Pricing Your Own Work: Markup, Margin and Overhead

Half past nine on a Sunday and the total line is still empty

The bathroom was measured on Thursday. The merchant's quotation for the suite, the tray, the boarding and the tiles came back on Friday and it is sitting in the other window. Six days on site, near enough, maybe seven if the soil pipe is where you think it is. Everything above the last line is arithmetic you have done a hundred times. The last line is a rate, and the rate came from somewhere you would rather not examine too closely — what the last customer accepted, or what did not make the woman in the kitchen flinch, or a number that has not moved since the year you bought the van.

That rate is the answer to a division most people in the trade have never done. It carries two different things at once. One is the cost of this job: the suite, the adhesive, the tip run, the wages of anybody who turns up. The other is a share of the cost of being a business at all — the van, the insurance renewals, the accountant, the ladder that walked, the Sunday evening you are currently spending. The first appears on a job sheet. The second never appears on any job sheet, in any month, which is exactly why it goes missing from the price.

What follows is not a page about what to charge. The price of a plumber-day in one town is not the price of one forty miles away, which is why this site publishes no rate list. It is a page about the divisions that have to happen before a rate means anything: what the year costs, how many hours of it anybody actually pays for, what your own time is worth against what is left at the end, and where a single percentage on top of everything quietly stops working.

What the year costs before a single job is priced

Overhead is not a percentage. It is a list of real payments with dates on them, most of which arrive whether you worked that month or not, and the only sane way to see it is annually. The van and everything that keeps it moving. Public liability, professional indemnity if you design anything, and employer's liability if anybody works for you — which in Great Britain is not optional, the Employers' Liability (Compulsory Insurance) Act 1969 making it a criminal matter to be without. Tools that break or walk, and test equipment that goes away and comes back with a calibration certificate. The phone, the accountant, the software, the bank charges, the licence your work needs, the storage unit, the waste carrier account.

Then the lines nobody counts, because they arrive as evenings rather than invoices. Under regulation 7 of the Construction (Design and Management) Regulations 2015 the client duties on a domestic project pass to the contractor in most arrangements, so the construction phase plan required by regulation 12 is your unpaid Sunday and nobody else's. The American equivalent is the accident prevention programme and the competent-person duties in OSHA 29 CFR 1926 Subpart C. Tickets expire on their own calendar and certificates get re-sat. None of it is billable and all of it is compulsory.

The divisor is the number that decides everything

Overhead per hour is the annual total divided by the hours you actually invoice. Everybody assembles the numerator carefully, from bank statements and renewal notices, and then guesses the denominator — and the denominator is where the larger error lives, because it is the only one of the two that nobody sends you a letter about.

Start from the calendar and take things off it. Statutory paid holiday in Great Britain is 5.6 weeks under regulations 13 and 13A of the Working Time Regulations 1998 — four weeks and a further 1.6, which for a five-day week is twenty-eight days. Federal law in the United States sets no equivalent: the Fair Labor Standards Act requires no paid vacation and no paid sick leave at all, which makes the time a decision rather than an entitlement, not free. A sole trader who takes no holiday has paid for it in a currency the accounts do not record. Then sickness, which is unpredictable and not zero, the days lost to weather in trades that have them, and the days spent on training that expires.

Now take the second bite, out of the day rather than the year, because this is the one that surprises people. Travelling between jobs. The merchant run because the fittings were wrong. Loading and unloading. Waiting for the electrician who said Tuesday. The half hour on the phone about a job that finished in March. Writing the invoice, then chasing it. Setting up and clearing away, which on a house somebody is living in is a serious daily overhead nobody bills. Hours awake, hours worked and hours anybody pays for are three different quantities, and they diverge much further than the trade admits.

