Gross Margin
Gross margin in construction: how to calculate it, what a healthy number looks like for remodeling contractors, and why it's the most important number in your business.
Calculation Formula
Gross Margin % = ((Revenue - Direct Costs) / Revenue) × 100 Real Contractor Example
A contractor bills $100,000 for a roof replacement. The materials cost $45,000 and labor costs $25,000.
Gross Margin Is the Only Number That Matters on a Job
Revenue tells you how much work you did. Net profit tells you what the year looked like. But gross margin on a per-job basis tells you whether any given project actually contributed to your business or quietly drained it.
Gross margin is the percentage of revenue remaining after paying all direct project costs — labor, materials, subcontractors, and equipment. It does not include overhead. It answers the question: "Before I pay for my truck, my office, my insurance, and my own time running the company — did this job contribute to those costs or cost me money?"
A job with a 28% gross margin on $80,000 of revenue generates $22,400 of gross profit. Out of that $22,400, you pay your overhead (rent, admin, vehicle costs, marketing) and the remainder becomes net profit. If your overhead runs 15% of revenue, you have 13% net profit, or $10,400.
A job with a 10% gross margin on $80,000 generates only $8,000 of gross profit. After 15% overhead ($12,000), that job lost you $4,000.
Healthy Gross Margin Benchmarks for Remodeling Contractors
Based on NAHB Cost of Doing Business Study data and industry benchmarks, here is what gross margin looks like by contractor type:
General Contractors who subcontract most of the work: Target 18–25% gross margin. Because direct costs are primarily sub labor and materials, margins tend to be lower but overhead is also lower.
Design-Build Remodelers with significant self-performed work: Target 28–38% gross margin. Higher labor intensity means more burden cost exposure, but also more opportunity for efficiency gains.
Specialty Trades (electricians, plumbers, HVAC): Target 35–50% gross margin. Higher margins reflect higher skill premium and lower material intensity relative to labor.
If your gross margin is consistently below 20% and you are self-performing significant work, you are likely underpricing or under-tracking labor burden.
Gross Margin vs. Markup — The Most Expensive Confusion in Construction
The most common financial error in remodeling is confusing markup with margin. They are not the same number and conflating them can cost a contractor tens of thousands of dollars per year.
If your direct costs on a job are $60,000 and you apply a 30% markup, you charge the client $78,000. Your gross profit is $18,000 — a 23.1% gross margin, not 30%.
If you actually want a 30% gross margin, you need to divide your costs by (1 - 0.30 = 0.70). So: $60,000 / 0.70 = $85,714. You need to charge $85,714 to achieve a 30% margin on $60,000 of direct costs — nearly $8,000 more than the 30% markup calculation produces.
Every job you price using markup instead of margin leaves money on the table.
Frequently Asked Questions
What is a good gross margin for a remodeling contractor?
For residential remodeling contractors, target 28–35% gross margin. General contractors who subcontract most work typically run 18–25%. If your gross margin is below 20% on self-performed work, you are either underpricing or mis-allocating labor burden costs.
How do I calculate gross margin on a job?
Gross Margin % = (Revenue – Direct Costs) / Revenue × 100. Direct costs include direct labor (burdened), materials, and subcontractors. Do not include overhead or your salary in direct costs — those come out of gross profit to determine net profit.
Why does my gross margin look fine but my bank account is always low?
This is usually a timing issue (cash flow vs. profitability) or an overhead allocation problem. If gross margin looks healthy but there's no cash, check: (1) Are you collecting progress payments on schedule? (2) Is your overhead actually higher than what you've budgeted? (3) Are you tracking all direct costs — especially material purchases that hit your card before the invoice is logged?
Put This Into Practice
Knowing the definition is step one. RemodelFin tracks this in real time on every job — no spreadsheets.