Construction Estimating Basics: How to Bid Jobs Profitably

Construction estimating requires calculating four components: materials (with waste and markup), labor (hours × burdened rate), overhead allocation (10-20% of direct costs), and profit margin (15-25%). The most common estimating mistake is underestimating labor hours—always add 15-20% buffer for setup, cleanup, and problem-solving.

The Estimating Formula

Estimate = Materials + Labor + Overhead + Profit

Materials = (Quantity × Unit Cost) × Waste Factor × Markup
Labor = Hours × Burdened Rate
Overhead = (Materials + Labor) × Overhead %
Profit = Subtotal × Profit Margin %

Step 1: Material Takeoff

What to Include

Waste Factors by Material

Material Markup

Add 10-15% markup on materials for:

• Your time sourcing/ordering
• Pickup and handling
• Returns/restocking fees
• Storage and organization

Material Takeoff Example

10×12 Deck:

Step 2: Labor Estimation

Calculating Hours

Method 1: Task-Based Break project into tasks, estimate each:

• Demo: 4 hours
• Layout: 2 hours
• Post installation: 6 hours
• Framing: 8 hours
• Decking: 12 hours
• Railings: 6 hours
• Finish: 4 hours
• Total: 42 hours

Method 2: Production Rates Use historical rates:

• Framing: 0.05 hours per board foot
• Drywall: 0.08 hours per sq ft
• Painting: 0.02 hours per sq ft

The 15-20% Buffer

Always add buffer for:

• Setup and cleanup
• Material handling
• Problem-solving
• Weather delays
• Communication/coordination

42 hours × 1.15 = 48 hours

Burdened Labor Rate

Your labor costs more than base wages:

Multiplier: 1.26× (or use 1.30-1.40 for safety)

Labor Calculation Example

Step 3: Overhead Allocation

What Is Overhead?

Costs of running your business that aren't direct project costs:

• Vehicle expenses
• Insurance
• Tools and equipment
• Office costs
• Phone and software
• Accounting and legal
• Marketing
• Your unbillable time

Calculating Your Overhead Rate

1. Total your annual overhead costs
2. Total your annual direct costs (materials + labor)
3. Overhead rate = Overhead ÷ Direct costs

Example:

• Annual overhead: $60,000
• Annual direct costs: $400,000
• Overhead rate: 15%

Overhead Allocation Example

Step 4: Add Profit

Recommended Profit Margins

Profit Is Not Your Salary

Your salary is in:

• Labor (if you're working)
• Overhead (your admin time)

Profit is:

• Business growth reserve
• Equipment replacement
• Emergency fund
• Risk compensation

Profit Calculation Example

Complete Estimate Example

Project: 10×12 Deck

Per square foot: $4,254 ÷ 120 = $35.45/sq ft

Common Estimating Mistakes

1. Underestimating Labor

The problem: Estimates assume everything goes perfectly

The fix: Add 15-20% buffer, track actuals to improve

2. Forgetting Overhead

The problem: Only counting materials + labor = no profit for business

The fix: Calculate your overhead rate, apply to every job

3. Ignoring Small Items

The problem: $50 here, $100 there adds up

The fix: Use allowances for incidentals, hardware, consumables

4. Using Old Prices

The problem: Material prices change (especially lately)

The fix: Verify current prices, include escalation clause for long projects

5. No Contingency

The problem: Unforeseen conditions happen

The fix: 5-10% contingency for unknowns, especially renovations

Estimating Checklist

Before Starting

• Visit site in person
• Review drawings/specs completely
• Identify unknowns and risks
• Check current material prices

Material Takeoff

• All primary materials listed
• Hardware and fasteners included
• Consumables/supplies added
• Delivery costs included
• Tax calculated
• Waste factor applied
• Markup added

Labor Estimate

• All tasks identified
• Realistic hours per task
• Buffer added (15-20%)
• Burdened rates used
• Multiple workers accounted for

Overhead and Profit

• Overhead rate applied
• Appropriate profit margin added
• Total makes sense for market

Final Review

• Square foot cost reasonable?
• Compared to similar past jobs?
• Contingency included for unknowns?
• Comfortable with this number?

FAQ

How do you estimate construction jobs?

Calculate materials (with waste and markup) + labor (hours × burdened rate) + overhead allocation + profit margin. Always visit the site and review specs before estimating.

What markup should contractors charge?

10-15% on materials for handling. 15-25% profit margin on the total job. Higher for specialty work, complex projects, or rush jobs.

How do I calculate my overhead rate?

Total annual overhead costs ÷ total annual direct costs (materials + labor) = overhead rate. Typical range is 10-25%.

How much profit should a contractor make per job?

Target 15-25% net profit on most work. 10-15% for competitive bids. Never accept jobs below 10% unless there's a strategic reason.

How do I know if my estimate is accurate?

Track actual costs on completed jobs. Compare estimated vs. actual hours and materials. Adjust your estimating process based on patterns.

Should I give free estimates?

For small jobs and residential work, yes—it's expected. For large commercial projects, you may charge for detailed estimates.

The Bottom Line

Profitable estimating requires:

1. Complete material takeoff — Don't forget anything
2. Realistic labor hours — Add buffer
3. Burdened labor rates — Include all costs
4. Overhead allocation — Cover your business costs
5. Real profit margin — You deserve to make money

Track your actual costs against estimates. Over time, your estimates become more accurate and profitable.

Related: How to Price Construction Jobs | Contractor Accounting Mistakes