The consequence is arithmetic and it is unforgiving. Build a rate assuming you will invoice every working hour and then invoice two-thirds of them, and you have not missed overhead recovery by a third: you recovered two-thirds of what you needed, so the shortfall per invoiced hour is half again on top of what you charged. The error is invisible for eleven months, then shows up as a year that was busy from January to December with nothing at the end of it — and the natural diagnosis is that the rate was too low when the fault was the divisor. It also means utilisation is worth as much as price. An hour moved from the unbilled column to the billed one carries no extra overhead at all, which is why an afternoon spent fixing how you buy materials can pay better than an afternoon on the tools.

Keep the vocabulary straight while you do it, because three words get used interchangeably and are not interchangeable. AACE International Recommended Practice 10S-90 defines them separately: overhead is the cost of the business that no single job causes, burden is what sits on top of a wage to make it the cost of employing somebody, and margin is what is left after both. Fold burden into overhead and you will recover it twice on labour-heavy work and not at all on the rest.

1. Take twelve months of bank and card statements, not a memory, and total every payment that would have happened even if you had booked no work. That is the numerator, once, for the year.
2. Count the weeks you intend to be available: fifty-two, less the holiday you intend to take, less any public holidays not already sitting inside that figure — the statutory 5.6 weeks can absorb them, and subtracting both is a double count — less an honest allowance for illness and for training that falls due.
3. Multiply by the days you work in a week and the hours you are genuinely on site in a day, ending at the hours that could in principle be invoiced.
4. Subtract the unbilled working hours: travel, merchant runs, quoting and measuring, invoicing and chasing, van maintenance, waiting on other trades, setting up and clearing down.
5. Divide the annual overhead by what is left. That is what every invoiced hour must carry before your own wage and before any profit, and it belongs in the cost stack rather than in the markup.
6. Write the utilisation you have just assumed as a plain fraction of available hours, date it, and test it against reality in December — it is the assumption most likely to be wrong and the easiest to check.

Your own wage is a cost line, not what is left in the account

The commonest structural fault in a small builder's pricing is treating the owner's living as the residue. Net profit on a Schedule C, or the taxable profit an HMRC self-employed computation arrives at, is what the business earned after everything except you. If your own wage is not in the cost stack, every price you write has a hole in it exactly the size of what you need to live on, and it is a hole you will only find by failing to fill it.

There are two hats and they are paid for different things. On the tools you are labour, and the price of that hour is what you would have to pay a competent person to do the same work, burden included — no more, because a business does not become efficient by valuing its owner sentimentally, and no less, because a day spent tiling is a day not spent selling, buying or running anything. Whatever survives that wage and every other cost is the return on owning the firm, which is a separate thing entirely. Collapsing the two is how a sole trader ends a good year unable to say whether they ran a profitable business or had a well-paid job with a van attached to it.

Legal form changes the vocabulary and not the arithmetic. A sole trader draws; a limited company or an S corporation pays a salary, and in the United States the Internal Revenue Service's long-standing position on reasonable compensation for shareholder-employees means that salary is not a number you may set to zero for convenience. Whichever applies, the figure goes above the line, in the cost the markup is calculated on, not below it where it competes with profit for whatever survives.

The quotes you did not win are inside the price of the one you did

Pricing the bathroom took an evening. Measuring it took most of a morning, including the drive. Do that arithmetic across a year and it is one of the largest single lines in your unbilled hours — and unlike the others it scales with how often you lose. If a quote costs you half a day all in and you win one in three, then every won job carries a day and a half of selling. That time is either inside your overhead, and therefore inside your rate, or it is nowhere, being paid for out of your evenings.

Once the number exists there are two levers. Quote less — qualify harder on the phone, decline the ones you can tell are shopping, and where the trade allows it charge for a measured survey and credit it against the job if it goes ahead. Or win more, which usually means quoting a narrower kind of work rather than dropping the price. The win rate is itself diagnostic: a very high one suggests pricing below the market, a very low one suggests quoting into a market that was never going to buy from you, and both are cheaper to discover in your own diary than in a bank statement.

