How to Price a Job: Materials, Labor, Overhead and Margin

Put the price on an estimateDownload the job pricing worksheet (PDF)

The four numbers in a job price

Every job price is built from four parts. Materials: what you buy for this job, including waste, delivery and disposal. Labor: the hours the job takes, at what those hours cost you (your own pay, or your crew's wages plus payroll costs). Overhead: the costs of being in business at all, such as insurance, vehicle, phone, software, accounting and advertising, which no single job causes but every job has to pay for. And margin: the profit that is left after all three.

The US Small Business Administration describes fixed costs as costs that do not change as your sales rise or fall, and gives rent, insurance and salaries as examples. Most of your overhead is fixed in that sense. The mistake most people make is to forget it entirely, price materials plus their hourly rate, and then wonder why a busy year leaves so little in the bank.

Work out your overhead rate once

The simplest way to charge overhead fairly is per billable hour. Add up a year of overhead and divide by the hours you actually expect to bill, not the hours you are at work. Travel, quoting, admin and the days lost to weather are not billable, so they come out of the second number.

A worked example: a one-person painting business with $24,000 a year of overhead and 1,200 billable hours has an overhead rate of $20 per billable hour. Every hour on every job has to carry that $20 before it earns anything. Recalculate once a year, or when a big cost such as insurance or a vehicle changes.

Price a job, step by step

The example is painting one room: walls and ceiling, two coats.

1. Cost the materials

Paint, primer, tape, filler, sheeting and a share of rollers: $180, including a little waste and the trip to the supplier.

2. Cost the labor

Ten hours, including preparation and clean-up. If your labor costs $45 an hour, that is $450.

3. Add overhead

Ten hours at the $20 overhead rate is $200. The job's total cost is $180 + $450 + $200 = $830.

4. Apply your margin

For a 20 percent margin, divide the cost by 0.80: $830 ÷ 0.80 = $1,037.50. Of that price, $207.50 is profit, which is exactly 20 percent of $1,037.50.

This is where the arithmetic catches people. If you had added a 20 percent markup to the $830 instead, you would charge $996, and your profit of $166 would be only 16.7 percent of the price. Markup is calculated on cost; margin is calculated on the price. Investopedia's explanation of margin and markup covers the general case, and the worksheet with this post has a table that converts one into the other: a 20 percent margin needs a 25 percent markup.

5. Spread it across the lines

Do not put the profit at the bottom as one lump. Give each estimate line its own materials, hours, overhead and margin. If the client drops the ceiling from the job, the price for the walls still carries its own share of overhead and profit, and you have not quietly agreed to do the walls at cost.

6. Sense-check against the market

Compare the result with similar jobs you have done and what clients in your area expect. If the number is too high, reduce the scope (one coat on the ceiling, client moves the furniture) rather than the margin. A smaller job at your margin is still a good job; the full job at no margin is not.

Charge by the hour or by the job?

The same arithmetic works for both, but clients read them differently. An hourly rate puts the risk of a slow job on the client and invites questions about every hour. A fixed price per job puts the risk on you, but rewards you for working efficiently and is easier for a client to say yes to. Many trades quote the job and keep an hourly rate for changes and extras.

If you quote by the job, the hours in step 2 are your own estimate, and that is where pricing goes wrong most often. Add time for the things that always happen and never get written down: setting up and packing away, the trip to the supplier for the part you did not know you needed, and the conversation with the client at the end. If you quote by the hour, your hourly rate must still carry overhead and margin: in the example, $45 of labor plus $20 of overhead at a 20 percent margin is $81.25 an hour, not $45.

Putting the price on an estimate

Once each line has a price, the estimate is quick. In the free estimate maker, enter one row per line with its quantity and unit price; the tool works out each amount, the subtotal, any discount and the tax, in whole cents so the totals always add up. Use the Terms box to say what is not included, and set a valid-until date shorter than the time your supplier holds its prices.

A few habits keep pricing honest over time. Write down actual hours when each job finishes and compare them with the estimate; most people find one kind of job they consistently underestimate. Keep a short price list of your common lines so you are not re-pricing a standard task from scratch. On a paid Fynl plan those can be saved as products and packages that drop into a quote. On paper, a single sheet does the same job.

Our step-by-step estimate guide covers the site visit that gives you the quantities and hours, and the estimate vs quote guide covers whether to promise a fixed price at all.

The estimate maker is one of several no-sign-up tools on our free tools page, alongside the invoice generator and a QR code generator for your quotes and flyers.

Questions people also ask

Sources

• US Small Business Administration — Calculate your startup costs
• Investopedia — Profit margin vs markup
• Investopedia — Markup