typically ranging from 3.5% to 7% depending on location and market conditions.
These benchmarks can help you see where your business stands compared to industry averages.
Average profit margins of U.S. contractors
| Contractor type | Average gross profit margin | Average net profit margin |
| General/prime contractors | ~20–22% | ~10–12%1 |
| Single-family residential builders | ~21% | ~9%2 |
| U.S. construction industry average (all sectors) | — | ~5% (range 3.5–7%)3 |
All this to say, while it helps to know these nationwide benchmarks, the more important factor is your own overheads and profits when it comes to setting prices.
How and when to raise your prices
Raising prices can be a sensitive topic for contractors who want to stay competitive without losing clients. Here are a few practical ways to do it strategically:
5 tips for adjusting your contractor pricing
- Compare your rates to the market. If you’re consistently winning bids too easily, your prices may be too low. Check what other contractors in your trade are charging through local associations, peer networks or mentors.
- Quote by project, not by the hour. Project-based bids help you include all costs — labor, materials and overhead — and ensure your markup protects your profit margin.
- Review your costs regularly. Follow bookkeeping best practices to track rising expenses and know when to adjust your markup. Staying on top of material and labor costs helps you raise prices gradually instead of all at once.
- Plan ahead for increases. Don’t wait until you’re under pressure to make changes. Plan modest increases in advance and communicate them early so clients aren’t surprised.
- Be transparent when asked. You don’t need to over-explain, but be ready with a simple reason — like higher material costs or better service standards. Most clients will understand.
Early in his career, McSweeney recalls going to a cocktail party and meeting a local industry veteran who told him he should be charging more. “I raised my prices after going to that trade show by 10%, and I didn’t have a single client blink,” he says.
Some customers will not be able to afford the new fees or may look for a bargain elsewhere, and that’s okay. Explain the benefits of your growing business to your customers. Work on strengthening your relationships with your current customers at the same time as you increase your rates so they will value your business enough to stay.
Reducing overhead isn’t just about cutting costs — it’s about running a lean, protected business.
