How contractors make money

Every bid starts as an estimate. First come the direct costs, everything this one job needs: materials, your crew's hours, the quotes from subcontractors (other contractors you hire for part of the job, like an electrician) and the permit. Then a contingency: a cushion for what nobody can see yet, like rot behind a wall.

Next comes overhead: the costs no single job pays for, like the truck, insurance, the office and the hours spent estimating jobs you don't win. Each bid carries a share of it. The profit goes on last. In our example below, $22,500 of direct costs plus a 10% contingency and a 10% share of overhead make a full cost of $27,000, and a profit of 10% of the price brings the bid to $30,000.

These numbers are our example.

Price the crew at what an hour really costs you, not the bare wage. The median carpenter earned $29.12/hour in May 2025, and on top of pay, remodelers paid about 19.1% more in 2022 for payroll taxes, workers' compensation and benefits. That's why our example prices 160 hours of crew time at $35/hour.

Our example numbers here are 160 hours and $35/hour; the others come from the sources below.

The squeeze is real. Out of each dollar US remodelers took in during 2022, only about 24.1% was left after materials, subcontractors and payroll, and that slice had to pay for the truck, the office, insurance and the owner's profit. A bid that misses its costs by a few percent can wipe out the profit. The free lesson walks you through an estimate line by line.

Once the client signs, the price is fixed but the costs aren't. On a fixed-price job, every dollar the job runs over comes out of the profit. Comfort Systems, a big heating, plumbing and electrical contractor, kept 24.1% of its $9.1B of revenue in 2025 after the cost of doing the work (the same share as the remodelers' slice above, by chance), and its annual report puts incorrect estimates on fixed-price bids first in its list of things that could hurt its results.

Extra work needs a change order: a written note of what changes, what it adds to the price and how many extra days it takes, signed before the work is done. In California, extra work on a home improvement job is part of the contract only if the change order was signed before that work started. Other states set their own rules.

Cash is the other half. In California, a home improvement job's down payment can't be more than $1,000 or 10% of the price, whichever is less, and later payments can't run ahead of the work done. So there, the contractor pays for materials and crew time first and gets paid as the work gets done.

Good contractors check the job while it runs: how much has been spent against how much of the work is done, while there's still time to act. Even big public builders run over. On the construction contracts the Texas Department of Transportation closed from September 2017 to August 2019, it paid 3.5% more than the original contract amounts, within its own target of 5%.

Many states license contractors, each with its own rules. In California, a job of $1,000 or more, counting labor and materials, or any job that needs a building permit, takes a licensed contractor, and every active license needs a $25,000 contractor's bond on file.

A bond isn't insurance for the contractor. A surety company promises to pay the client if the contractor doesn't do the work or pay its bills, and then the contractor has to pay the surety back. Federal construction contracts above $150,000 need a performance bond (the work gets done) and a payment bond (the subcontractors and suppliers get paid), each normally 100% of the contract price.

A new contractor may not meet a surety company's requirements yet. The US Small Business Administration guarantees bonds for small businesses that might not qualify otherwise, on contracts up to $9M, or $14M for federal work. Insurance comes on top: liability insurance for damage to other people or their property, and workers' compensation for injured workers, priced by your trade and your payroll.

A contractor can do the work with its own crew or hire subcontractors, and different kinds of contractor mix them very differently. In 2022, commercial builders paid 45.4% of what they took in to subcontractors; remodelers paid 19.3%, and plumbing and heating contractors only 7.1%.

A general contractor's real product is running the job: collecting the trades' prices, scheduling them and carrying the risk if a price turns out wrong. A trade contractor, like a plumber, sells its own crew's skilled hours. Your own crew costs money every week, busy or not; a subcontractor costs more an hour but only when you need one.

Work comes in seasons too. US construction had 6.8% more jobs in July 2025 than in January 2025, before adjusting for the seasons, the BLS counts. A crew big enough for summer has to be paid, or let go, in the quiet months.