Subcontractor Markup: The Rate Nobody Teaches You

A general contractor bids a $18,000 bathroom remodel. The electrician subs out at $2,200. The plumber subs out at $3,800. The GC marks them up 10% ($220 + $380 = $600 total markup). After paying both subs on net-30 and waiting 60 days to collect final payment from the customer, the GC's actual margin on $6,000 of subbed work is negative. Here is why — and what the markup should actually be.

What Subcontractor Markup Pays For

Subcontractor markup is not profit on someone else's work. It is compensation for specific functions you perform on behalf of the sub:

• Coordination — scheduling the sub to show up when their work is ready, coordinating with other trades, managing conflicts
• Warranty responsibility — your contract warrants the entire project to the customer. If the sub's work fails in year 2, the customer calls you, not the sub. You chase the sub for warranty service.
• Payment management — you pay the sub before the customer pays you. That is a loan to the customer, financed by you.
• Liability exposure — your general liability policy covers the project. If the sub causes damage, your policy pays first; you then chase the sub's insurance. This is time, legal cost, and sometimes money.
• Dispute resolution — if the customer and sub disagree on the work, you mediate. If the sub walks off, you find a replacement.
• Supervision — ensuring the sub's work meets quality standards and completes correctly before the next trade comes in

The Markup Math

Base calculation: start with the sub's invoice. Add:

• Coordination time at your admin rate (typically 1–3% of sub cost on simple jobs, 5–8% on complex ones)
• Warranty reserve (set aside for warranty callbacks, typically 2–4% of sub cost)
• Payment float cost (interest on money you float the customer, 2–5% depending on your collection terms)
• Liability contribution (small share of your GL premium allocated to subbed work, 2–4%)
• Profit margin (minimum 5% to make the whole exercise worth doing)

Total minimum markup: 15%. Standard markup: 20–25%. Premium markup (complex coordination, higher risk): 25–30%.

Industry Averages

Published industry data for general contractor markup on subs:

• Residential remodel: 15–25% is typical
• Commercial GC: 10–15% is common (higher volumes compensate)
• Specialty GCs (kitchen/bath only): 20–30%
• Design-build firms: 25–40% (reflecting design time embedded)

If you are below 15% as a residential GC, you are below industry norms and almost certainly leaving money on the table.

Transparency vs. Hidden Markup

Two approaches:

Hidden markup — the customer sees "Electrical: $2,800" on the invoice. They do not see the sub charged you $2,200 and you added 27%. This is the standard GC model. Simpler, less customer pushback.

Transparent / cost-plus — the customer sees "Electrical sub: $2,200. GC markup 20%: $440." Used in high-end residential where the customer wants to see cost structure. Honest, allows the customer to question markup, requires more negotiation skill.

Hidden markup is still ethical if your contract clearly states that subcontractor costs are not provided at pass-through. Make the contract language clear so you are not accused of hidden fees.

Red Flag Pricing Scenarios

• Sub says "I'll bill the customer directly" — you lose coordination control, warranty passthrough gets confused, customer may not pay. Decline the arrangement unless you have no choice.
• Customer asks "what did the sub charge you?" — polite answer: "Our pricing covers the full installed cost including coordination, warranty, and project management. The subcontractor invoice is part of our internal cost structure." Do not share sub costs unless you have agreed to cost-plus pricing.
• Sub quotes you higher than public rates — some subs charge GCs more because they expect slower payment. Negotiate with volume commitments or faster payment terms (COD, net-10).
• Customer wants to supply the sub directly — "owner-furnished" arrangements where the customer hires the sub directly. You coordinate but do not warrant. Charge a coordination fee (5–10% of sub cost) and disclaim warranty on that scope in your contract.

Warranty Reserve: The Hidden Cost

Your contract warrants installation for 1–2 years in most states. If a sub's electrical work fails in year 2, you pay (or coordinate the warranty service) and chase the sub later. If the sub is out of business or will not respond, you eat the cost.

Set aside 2–4% of every sub invoice into a warranty reserve. Over 10 years, warranty callbacks will probably average 2–4% of total sub cost. If you did not reserve, every callback eats directly into current-year profit.

Payment Timing

Standard sub payment: net-30. Standard customer payment on completion: often 60+ days from when the sub was paid. That is 30–45 days of free financing you provide. On a $5,000 sub payment at 8% annualized financing cost: $5,000 × 8% × 45/365 = $49 per sub. Add that to markup.

Better: structure customer payments so sub payments align with milestone collections. Collect 50% at project start, pay subs from that cash. Collect 40% at midpoint, pay remaining sub balances. Final 10% at completion covers your margin.

Build the Markup

Use the Subcontractor Markup Calculator to compute markup by trade type, project complexity, payment terms, and warranty risk. The calculator formalizes what you should charge so you stop subbing at a loss.