General contractors make money by marking up the subcontractors and materials they buy, keeping the spread on work their own crews perform, holding onto whatever they don’t spend against a fixed-price bid, charging premium rates on change orders, and collecting wholesale discounts and rebates from suppliers. After paying for insurance, office staff, vehicles, and everything else that doesn’t sit on a single invoice, net profit margins typically land somewhere between 5% and 10%. The rest of this article walks through each of those income streams and the costs that quietly shrink them.
Markup on Subcontractors and Materials
The most visible revenue stream is the markup a contractor adds to every outside cost on the job. Under a cost-plus structure, the client pays for each subcontractor invoice, material purchase, and permit fee, and the contractor adds a percentage on top. That percentage commonly falls between 10% and 25%, and it can run higher on complex or high-risk work. When a plumbing subcontractor bills $5,000 for a rough-in and the markup is 20%, the client pays $6,000. The extra $1,000 goes to the contractor.
That $1,000 is not profit. It is the pool the contractor uses to cover every indirect cost that doesn’t appear anywhere on the client’s ledger:
- General liability, commercial auto, and umbrella insurance policies
- Office rent, administrative staff, accounting, and estimating software
- Trucks, trailers, tools, and fuel
- Licensing exam fees, renewal fees, and required continuing education
A contractor who marks up 15% but carries 12% in overhead is netting about 3% on each dollar billed. That is a thin cushion, and it explains why margins in the industry are much smaller than the raw markup percentage suggests.
Federal work operates under stricter rules. The Federal Acquisition Regulation caps fees on cost-plus-fixed-fee construction contracts at 10% of estimated cost, and at 6% for architect-engineer services on public works.1Acquisition.GOV. 15.404-4 Profit Private contracts carry no federal cap; the markup is whatever the parties sign.
Profit Built Into Fixed-Price Bids
On a fixed-price or lump-sum job, the contractor quotes one number before construction begins.2Acquisition.GOV. 36.207 Pricing Fixed-Price Construction Contracts Labor, materials, subcontractors, overhead, and a profit margin all get baked into that single price. If the work comes in at $130,000 against a $150,000 contract, the contractor keeps the $20,000 gap. If costs run past $150,000, the contractor absorbs the overage.
The structure shifts the financial risk from the owner to the contractor. The owner knows the total upfront. The contractor bets on the accuracy of the estimate, and earnings on that job depend on tight bidding, efficient scheduling, and careful control of material waste.
Experienced contractors add a contingency allowance to fixed-price bids to cover surprises like hidden water damage, soil problems, or a sudden jump in lumber prices. A range of 5% to 10% of project cost is common, depending on how much is unknown at bid time. When the contingency goes unspent, it becomes additional profit. When site conditions burn through it, the contractor may still break even instead of losing money.
The Spread on Self-Performed Work
Contractors often keep more of the pie by using their own employees rather than outside subcontractors for certain phases. Framing, drywall, concrete, and finish carpentry are common candidates. The contractor bills the client at the going market rate for that trade and pays the employee a lower base wage. The difference is where the profit lives.
That difference is narrower than it looks, because the contractor also pays a “labor burden” on top of the base wage:
- Payroll taxes, including the employer’s share of Social Security and Medicare at 7.65% of wages, plus federal and state unemployment taxes
- Workers’ compensation insurance, which for construction trades often runs several dollars per $100 of payroll
- Health insurance, paid time off, retirement contributions, and training
Once the burden is subtracted from the billable rate, the real margin on self-performed work is more modest than the raw hourly spread suggests. The tradeoff is that the contractor captures profit that would otherwise flow to a subcontractor and keeps tighter control over quality and scheduling.
Change Order Revenue
When a client changes the original plan by upgrading countertops, moving a wall, or adding a bathroom, the contractor issues a change order that documents the new scope, cost, and timeline. Change orders are legally binding amendments to the original contract, and they usually carry higher markups than the base work.
Many construction contracts allow a 10% to 15% markup on change orders to cover repricing, rescheduling, and the disruption they create. On especially disruptive changes, the effective markup can reach 20% to 30% because the contractor has to absorb idle crew time, reorder materials, and manage delays that ripple through the rest of the schedule. A $10,000 material upgrade might land at $12,000 to $13,000 on the client’s invoice.
Written change orders also protect the contractor’s ability to collect. In many states, a properly documented written change order strengthens the contractor’s position on payment for extra work, including, in some jurisdictions, the right to file a mechanic’s lien if the client refuses to pay. Without documentation, disputes about what was authorized get much harder to resolve.
Supplier Discounts and Rebates
Contractors with established supplier relationships pay less for materials than a homeowner walking into a retail store. Professional accounts, trade pricing, and bulk purchasing produce real savings. A contractor might buy hardwood at $4 per square foot and bill the client at the $6 retail price, keeping $2 per square foot installed.
National suppliers also offer volume rebates or year-end incentives to contractors who hit annual spending thresholds. Sometimes structured as a percentage of total purchases, these rebates add another revenue layer that never shows up on any client’s invoice. It is standard industry practice, and it rewards purchasing volume and long-term relationships.
What Shrinks the Take-Home
Gross revenue is not what the contractor actually keeps. Several ongoing costs pull down the number that eventually lands in the owner’s pocket.
Retainage Ties Up Cash
Retainage is the portion of each progress payment the owner holds back until the project is finished. On private jobs, 10% is common. On federal projects, retainage is capped at 10% and can only be withheld when the contracting officer determines that satisfactory progress has not been achieved.3Acquisition.GOV. 52.232-5 Payments Under Fixed-Price Construction Contracts When progress is satisfactory, the contractor is entitled to full payment without a holdback.4Acquisition.GOV. 32.103 Progress Payments Under Construction Contracts
On a $500,000 job with 10% retainage, the contractor is carrying $50,000 in earned-but-unpaid revenue until the owner releases the holdback. Subcontractors still need to be paid, materials still need to be bought, payroll still needs to run. Many contractors respond by holding a matching percentage from their own subcontractors, passing the cash-flow pressure down the chain. Several states cap retainage at 5% or prohibit it once a project reaches substantial completion, so the exact rules depend on where the work sits.
Bonding Costs on Larger Jobs
Government work and large commercial projects usually require surety bonds that guarantee the contractor will finish the job and pay subs and suppliers. The Miller Act requires both a performance bond and a payment bond on any federal construction contract above $100,000.5Office of the Law Revision Counsel. 40 USC 3131 – Bonds of Contractors of Public Buildings or Works The payment bond amount generally must equal the full contract price.6Acquisition.GOV. Subpart 28.1 – Bonds and Other Financial Protections
Bond premiums typically run 1% to 3% of the contract value, depending on the contractor’s financial history and the project’s risk. Most contractors build that cost into their bid. The ability to get bonded at all depends on credit, net worth, and track record, so bonding capacity effectively caps how large a project a contractor can pursue.
Self-Employment Tax
Contractors operating as sole proprietors or single-member LLCs pay self-employment tax of 15.3% on net earnings, made up of 12.4% for Social Security and 2.9% for Medicare.7Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) The Social Security portion applies to the first $184,500 of net earnings in 2026.8Social Security Administration. Contribution and Benefit Base The Medicare portion has no cap.
That 15.3% covers both the employer and employee halves of payroll tax. An employee splits it with their employer; a self-employed contractor pays both. The one offset is that the employer-equivalent half, 7.65%, is deductible when calculating adjusted gross income for income tax.7Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) For a contractor netting $100,000 on paper, self-employment tax alone takes roughly $14,100 before any income tax gets calculated. That is the gap between a healthy-looking gross profit and actual take-home pay.