Cost-Plus Pricing: The Foundation Most Businesses Get Wrong

Why Cost-Plus Is the Starting Point

Cost-plus pricing is the simplest model: figure out what a job costs you, add a markup, and that is your price. Most small business owners think they already do this. Most of them are wrong.

The problem is not the formula. The problem is that almost nobody calculates their true costs. They account for materials and maybe direct labor, but they forget about the truck rolling, the insurance premium that renews quarterly, the office manager answering the phone, and the owner's own time. When you leave those out, your "markup" is just filling the gap your overhead already ate.

The Real Cost-Plus Formula

Here is the formula that actually works:

Price = (Direct Costs + Allocated Overhead) x (1 + Desired Profit Margin)

Direct Costs

These are the costs you can tie directly to a specific job:

• Materials — Everything the job consumes: lumber, wire, drywall, fixtures
• Direct labor — Wages, payroll taxes, workers' comp, and benefits for crew members on that job
• Subcontractors — Any trade partners you bring in
• Permits and fees — Job-specific permits, inspections, disposal fees

Allocated Overhead

This is where most owners fall short. Overhead includes every cost that keeps your business open regardless of whether you land another job:

• Rent or mortgage on your shop
• Vehicle costs (fuel, insurance, maintenance, payments)
• Tools and equipment depreciation
• Office staff salaries
• Software subscriptions and phone lines
• General liability and umbrella insurance
• Marketing and advertising
• Owner's salary (yes, this is a real cost)

To allocate overhead per job, take your total annual overhead and divide by the number of billable hours or jobs you expect to run.

Example: Your overhead is $180,000 per year. You bill roughly 1,800 hours of crew time annually. Your overhead rate is $100 per billable hour. A 40-hour job needs to absorb $4,000 in overhead on top of direct costs.

Setting the Markup

After you have covered costs and overhead, markup is your actual profit. Not your salary — that is already in overhead. Profit is what grows the business, covers the unexpected, and eventually lets you step back.

Industry-standard markups vary:

• Residential remodeling: 35%–50% over costs
• New construction: 15%–25%
• Service and repair trades: 50%–75%
• Professional services: 100%–300% over direct labor cost

If your markup only gets you to breakeven, it is not a markup. It is survival.

Common Mistakes

Forgetting owner compensation. If the owner does not draw a real salary and instead "takes what is left," cost-plus math breaks because a major cost is invisible.

Using material cost as the base. Some owners mark up materials 20% and think they have priced the job. Materials are often the smallest component of total cost.

Ignoring non-billable time. Your crew does not produce revenue 2,080 hours per year. Between drive time, training, callbacks, weather days, and admin, you might get 1,400 to 1,800 billable hours. Your overhead rate must reflect reality, not a fantasy schedule.

Not updating annually. Insurance goes up. Fuel fluctuates. If you set your overhead rate three years ago and never revisited it, you are working off bad data.

When Cost-Plus Falls Short

Cost-plus is the floor, not the ceiling. It tells you the minimum you can charge and stay in business. It does not tell you the maximum the market will bear or the value you deliver. Once you know your cost-plus number, read the value-based pricing guide to learn how to charge above that floor.

Putting It Into Practice

1. Pull your books from last year and total every overhead expense
2. Count your actual billable hours or completed jobs
3. Divide to get your overhead rate per hour or per job
4. On your next estimate, add direct costs plus allocated overhead
5. Apply your target profit margin on top

If the resulting price feels high, that is often a sign you have been undercharging. Run the numbers. The math does not lie.