Price every job from your own costs, not from what the trade up the road charges. Add up your direct costs (materials, your labour at a real hourly rate, subcontractors, disposal, permits), add a share of your overhead, then add a profit markup on top. The single most common pricing mistake is confusing markup with margin: a 20 percent markup does not leave you a 20 percent margin. Get that one distinction right and most of your pricing problems disappear.
Markup is not margin
Markup is the percentage you add to your cost. Margin is the percentage of the final price that is profit. They are different numbers on the same job.
- A job costs you $1,000. You add 20 percent markup, so you charge $1,200. Your profit is $200. But $200 out of $1,200 is a margin of about 16.7 percent, not 20 percent.
- To actually keep a 20 percent margin, you charge $1,250 (because $1,000 is 80 percent of $1,250). That is a 25 percent markup.
The pattern to remember: the margin you keep is always smaller than the markup you added. Quoting on a 20 percent markup while telling yourself you are making 20 percent is how busy trades end up with no money at year end. Many established trades work on a markup of 30 to 50 percent on cost once overhead and profit are both built in.
Recovering your overhead
Overhead is everything you pay whether or not you are on a job: insurance, vehicle, phone, tools, software, accountant, advertising and your own unbillable hours. Total it for a year, then spread it across the hours you can realistically bill. If your overhead is $40,000 a year and you can bill 1,200 hours, that is about $33 of overhead loaded onto every billable hour before you have made a cent of profit or paid yourself a wage. Skip this step and you will quote too low without ever knowing why.
Materials markup
Marking up materials is normal and fair: you carry the cost, the risk of waste, the warranty hassle and the time spent sourcing. A materials markup of 10 to 20 percent is common in the residential trades, more on small fiddly orders. Just be consistent, and quote one all-in number. Splitting out a separate undisclosed "handling fee" on top of an advertised price can stray into drip pricing, which is prohibited under the federal Competition Act.
A worked example
A bathroom tiling job. All figures are illustrative.
- Materials (tile, adhesive, membrane, grout): $1,400 plus 15 percent markup = $1,610
- Your labour: 40 hours at a $60 charge-out rate = $2,400
- Disposal and sundries: $200
- Direct cost subtotal: $4,210
- Overhead recovery: 40 hours at $33 = $1,320
- Cost to you, all in: $5,530
- Profit markup at 15 percent: $830
- Price to quote: $6,360, plus applicable sales tax shown on top
Notice the profit is calculated on the full cost, overhead included. That $830 of profit is a margin of about 13 percent of the $6,360 price, which again shows why markup and margin are not the same number.
Pricing fixed price versus time and materials
- Fixed price suits well-defined jobs. The client gets certainty; you carry the risk of underestimating, so build in a contingency.
- Time and materials suits open-ended or unknown work (old houses, damage). The client carries the overrun risk, but you must track hours honestly and update them as you go.
Whichever you choose, write the basis into the quote. In Ontario, a written estimate is protected by the Consumer Protection Act: you cannot charge more than 10 percent above it without the customer's written agreement, so price carefully and use a signed change order for anything extra. See Quoting to Win Without Racing to the Bottom.
Common mistakes
- Confusing markup and margin. The classic. Your margin is always less than your markup.
- Forgetting overhead. Direct cost plus profit, with no overhead recovery, quietly loses money on every job.
- Pricing your own labour at zero. Your time is the most expensive thing on the job. Put a real rate on it.
- No contingency on fixed-price work. One surprise wipes out a thin margin.
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