How a freelance or trade rate is built

A bid is built from what the work costs you, plus a markup for overhead and profit. Here are the components and the formula.

The components of a bid

A bid is made of five figures:

Materials — everything bought for the job: parts, supplies, rentals.
Hours — the hours the work takes.
Labor rate — the rate those hours are priced at.
Other direct costs — fuel, disposal or dump fees, permits, hired help, equipment rental.
Markup — a percentage added to the above, covering overhead and profit.

The formula

Bid = (materials + labor + other costs) × (1 + markup%).
Profit = bid − direct costs. Margin = profit ÷ bid.

What the markup covers

The markup covers the costs that do not appear on any single job: insurance, tools, a vehicle, licensing, software, admin time, and unbilled weeks. Published contractor guidance (Angi, NAHB) puts a typical overall markup at 20–30%.

Markup and margin are different numbers

A markup is a percentage of your costs; a margin is the share of the finished bid that is profit. The margin is always the lower of the two — margin = markup ÷ (1 + markup) — so a 30% markup is about a 23% margin, and a 50% markup is about a 33% margin. The rate calculator shows both.

Hourly and fixed-price billing

Under hourly billing the client pays for the time taken, so the cost rises if the job runs long. Under a fixed project price the amount is agreed in advance, so the risk of the job running long sits with whoever does the work. A fixed bid is still calculated from an hourly labor rate.

Tax is owed on the profit

For a self-employed worker, the bid reimburses materials, labor, and costs; income tax and self-employment tax are owed on the profit, and nothing is withheld. See what to set aside for taxes.

Estimates for planning, not financial advice.