Overhead and profit, in plain numbers

You add up materials, add up labor, put something on top, and send the estimate. The job goes fine. At the end of the year the bank balance has barely moved. That gap almost always lives in the markup.

Here is one job, priced both ways.

The job: a 320-square-foot deck rebuild

Tear out an existing wood deck, rebuild on new footings with composite decking and railing. Two carpenters, five days.

Burdened labor is the wage plus payroll taxes, workers' comp, and any benefits. If you are costing at the raw hourly wage, every number after this one is already low.

These are plausible numbers for one job in one market, not benchmarks. Materials, permit fees, rental rates and the burden on a wage all move by region and trade. Substitute your own.

Price one: direct cost plus a bit on top

Add 20 percent. That is $13,008, and you round it to $13,000. The estimate goes out, the customer signs, and you expect to keep around $2,160.

The "10 and 10" version lands in the same place. Applied the usual way — 10 percent overhead and 10 percent profit, both on the same base — that is 20 percent, so the same $13,008. Compound it instead, 10 percent and then 10 percent again, and you get $13,116. Either way it feels like a real markup.

Direct cost, overhead and profit are three different things

Direct cost is anything you can point at a specific job — the materials, the crew hours, that dumpster, that permit.

Overhead is what the business spends whether or not that deck exists: the shop, the insurance, the trucks between jobs, the estimating hours, the callback you did for free in March.

Profit is what remains after both are paid — the return for carrying the risk, on top of paying everyone who worked, including you. That last part gets skipped. If your field hours are not in direct labor and your office time is not in overhead, what you call profit is really your unpaid wage, and you will keep undercharging.

This is a costing distinction, not a tax one. On the tax return a sole proprietor's wage and profit arrive as one figure — net income on Schedule C — which is why the split has to be made deliberately when you price.

Work out your own overhead rate from last year

Pull last year's profit-and-loss statement and sort every line into "job" or "business". A small remodeler with an owner and two carpenters might land here:

That first line is the one you cannot copy off the statement. A sole proprietor or single-member LLC has no owner's-pay line to sort, for the reason above — you decide what your non-field time is worth and add it by hand. An S-corp owner on a W-2 salary will find it there; only the non-field share belongs here.

Now divide by last year's total direct job costs — say $430,000:

$123,400 / $430,000 = 0.287 -> 29% overhead rate

That rate assumes you do the same volume again. Drop to $300,000 of direct cost and the same $123,400 needs a 41 percent rate. Recheck it whenever volume or fixed costs move.

Know the limitation. A flat rate on direct cost charges a material-heavy job more overhead than a labor-heavy job of the same size, even though estimating and supervision usually run the other way. Some contractors allocate overhead per field labor hour instead. Pick one, use it on every job, and have your accountant check it.

Price two: the same deck, fully costed

Direct cost                    $10,840
+ Overhead at 29%               $3,144
= Break-even                   $13,984

Then add profit. Watch markup against margin: 10 percent added to $13,984 gives $15,382, which is only 9.1 percent of the price. To keep a true 10 percent of what the customer pays, divide instead:

$13,984 / 0.90 = $15,538 -> price it at $15,540

The gap is $2,540. The $13,000 estimate never reaches break-even: it is $984 short of this job's share of overhead. It still puts $2,160 toward the office, so one job like that will not sink you. Price a year of them that way and the shortfall is the year's loss, found when the books close.

"10 and 10" is a convention, not a rule

Nobody can point to where 10 and 10 started. Where it is entrenched is insurance restoration: when a contractor coordinates several trades on a claim, carriers commonly add 10 percent overhead and 10 percent profit. Even there it is custom, not law. The "three trades" test adjusters use to decide whether it is owed is a rule of thumb with no statutory footing in most states, and Xactware, which makes the estimating software, does not endorse it.

Public and institutional contracts do cap markup — 10 and 15 percent are both common — but each agency at its own number, usually only on change orders and force-account work. That is a ceiling on what they reimburse, not a method for pricing your work. Read the contract.

What makes 10 percent survivable is a large direct-cost base, mostly subcontracts, spreading a modest office over a lot of dollars. A two-truck remodeler carries a similar office over a fraction of that volume. The question is not whether 10 and 10 is standard. It is whether 10 percent covers your $123,400.

Insurance and bonding sit heavier on some trades

Workers' comp is priced by class code, and the spread is wide: roofing and structural framing sit at the top per $100 of payroll, finish trades and office classifications well below. It rides on payroll, so it belongs in your burdened labor rate and moves with the job. General liability, license bonds and payment bonds are overhead, paid whether you work or not. Rates, bond requirements and license classes vary by state; your carrier and your surety agent have your numbers.

That is the real reason a borrowed markup fails: overhead is specific to one business.

Carrying the number into every estimate

Once you know your rate, the risk is forgetting to apply it under pressure. In DoneQuote your services carry prices with the markup already built in, so an estimate drafted from a photo or an email starts from the costed number, not a round figure.

Summary

• Direct cost is job-specific; overhead is what the business spends regardless
• Overhead rate = annual overhead / annual direct job costs, redone when volume moves
• Profit sits on top of break-even, after the owner's labor is paid
• Divide by (1 − margin) to keep a real percentage of the price
• Treat 10 and 10 as someone else's arithmetic until you check your own