How do contractors calculate pricing?

The standard formula is: (Labor + Materials + Overhead) × Markup = Price. Calculate your true hourly cost (including insurance, truck, tools, and taxes), add material costs with a 15-25% markup, factor in overhead (office, phone, software, accounting), then apply your profit margin (typically 20-35%). A 50% gross margin means doubling your direct costs.

What is a fair markup for a contractor?

A fair markup depends on your overhead structure, but most successful residential contractors operate at 30-50% gross margin. The commonly cited '10-10 rule' (10% overhead + 10% profit = 20% markup) is outdated and barely covers real costs. A 35-40% markup on total job costs is a healthy starting point for solo operators. Larger companies with more overhead often markup 50-65%.

How to estimate a job as a new contractor?

Start with time: how many hours will this job realistically take? Multiply by your billing rate ($75-$150/hr depending on trade and market). Add materials at cost plus 15-25% markup. Add permit fees, dump fees, and any subcontractor costs. Then add your overhead allocation (10-20% of the subtotal). Finally, review the total — if it feels too low, it probably is. New contractors undercharge on 90% of their first jobs.

What is the 10-10 rule in construction?

The 10-10 rule adds 10% for overhead and 10% for profit to direct costs. On a $10,000 job, that's $12,000 total. While widely taught, most experienced contractors consider 10-10 inadequate — real overhead for a small contractor runs 25-35% of revenue, and 10% profit means one bad job wipes out a month's earnings. Think of 10-10 as a floor, not a target.

Should new contractors use flat rate or hourly pricing?

Start with hourly pricing until you learn how long jobs actually take. Once you have 20-30 completed jobs of similar scope, you'll know your real time per task and can switch to flat-rate pricing. Flat rate is better long-term because customers prefer price certainty, and as you get faster, your effective hourly rate increases without raising your published rate.

How much should a contractor charge per hour?

Your billing rate should be 2.5-3x your desired take-home pay divided by billable hours. If you want to earn $80,000/year and bill 1,200 hours, your minimum rate is $67/hr — but that doesn't include overhead. Add insurance ($5-$15/hr), vehicle ($10-$20/hr), tools and supplies ($5-$10/hr), and profit margin, and you're at $100-$150/hr minimum for most trades.

What is the biggest pricing mistake new contractors make?

Undercharging. Every experienced contractor says the same thing: they charged too little when starting out. New contractors base their rate on what they'd accept as an employee, not what it costs to run a business. They forget self-employment tax (15.3%), insurance, vehicle costs, unbillable hours (estimating, driving, admin), and callbacks. The result: working 60 hours a week for less than minimum wage.

How do I know if my prices are too low?

Three signs: you win almost every job (above 70% close rate means you're too cheap), you can't afford to take a week off without financial stress, and you resent the work because the pay doesn't match the effort. A healthy close rate is 30-50% — losing half your bids means your price is in the right range for the quality you deliver.

How to Price Your Work as a New Contractor

By the BidOrca Team•Updated April 2026•For contractors in their first 1-3 years

Every contractor gets this wrong at first. Every single one.

“Starting out, you will undoubtedly sell yourself short, then price [goes up from there].”
An electrician on r/electricians — stating the universal truth about new contractor pricing

You left your W-2 job making $30/hour. Now you're on your own. You figure $50/hour sounds right — almost double what you made before. You start bidding jobs. You win almost everything. Business is booming.

Then tax season hits. You owe $12,000 in self-employment tax. Your truck needs tires ($1,200). Insurance renewal is $6,000. Your tools broke ($800). And you realize you worked 2,500 hours last year and took home less than your old W-2 salary. The “boom” was a mirage. You were paying yourself less than minimum wage to run a business.

The Pricing Formula (Memorize This)

(Labor + Materials + Overhead) × Markup = Price

This is the foundation. Every pricing method — hourly, flat rate, cost-plus — is a variation of this formula.

The formula is simple. Getting the inputs right is where new contractors fail. Let's break each one down.

Step 1: Calculate Your True Labor Cost

Your labor cost is not what you want to earn per hour. It's what it actually costs to put you (or your employee) on a job site for one hour, including everything you don't see on a paycheck.

Cost Component	Annual Cost	Per Hour*
Desired take-home pay	$70,000	$58.33
Self-employment tax (15.3%)	$10,710	$8.93
Health insurance	$6,000–$12,000	$5.00–$10.00
General liability insurance	$3,000–$8,000	$2.50–$6.67
Workers' comp (if applicable)	$3,000–$10,000	$2.50–$8.33
Vehicle (payment, gas, maintenance)	$10,000–$18,000	$8.33–$15.00
Tools, equipment, replacement	$3,000–$8,000	$2.50–$6.67
Phone, software, office	$2,000–$4,000	$1.67–$3.33
Total cost to operate	$107,710–$140,710	$89.76–$117.26

*Based on 1,200 billable hours per year (realistic for a solo operator who also estimates, drives, and handles admin).

Read that bottom line again. To take home $70,000, you need to generate $108,000-$141,000 in revenue — before any profit margin. At 1,200 billable hours, that's a minimum billing rate of $90-$117/hour just to break even.

The contractor charging $50/hour? They're losing money on every job. They just don't know it yet.

Step 2: Price Materials Correctly

Materials should be billed at cost plus a 15-25% markup. The markup covers your time sourcing, ordering, picking up, transporting, and storing supplies. It's not greed — it's a real cost.

