Pillar Guide
Contractor financial operations: the complete guide
This guide covers every financial system a contractor needs to run a profitable business: understanding margin, pricing labor correctly, allocating overhead, managing change orders, and building proposals that close. Each section links to deeper guides and tools for that specific area.
1. Margin vs markup
The most common financial mistake contractors make: using markup and margin as if they mean the same thing. A 25% markup does not produce a 25% margin. It produces a 20% margin. On a $100,000 job, that error costs $5,556 in missed profit.
Correct pricing: Price = Cost ÷ (1 − Target Margin)
Example: $75,000 cost, 25% margin target → Price = $75,000 ÷ 0.75 = $100,000
2. True labor cost
Paying someone $28/hr costs you $34–38/hr after employer taxes, workers comp, and general liability. Estimating at the wage rate instead of the burden rate systematically underprices every labor-intensive job.
Burden rate components: FICA (7.65%) + FUTA/SUTA (2–4%) + Workers comp (5–18%) + GL (2–4%)
Total burden rate for most trades: 18–32% above base wage
3. Overhead allocation
Overhead is the fixed cost of running your business — vehicles, insurance, owner salary, admin, software. It does not go away when jobs slow down. Every job must recover a proportional share of overhead or you are subsidizing jobs with your own cash.
Overhead rate = Monthly overhead ÷ Monthly billable hours
Typical range: $18–$45/hr depending on company size and structure
4. Job pricing
The complete pricing formula layers all costs and produces a price at your target margin — not markup.
Total cost = Direct labor (burden rate) + Materials + Subs + Overhead
Price = Total cost ÷ (1 − Target margin)
5. Job costing
Job costing is the comparison of estimated costs to actual costs after a job completes. Without it, you cannot know which jobs are profitable and which are losing money — you can only guess from bank balance.
Track: actual labor hours, material receipts, sub invoices — all coded to job
After job: Actual margin = (Revenue − Actual cost) ÷ Revenue
Compare to estimated margin → identify where the variance occurred
6. Change orders
Contractors absorb $40,000–$80,000/year in unpaid change order work. The fix is operational, not confrontational: no work outside original scope starts without a written, signed change order.
7. Proposals
A proposal is not just a price. It is the document that justifies the price, defines the scope, and creates the legal foundation for the job. Proposals with specific scope, clear payment terms, and a defined approval process close at higher rates and dispute at lower rates.
8. Pricing strategy
Presenting one price gives the client a yes/no decision. Presenting three structured price points — floor, mid, and anchor — shifts the decision to which option, and anchor pricing makes the mid-tier look like exceptional value.