Underquoting is one of the fastest ways to destroy a contracting business. You win the job, complete the work, and realize you've made half what you expected—or worse, you've lost money.
Accurate estimating is a learnable skill. This guide covers how to calculate labor hours, estimate materials, account for overhead, and build quotes that keep projects profitable.
Why Contractors Underquote
Understanding why you underquote helps you fix it:
Optimism Bias
You remember the time a bathroom remodel went perfectly and took 3 days. You forget the one that took 6 days because of hidden water damage and outdated plumbing.
When estimating, most contractors unconsciously remember best-case scenarios rather than typical ones.
Fear of Losing the Job
When you're worried about staying busy, you're tempted to lower your price to win work. This creates a cycle: underquoted jobs reduce profit, reducing your financial cushion, making you more desperate for the next job.
Not Tracking Actual Costs
If you don't track how long jobs actually take and what they actually cost, you're estimating blind. You might think a kitchen backsplash takes 4 hours when your actual average is 6.
Forgetting Overhead
Many contractors price based on direct costs (materials + labor) and forget about overhead: insurance, vehicle costs, tools, fuel, administrative time.
Scope Creep
You quote for replacing a faucet. While you're there, the client asks you to fix a leaky shutoff valve. You do it without adjusting the price. These additions add up.
The Components of an Accurate Estimate
Every estimate should account for:
Direct Labor
The hours you (or your crew) will spend on site actually performing work.
Common mistake: Estimating only the installation time and forgetting prep, cleanup, and travel.
Better approach: Break down every phase:
- Travel time (round trip)
- Site preparation
- Actual work
- Cleanup
- Final walkthrough
Example (kitchen faucet replacement):
- Travel: 0.5 hours (30 min round trip)
- Prep: 0.25 hours (lay drop cloth, clear area)
- Disconnect old faucet: 0.5 hours
- Install new faucet: 0.75 hours
- Test and adjust: 0.25 hours
- Cleanup: 0.25 hours
- Total: 2.5 hours
Many contractors would estimate this as "1-2 hours" based only on installation time, then wonder why they're consistently behind schedule.
Materials
Direct materials costs plus a markup for handling, waste, and risk.
Materials pricing strategy:
Actual cost: $100 Your price: $100 + 15-20% markup = $115-$120
The markup covers:
- Time spent sourcing and picking up materials
- Waste (you always need 10% more tile, paint, etc.)
- Storage before job
- Risk of damage during transport
- Returns and restocking hassles
Don't just pass through material costs at your exact cost. Your time and expertise in material selection has value.
Overhead
These are business costs that aren't directly tied to specific jobs but must be covered to stay in business:
Common overhead costs:
- Vehicle payments and maintenance
- Fuel
- Insurance (liability, vehicle, workers comp)
- Tools and equipment
- Business licenses and permits
- Phone and internet
- Accounting and legal fees
- Office supplies
- Marketing
- Software subscriptions
How to calculate overhead rate:
- Total your annual overhead costs
- Estimate your annual billable hours
- Divide overhead costs by billable hours
Example:
- Annual overhead: $36,000
- Annual billable hours: 1,500
- Overhead per hour: $36,000 ÷ 1,500 = $24/hour
This means every hour you bill needs to include $24 just to cover overhead, before you make any profit.
Profit Margin
After covering labor, materials, and overhead, you need profit.
Typical contractor profit margins:
- Small repairs and service work: 30-40%
- Mid-sized projects: 20-30%
- Large projects: 15-25%
Lower margins on larger projects are acceptable because:
- They provide more total profit dollars
- They're more efficient (less travel time per dollar earned)
- They keep you busy longer
How to calculate selling price with profit margin:
Example (target 25% profit margin):
- Direct labor cost: $200 (4 hours at $50/hr)
- Materials: $300
- Overhead: $96 (4 hours at $24/hr)
- Total costs: $596
To achieve 25% profit margin:
- If $596 = 75% (100% - 25%)
- Then 100% = $596 ÷ 0.75 = $795
Your quote should be $795.
Check: $795 - $596 = $199 profit, which is 25% of $795. ✓
Building Your Labor Rate
Your labor rate needs to cover your desired income, overhead, and account for non-billable time.
Calculate Required Labor Rate
Step 1: Determine target annual income How much do you want to take home? Be realistic: $60,000? $80,000? $100,000?
Step 2: Calculate total work hours available
- 52 weeks × 40 hours = 2,080 total hours
- Minus: Holidays, vacation, sick days (assume 3 weeks) = 120 hours
- Available: 1,960 hours
Step 3: Account for non-billable time You don't spend all available time on paying jobs. You spend time on:
- Quoting and sales
- Administrative work
- Driving between jobs
- Tool maintenance
- Training
Assume 70-75% of available hours are billable:
- 1,960 × 0.70 = 1,372 billable hours per year
Step 4: Calculate required hourly rate
Example (target $80,000 income):
- Annual overhead: $36,000
- Target income: $80,000
- Total to earn: $116,000
- Billable hours: 1,372
- Required rate: $116,000 ÷ 1,372 = $85/hour
This is your minimum labor rate to hit your income target. Add profit margin on top of this.