New contractor mistake: billing materials at cost to “be fair.” You spent 2 hours at Home Depot plus 45 minutes driving. That's nearly 3 hours of unbilled time. The 20% markup on $500 in materials ($100) barely covers the trip.

Check supplier prices before every job. The copper price from 3 months ago is wrong. Lumber changes weekly. If you're not re-pricing materials per job, you're eating cost increases. For a deeper dive, see our material estimation guide.

Step 3: Don't Forget Overhead

Overhead is everything you pay for that isn't tied to a specific job: your contractor's license renewal, accounting software, website, advertising, continuing education, and the 20 hours a week you spend estimating, invoicing, and driving between jobs.

The 10-10 rule says 10% overhead + 10% profit. Ignore it.

Real overhead for a solo contractor is 25-35% of revenue. If you allocate only 10%, you're subsidizing every job with unpaid time and unrecovered costs. Use the free profit margin calculator to see what your actual margins are.

Step 4: Apply Your Markup (And Stop Feeling Guilty)

“Estimate job hours, multiply by that rate, add materials with markup, add profit margin. That's your baseline pricing formula.”
A contractor on r/Contractor (40+ comments) — advice to a new GC who was “losing money on every bid”

Your markup is your profit. It's not extra. It's the reason you started a business instead of working for someone else. A 30-40% markup on total job costs is healthy. A 50% markup is not greedy — it's what funds growth, savings, and the ability to survive a slow month.

Markup %	Gross Margin	On a $10K Job	Verdict
10%	9%	$11,000 (profit: $1,000)	Barely surviving
20% (10-10 rule)	17%	$12,000 (profit: $2,000)	One bad job away from broke
35%	26%	$13,500 (profit: $3,500)	Minimum viable
50%	33%	$15,000 (profit: $5,000)	Healthy business
65%	39%	$16,500 (profit: $6,500)	Premium positioning

For a deeper understanding of markup vs margin (they're not the same), see our contractor markup guide.

Hourly vs Flat Rate: Which to Start With

“You really want to do hourly? Flat rate is absolutely the way to go. I charge flat rate based on $135/hr and nobody bats an eye at my prices.”
A handyman on r/handyman (20+ comments) — on why flat-rate pricing wins more jobs than showing your hourly rate

Start hourly. Switch to flat rate once you know your real time per task type (usually after 20-30 jobs). Here's why flat rate is better long-term:

Customers prefer price certainty — “$400” is less scary than “$135/hr and I'm not sure how long”
As you get faster, your effective hourly rate increases automatically
You stop being punished for efficiency
Comparing to competitors becomes harder (your price, not your rate)

“I started at $150 an hour baked into my flat rate pricing and struggled. I've raised my prices significantly and I'm at $350-500 an hour now.”
A plumber on r/Plumbing — showing the pricing evolution every contractor goes through

Five Signs Your Prices Are Too Low

You win more than 70% of bids. A healthy close rate is 30-50%. Winning everything means you're the cheapest — not the best.
You can't take a week off. If missing 5 days of billing creates financial stress, your margins are too thin to sustain a business.
You resent the work. Resentment is a pricing problem, not a motivation problem. When you're paid fairly, the work feels different.
You attract difficult customers. The cheapest customers are the most demanding. They haggle, micromanage, and leave bad reviews for perceived slights. Raise your prices and your customer quality improves.
Your bank account doesn't grow. Revenue is up but savings are flat. That means your margins can't absorb the overhead you're not tracking.

The First-Year Pricing Plan

Month	Action	Why
1-2	Calculate your true hourly cost using the table above	Stops the guessing
2-3	Price 10 jobs using the formula. Track actual time vs estimated	Calibrates your estimates
3-4	Raise prices 10-15%. Watch your close rate.	If close rate stays above 40%, you were too cheap
4-6	Build flat-rate price book for your top 10 job types	Speeds up quoting, improves consistency
6-9	Raise prices again. Add a service call minimum.	Filters tire-kickers, protects small-job margins
9-12	Review annual P&L. Adjust for year 2.	You now have real data, not guesses

Presentation Matters as Much as Price

A $12,000 estimate on a professional, branded PDF with line items wins over a $10,000 price texted from a pickup truck. Homeowners don't just compare numbers — they compare the feeling of professionalism behind those numbers.

Learn what every estimate should include and understand the difference between an estimate, quote, and bid. Label your documents correctly — it builds trust and has legal implications.

“You should really have a minimum service call fee starting around $200 to $250 just to show up.”
An electrician on r/electricians (95 comments) — the concept that your time has value before you touch a tool

Frequently Asked Questions

How many hours can I realistically bill per year?▾

A solo contractor bills about 1,000-1,500 hours per year. The rest goes to estimating, driving, admin, marketing, and callbacks. Most new contractors overestimate billable hours by 40-50%. Use 1,200 as your planning number until you have a year of real data.

Should I match my competitor's prices?▾

No. You don't know their overhead, their margins, or whether they're actually profitable. The contractor who charges $60/hr might be going broke. Price based on your costs and your target margin, not on what someone else charges.

When should I raise my prices?▾

Raise prices when your close rate exceeds 60%, when you're booked 3+ weeks out, when your costs increase (insurance, fuel, materials), and at minimum once per year. A 5-10% annual increase is standard. Customers who leave over a 10% increase were never your ideal customers.

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