How to calculate markup that recovers contractor overhead
When overhead and target profit are planned as percentages of revenue, the required price equals direct job cost divided by one minus both percentages. A markup added to cost is not automatically an overhead recovery plan because markup and revenue margin use different denominators.
Use the formula
- Overhead rate
- Annual overhead / Annual revenue
- Required price
- Direct job cost / (1 - Overhead rate - Target profit rate)
- Required markup
- (Required price - Direct job cost) / Direct job cost
Worked example
The verified example has $234,000 of annual overhead against $780,000 of revenue, a 30 percent overhead rate. It also models a 10 percent operating profit target.
| Line | Result | Meaning |
|---|
| Direct job cost | $10,000 | Costs assigned to this job |
|---|
| Overhead rate | 30% | $234,000 / $780,000 |
|---|
| Target profit rate | 10% | A planning input on revenue |
|---|
| Required price | $16,666.67 | $10,000 / 0.60 |
|---|
| Required markup | 66.67% | The addition to direct cost |
|---|
Repeatable method
- Build an annual overhead list from records, not memory.
- Choose a realistic revenue denominator for the same period.
- Set a visible operating profit planning rate.
- Solve price from each job's direct cost.
- Compare estimates with completed job results and update the assumptions.
Questions and answers
- Why is the required markup higher than the overhead rate?
- Because overhead and profit are percentages of the final price, while markup is measured against direct cost.
- Does this formula set a market price?
- No. It calculates what the entered business model requires. Market response remains a separate constraint.
- Should owner compensation be overhead or profit?
- Define the policy explicitly and use it consistently. Do not let required labor or management work disappear into an undefined profit target.
Sources
This is general business calculation information, not accounting, tax, legal, or pricing advice. Use current records and qualified advice for your business.