Money that passes through you and was never yours

A bank balance is not a profit, and this is where small firms most often mistake one for the other. Sales tax or VAT collected on somebody else's behalf, deductions held for the revenue, retention held back by a main contractor, a deposit taken against material not yet ordered — each sits in the same account as your money and looks exactly like it. Spending it is not fraud and not even unusual; it is borrowing from a creditor who has not asked yet, and the asking has a fixed date.

Two United Kingdom mechanisms are worth understanding before you price rather than after you invoice. The domestic reverse charge in HMRC VAT Notice 735 moves VAT accounting on many business-to-business construction supplies to the customer, so a subcontractor accustomed to holding that cash for a quarter no longer does — a serious working capital change with no effect whatever on profit, which is exactly what catches a firm pricing off its bank balance. And the Construction Industry Scheme in HMRC's CIS340 requires a contractor to deduct from the labour element of a subcontractor's payment at the rate their registration attracts and pay it over. Neither is a cost; both change when money is yours to use.

On the American side the discipline is the opposite: nothing is withheld for you at all. A sole proprietor pays through quarterly estimated payments on Form 1040-ES and carries self-employment tax on Schedule SE — both halves of it, employer and employee, which an employed tradesman never sees on a payslip. That belongs in what an hour of your own time has to earn, not in an unpleasant April. One entitlement runs the other way and is routinely forgotten: on business-to-business work in the United Kingdom the Late Payment of Commercial Debts (Interest) Act 1998 gives a statutory right to interest and a fixed recovery sum, which a domestic customer never triggers, so it is worth knowing which of your customers you may charge for slow payment. When a payment falls due in the first place is settled on this site's stage-payments guide.

What five per cent off actually costs

The discount conversation happens at the door, cheerfully, with a round number attached, and the arithmetic behind it is short enough to do standing up. If your net margin is a given share of price and you cut the price by a smaller share of it, what is left is the difference between the two — and to earn the same money as before you need the ratio of the old margin to the new one in extra work. Not extra profit and not extra turnover either — turnover rises by rather less, because every one of those extra jobs is sold at the reduced price. Extra work, at extra risk, out of the same year.

That ratio behaves violently at the margins most small contractors actually run at, and this is the table worth carrying in your head rather than in a spreadsheet.

Read it backwards too, because that is the more useful reading: a firm that raises its prices can lose a meaningful share of its work and still finish ahead, which is the arithmetic case for walking away from the job you can already tell will be difficult. Underneath both readings sits the break-even figure — annual overhead divided by the share of each pound of turnover that survives direct costs — which is the revenue the year has to produce before any of it is yours. That number, not the length of the order book, is what separates profitable from busy. For a comparison against the wider trade rather than against your own last year, the National Association of Home Builders publishes its Cost of Doing Business Study and the Construction Financial Management Association its Construction Industry Annual Financial Survey; both are aggregates from other people's books, for asking why you sit where you do rather than for setting a target.

The only proof is the job you finished last month

Every figure on this page is an assumption until a finished job tests it, so test them on the cheapest possible sample: write the quoted hours on the job file, write the actual hours beside them as the week goes, and do the same for the material. Whether a job currently running is ahead or behind is a live measurement and a different exercise, handled on this site's job-tracking guide; what is wanted here is the backward look, on work already finished and paid for. Ten jobs of that beats any amount of reasoning on a Sunday evening, because it catches the two failures that never announce themselves — a trade you under-price by a predictable amount every time, and a customer type whose jobs always run long for reasons that have nothing to do with the work.

Then rebuild the divisor once a year, in a quiet week, from what actually happened rather than from what you planned. The van gets older and dearer to keep. Insurance moves. The phone bill does not. A rate built on last year's overhead and the year before's optimism about billable hours is not a price, it is a hope with a decimal point in it — and the whole point of doing the division is that the number you write at half past nine on a Sunday is one you can defend on a Monday.