Estimating Labor Hours Accurately
Accurate labor estimates come from tracking actual job times.
Start Tracking
For every job, track:
- Actual start time
- Actual completion time
- What took longer than expected
- What went faster than expected
After 20-30 jobs, you'll have real data showing your actual pace.
Use Historical Data
Poor estimate: "I think this bathroom remodel will take about a week."
Data-driven estimate: "My last 5 bathroom remodels averaged 42 hours. This one is similar size, so I'll estimate 45 hours to account for the vintage plumbing."
Build a Task Library
Create a reference list of common tasks with actual time ranges:
Plumbing examples:
- Replace kitchen faucet: 1.5-2 hours
- Replace toilet: 2-3 hours
- Replace water heater: 4-6 hours
- Clear drain (simple): 1-1.5 hours
- Repipe bathroom: 16-24 hours
Adjust for conditions:
- Old/corroded connections: +25% time
- Tight access: +15% time
- Customer wants to watch and ask questions: +10% time
Add Buffer for Unknowns
For remodel work where you can't see everything until you open walls, add contingency:
Quote structure:
"Based on what I can see, this project will take 20-24 hours. However, if we discover issues behind the walls (old wiring, water damage, etc.), additional work may be required. I'll communicate any findings immediately before proceeding with extra work."
This sets expectations and protects you from scope expansion.
Common Estimating Mistakes
Not Including All Materials
Forget items like:
- Fasteners and hardware
- Sealants and adhesives
- Sandpaper and consumables
- Gas for equipment
- Disposal fees
Create a checklist for each job type so you don't forget small items that add up.
Underestimating Prep and Cleanup
Prep and cleanup often take 20-30% of total job time. Factor this in.
Forgetting Travel Time
If you're driving 30 minutes each way, that's an hour per day that needs to be billed somehow. Either:
- Include it in your labor hours, or
- Charge a trip fee for jobs beyond a certain radius
Not Accounting for Difficulty
A faucet replacement in a new home with accessible plumbing takes 1.5 hours. The same job in a 60-year-old house with corroded connections in a cramped vanity takes 3 hours.
Charge for actual difficulty, not idealized conditions.
Failing to Adjust for Experience
Junior crew members take longer. If you're sending an apprentice to do work you could do in 2 hours, estimate 3-4 hours.
When to Charge Fixed Price vs. Time and Materials
Fixed Price Works When:
- Scope is clearly defined
- You have experience with similar jobs
- Client wants budget certainty
- Job is straightforward
Time and Materials Works When:
- Scope is uncertain (remodel work with unknowns)
- You're doing diagnostic or repair work
- Client wants flexibility to add/change scope
- You're new to this type of work
For time and materials, still provide an estimate:
"Based on what I can see, I estimate 12-16 hours at $95/hour plus materials, roughly $1,500-$1,800 total. I'll track actual time and materials, and keep you updated if we're trending toward the higher end."
This gives the client a budget range while protecting you from fixed-price risk.
Using Software to Improve Estimates
Quoting software helps by:
Storing labor rates: Set your default rate once, use it consistently Creating templates: Standardize pricing for common jobs Tracking materials: Build material lists for typical projects Analyzing history: Review past quotes to improve future ones
Most contractors who switch from paper or spreadsheet quotes to software report 15-20% improvement in estimate accuracy within 3-6 months.
Testing Your Estimates
After each job, compare:
Estimated hours vs. Actual hours Estimated materials vs. Actual costs Estimated profit vs. Actual profit
If you're consistently under:
- Increase your labor estimates by 20%
- Track your actual pace for 10 jobs
- Adjust based on data
If you're consistently over:
- You're being too conservative
- You can lower estimates slightly
- You might be able to increase efficiency instead
The goal is to be accurate—not always high or always low, but consistently close to actual.
When You Discover You Underquoted
It happens. You start a job and realize you significantly underestimated. What do you do?
If It's Your Error
Absorb the cost. Complete the job professionally and learn from it. Trying to renegotiate damages your reputation.
If Scope Changed
Document the change and present options:
"The original quote covered replacing the existing vanity. Now that we've removed it, I can see the wall behind needs significant drywall repair that wasn't visible before. This will add approximately $400 in materials and 6 hours of labor. Would you like me to proceed with the repair, or would you prefer to have the wall repaired separately?"
Clear communication about genuine scope changes is appropriate. Trying to inflate costs because you estimated poorly is not.
The Bottom Line
Accurate estimating comes from three things:
- Tracking actual job costs so you have data instead of guesses
- Accounting for all costs including labor, materials, overhead, and profit
- Building in realistic time for prep, cleanup, travel, and unexpected issues
Underquoting destroys profitability. You can be the best technician in your trade, but if you consistently underestimate jobs, you'll struggle financially.
Start simple: track actual hours on your next 10 jobs, calculate your true overhead rate, and ensure every estimate includes labor + materials + overhead + profit.
The contractors who are profitable aren't necessarily faster or cheaper than you—they're just better at estimating what the work actually costs and pricing accordingly.
Estimate accurately every time. Try SemaQuote free and create consistent, profitable quotes. Build a library of common tasks, track your actual labor rates, and improve your estimating accuracy over time.
