How to Subcontract Work Properly: The 20% Profit Margin Rule

To learn how to subcontract work out profitably, general contractors must apply a minimum 20% margin on top of the subcontractor's bid. This non-negotiable markup covers your project management time, general liability insurance, and the inevitable warranty call-backs. If you don't build in this margin, you are carrying all the risk of the subcontractor's mistakes while effectively working for free.

Listen, you are not a true General Contractor until you stop swinging the hammer and start managing the guys who do. But the transition from tradesman to GC is where most guys go broke. They know how to build a house, but they don't know how to buy and sell labor.

When you hire a subcontractor, you aren't just renting their hands. You are buying their finished product wholesale, and you are selling it to your client retail. If you don't understand the math, the contracts, and the liability involved in that transaction, your subs will bleed your business dry.

Here is exactly how to subcontract work out without losing your shirt, your schedule, or your sanity.

Most Contractors Get This Wrong: Pass-Through Pricing

Here is the insight most contractors get wrong when they start hiring subs: They pass the subcontractor's bid directly to the client and just charge an hourly rate for "project management," or they slap a lazy 10% fee on top.

They think, "Well, I'm not doing the plumbing, so I shouldn't make a massive profit on it. 10% covers my phone calls."

That 10% doesn't even cover your overhead. It gets entirely eaten by your General Liability (GL) insurance audit, your payroll taxes, and the half-day you have to pay your lead carpenter $45/hr to fix the plumber's sloppy drywall cuts before the painters arrive.

When you hire a sub, you are the one signing the contract with the homeowner. If the sub's pipe bursts and floods the kitchen, the homeowner doesn't sue the plumber. They sue you. You carry 100% of the risk. You must be compensated for that risk.

The Math: Margin vs. Markup

Before we look at a real-world bid, we need to get the math straight. To achieve a 20% margin, you must apply a 25% markup.

• Markup is the percentage you add to your cost.
• Margin is the percentage of the final sale price that stays in your pocket.

If a sub bids $10,000, and you mark it up 20% (multiplying by 1.20), you charge the client $12,000. Your profit is $2,000. But $2,000 divided by the $12,000 sale price is only a 16.6% margin.

To get a 20% margin, you divide the sub's cost by 0.8. $10,000 / 0.8 = $12,500. Your profit is $2,500. $2,500 / $12,500 = 20% margin.

(Note: This applies to labor. If you want to know how to price the physical materials your subs are installing, read our guide on What is the Standard Markup on Contractor Materials?.)

The 4 Buckets of Your 20% Margin

Why 20%? Because it breaks down into four distinct buckets that keep your business alive:

1. 5% Liability & Insurance: Your GL policy charges you based on your gross revenue, including subbed work. You also need to cover the risk of the sub accidentally letting their insurance lapse.
2. 5% Project Management: Scheduling, inspecting the work, unlocking the site, and coordinating with the municipal inspector.
3. 5% Warranty Buffer: When a nail pop happens 11 months later, you aren't getting the framing sub back out there for free. You're sending your own guy. This bucket pays for that.
4. 5% Net Profit: The actual reward for running the business.

What This Looks Like on a Job: The $15,000 Framing Bid

Let's look at how to subcontract work out using a real framing package for a custom addition.

You send the plans to your framing sub. He bids $15,000 for labor and rough lumber.

The Wrong Way: You tell the client: "The framer is $15,000. I'll add $1,500 for my time managing him." Total: $16,500.

The Right Way: You apply your 20% margin (divide by 0.8). $15,000 / 0.8 = $18,750.

You present the client with a line item: Framing (Labor & Materials) - $18,750.

You do not show the client the sub's invoice. You do not break out your profit. You are selling a completed framing package for $18,750.

Where does that $3,750 gross profit go?

• $750 pays your insurance premium allocation for this phase.
• $750 pays for the 10 hours you spent reviewing the lumber takeoff, meeting the sub on-site, and walking the framing inspection.
• $750 sits in your bank account for the day the framer miscalculates a shear wall detail and you have to buy $750 worth of extra LVL beams to keep the job moving.
• $1,500 is your net profit for putting the deal together.

Structuring the Master-Subcontractor Agreement (MSA)

Handshake deals are for amateurs. If you want to know how to subcontract work out like a professional, you need a Master-Subcontractor Agreement (MSA).

An MSA is a blanket contract you sign with a sub once. It dictates the rules of engagement. Then, for every specific job, you just issue a simple "Work Order" or "Scope of Work" tied to that MSA.

