Three Markups, One Job Cost: How Contractors Price Risk and Change Orders
Estimate the work the same way every time. What changes is how much protection the price carries for uncertainty and disruption. Here are three markups on one published bathroom estimate, and what each one protects.
The assumptions
This model assumes
- A direct job cost of $11,799: the published 5x8 bathroom estimate, 53 itemized lines
- The Established Contractor profile: a 1.50x markup and 10% net profit, which leaves overhead at exactly 23⅓% of the selling price (1 - 1/1.50 - 10%), shown in tables as 23.3%
- Overhead recovered as a constant share of each sale, so a cost overrun comes straight out of net profit
- Risk premiums added as points of net profit, with the markup recalculated from them: high-risk +5, change order +10. This is Emmanuel Forge's method from the Minimum Pricing System, taught at Contractor School
- Markups shown to two decimals; prices calculated from the unrounded markup, so a rounded markup times the cost can differ by a few dollars
- The $1,400 change and its 10% overrun are illustrations, not a real job
The model, step by step
The selling price is job cost times markup, and the markup is 1 / (1 - overhead - net profit). Overhead should only move when the business moves. Net profit is the variable that answers risk.
| Pricing state | Job cost | Net profit | Markup | Price |
|---|---|---|---|---|
| Normal | $1,000 | 10% | 1.50x | $1,500 |
| High-risk | $1,000 | 15% | 1.62x | $1,622 |
| Change order | $1,000 | 20% | 1.76x | $1,765 |
The extra on a high-risk job covers uncertainty nobody can quantify yet. The extra on a change order covers that plus disruption and lost capacity.
The job cost column never moves. Everything you can foresee belongs in it, estimated the same way every time: the hours at the same loaded rate, the quantities at the same price, and known site conditions as their own line items, such as daily protection in an occupied home or a day of setup and cleanup on each end. What is left is uncertainty you cannot put a number on, and padding line items to cover it hides what the work actually costs. The course puts it in five words: put the risk in the profit.
Some costs are known in kind but not in amount, such as the tile not yet picked or the vanity still being chosen. An allowance budgets for each one. The published bathroom carries fifteen allowances totaling $4,750, which is 40.3% of its job cost. The largest are the vanity cabinet at $960 and the wall tile at $465.
Allowances are marked up like every other job cost dollar. At 1.50x, the fifteen of them carry $7,125 of the selling price. Leave them at cost and more than two-fifths of this job funds no overhead and no profit.
In this method, a selection that runs over its allowance bills at the job's normal markup, not the change order markup, because the scope did not change, only the selection did. An underage is credited the same way: tile that comes in $168 under the allowance credits $252. The contract should state both in advance, and each one is documented in writing.
With a mature estimating system, the goal is to bring actual job cost within about 2% of the estimate, either way. That is Forge's experience-based target, earned by repeating a scope, not a benchmark. Every point of overrun comes straight out of net profit.
Uncertainty widens the miss. Forge's judgement of typical job cost error by scope condition, and what each range leaves at the normal and high-risk markups:
| Scope condition | Typical error | Net profit at 1.50x | Net profit at 1.62x |
|---|---|---|---|
| Tight / defined | 3-5% | 6.7-8.0% | 11.9-13.2% |
| Moderately undefined | 6-8% | 4.7-6.0% | 10.1-11.3% |
| Undefined / evolving | 8-12% | 2.0-4.7% | 7.6-10.1% |
How to lose profit, on the bathroom at 1.50x
| 0% overrun | 10.0% |
| 2% overrun | 8.7% |
| 5% overrun | 6.7% |
| 10% overrun | 3.3% |
| 15% overrun | 0.0% (break-even) |
At 15%: $17,699 - $13,569 cost - $4,130 overhead = $0. Past 15%, the job loses money.
A change order brings more conversations with the customer, breaks the crew's sequence, lowers productivity and uses capacity planned for other work. Forge sets +10 points as the change order default to cover the overruns, disruption and lost efficiency that come with changes.
The change order markup is 1 / (1 - 23⅓% - 20%) = 1.76x. Take an illustrative $1,400 change where lost productivity pushes the actual cost 10% over, to $1,540:
| Normal, 1.50x | Change order, 1.76x | |
|---|---|---|
| Price | $2,100 | $2,471 |
| Actual cost | $1,540 | $1,540 |
| Overhead (23.3%) | $490 | $576 |
| Net profit | $70 (3.3%) | $355 (14.3%) |
The change is approved in writing before the work proceeds. How to write and price a change order covers the document itself.
Each profile keeps its own overhead and moves only net profit.
| Profile | Normal (10%) | High-risk (15%) | Change order (20%) |
|---|---|---|---|
| Low-Overhead | 1.30x | 1.39x | 1.49x |
| Established | 1.50x | 1.62x | 1.76x |
| Full-Service | 2.00x | 2.22x | 2.50x |
On the bathroom, Low-Overhead prices at $15,339, $16,405 and $17,631. Full-Service prices at $23,598, $26,220 and $29,498. Your own overhead sets the real numbers: see the overhead categories and markup vs margin.
What it means
Know your overhead before you choose a markup
Clamp tracks overhead by category and job costs against each job, so the overhead and profit behind all three markups come from the work you already logged rather than an annual reconstruction.
With one markup, you have to choose between overpricing routine work and underpricing risk and changes. With three, every job is costed with the same discipline and priced for what it is. Change your overhead or your profit target, and all three markups move together.
Questions
Why not add extra hours or material to a risky estimate?
Known conditions belong in the estimate as their own line items. Padding for what you cannot quantify hides what the work costs, so the next estimate starts from a wrong number. That risk belongs in the profit.
Is +10 points on a change order too much?
It is Forge's default, set to cover the overruns, disruption and lost efficiency that come with changes. Without it, the $1,400 change above keeps $70.
Do allowances get marked up?
Yes. They are job cost, and every job cost dollar carries overhead and profit.
Does an allowance overage get the change order markup?
No. The work was already in the scope, and only the selection cost more than the budget. It bills at the job's normal markup, and an underage is credited the same way. The change order markup is for work that was not in the scope.