Your MSA must include these three critical clauses:

1. The "Pay-When-Paid" Clause

Never act as a bank for your subcontractors. Your MSA must state that the subcontractor will be paid within 5 to 7 days of you receiving payment from the client for that specific phase of work.

If the client delays the framing payment, you are not legally obligated to drain your own operating account to pay the framer. (For more on managing cash flow like this, check out Stop Playing Bank: How to Structure Progress Payments and Get Paid Faster.)

2. The Clean-Up and Back-Charge Clause

Subs are notorious for leaving a mess. Your MSA must explicitly state: "Subcontractor is responsible for daily broom-swept cleanup and disposal of their own debris. If GC must clean up after Subcontractor, GC will back-charge Subcontractor at a rate of $65.00 per man-hour, deducted from the final payment."

Enforce this exactly once, and they will never leave a mess again.

3. The Retainage Clause

Never pay a sub 100% of their money before the work passes municipal inspection. Hold back 10% (retainage). If the plumbing rough-in fails inspection because they missed a nail plate, they will answer your phone call a lot faster if you are still holding $800 of their money.

Insurance and Compliance: The Paperwork Shield

Do not let a subcontractor step foot on your jobsite—do not even let them drop off a tool trailer—until you have two pieces of paper in your hand: a W-9 and a Certificate of Insurance (COI).

The W-9: If you pay an unincorporated sub more than $600 in a year, you must issue them a 1099 at tax time. If you don't get their W-9 upfront, good luck getting it in January. No W-9, no deposit check. Period.

The Certificate of Insurance (COI): Never accept a forwarded PDF of an insurance certificate from the sub. Subs have been known to pay the first month's premium, get the PDF, and cancel the policy.

You must request the COI directly from their insurance broker. Furthermore, the COI must list your company as an "Additional Insured." This means if the sub burns the house down, the claim hits their insurance policy first, protecting your premiums from skyrocketing.

Managing Subcontractor Change Orders

No matter how tight your scope of work is, changes will happen. The drywaller will find a rotten sill plate, or the electrician will realize the panel is undersized.

When a sub hits you with a change order, you must process it correctly. Let's say the electrician says, "Upgrading this panel is going to cost an extra $1,200."

1. Do not verbally approve it. Tell the sub to stop work on that specific item and text you a written change order request.
2. Apply your margin. Take that $1,200 and divide by 0.8. The new price is $1,500.
3. Present it to the client. Send a formal change order to the homeowner for $1,500.

Do not let the sub negotiate directly with the homeowner. You are the general contractor; you control the money. If you struggle with presenting these costs to homeowners, read How to Charge for Change Orders Without Losing the Client.

Jobsite Management and Schedule Stacking

Learning how to subcontract work out means learning how to be a conductor, not a musician. Your job is to make sure the trades flow seamlessly.

The biggest mistake new GCs make is "schedule stacking"—putting the drywallers, the trim carpenters, and the electricians in the house on the same day to "save time."

This never saves time. The drywallers get dust in the electrical boxes, the trim carpenters complain they have no room to set up their miter saws, and everyone gets pissed off.

Rule of thumb: Give each sub the entire house whenever possible. If you must overlap, overlap exterior and interior trades (e.g., siding guys outside, plumbers inside).

The Daily Check-In

You do not need to hover over your subs. You hired professionals. But you must do a daily site walk.

Arrive at 7:30 AM to unlock the site, review the day's scope with the foreman, and leave. Come back at 4:00 PM to verify progress, ensure the site is broom-swept, and lock up. This 4:00 PM walk is where you catch the plumber running a pipe through a load-bearing stud before it gets covered in drywall.

The Punch List Phase

The final 5% of the job takes 50% of the effort. When a sub says they are "done," they usually mean they are "done with the big stuff."

Walk the site with the sub's foreman. Bring blue painter's tape. Mark every missed caulk line, every un-sanded drywall patch, and every crooked switch plate.

Do not release their 10% retainage until every piece of blue tape is addressed and the municipal inspector has signed the permit card. If they refuse to finish the punch list, use their retainage money to pay your in-house guys to finish it. That is exactly what the retainage is for.

Your Next Step

If you want to scale your construction business, you cannot do all the labor yourself. You must master the art of subcontracting.

Tomorrow morning, do an audit of the last three jobs where you hired a sub. Did you apply a true 20% margin? Did you collect a W-9 and a direct-from-broker COI? Did you hold retainage?

If the answer is no, you are operating as a charity, not a business. Draft your Master Subcontractor Agreement, update your estimating spreadsheet to automatically divide sub costs by 0.8, and start charging what your risk is actually worth.