I sat down last week with a remodeling contractor in Chicago doing $2.1M annually who thought his 22% gross margin was “pretty good.” I pulled his last 12 jobs.
He was pricing contingency at 3% of hard costs. Standard practice, right? Lots of contractors do it.
When I looked at his actual contingency spend over the last two years, he was burning 8-12% on every single job. Permits took longer. Materials got back-ordered. Change orders happened but he absorbed them instead of billing them. Client scope creep happened in-field. Weather delays.
Not sure where your money's leaking? Take the free 5-question scorecard and I'll show you the first system to plug it.
Take the free scorecard →The gap: 5-9% on projects ranging from $80K to $400K.
On his lowest job (a $85K bathroom), that was $4,250 to $7,650 he never charged for. On his highest (a $405K full remodel), that was $20K to $36K he left on the table across the job.
He just thought some years were “good” and some were “tight.” He didn’t see the pattern because he was pricing at 3% and actually needing 11%.
That gap is not a cost problem. It’s a pricing problem.
How contractors misread contingency
Most contractors I talk to think contingency is insurance. You price it in, hope you don’t need it, and if the job goes smooth, you pocket the difference. That’s not how it actually works when you track real numbers.
Contingency is the bridge between your bid and reality. Your bid is built on assumptions. Those assumptions always fail. The question is not whether they fail, it’s how much they fail by.
When I was running Casamia (our remodeling firm), I tracked every job by category. Labor contingency was different from material contingency was different from structural contingency was different from design contingency. Each one had its own bleed rate.
If the permit process in one city took 4 weeks average, I priced in 4 weeks. If it consistently took 6 weeks, I was absorbing 2 weeks of overhead on every project. That was a pricing problem, not a surprise.
Labor contingency is where most contractors get demolished. You bid the job at the labor hours you think it’ll take. Then the crew shows up and the wall opens to reveal rotten framing that wasn’t apparent from the inside. Or the subfloor is uneven so the tile work takes 30% longer. Or the homeowner decides mid-job they want a slight change and everyone loses a day moving schedules.
Your bid said 120 hours. The job took 155 hours. You ate the difference.
If you track 30 jobs and find out you’re consistently 25-30% over on labor hours, that’s not a estimating problem. That’s a pricing problem. You’re bidding like the work is cleaner than it actually is.
Material contingency is simpler math but contractors still get it wrong. They bid material at 5-7% over hard costs and think that covers waste, breakage, and supply delays. Real contingency data shows it’s running 8-12% for most remodeling work.
Drywall waste alone runs 15% on complex geometry. Tile can run 12% with cuts and breakage. If you’re not pricing for actual waste, you’re betting that either the job is simpler than it actually is, or your crew is more careful than any crew has ever been.
Why you actually need to know your contingency bleed
This matters for two reasons.
First: your pricing is wrong if you’re not pricing real contingency. You think you’re profitable. You might be, on paper. But if you’re underpricing contingency by 5-7%, you’re actually making less margin than you think on every single job. That’s cash that should be building your business. It’s leaving instead.
Second: once you know your real contingency burn, you can actually manage it. Some contingency is unavoidable (permit delays, market material shortages, structural surprises). Some is a skill problem on your team (labor hours running long because the crew is slow, waste running high because they’re sloppy). Some is a process problem (no pre-construction review, no material ordering buffer, no change order process).
If you don’t know which contingency costs are which, you can’t fix anything. You just absorb them all.
How to price contingency correctly
Stop pricing contingency as a single line item. It’s not.
You need:
Labor contingency: Track your last 20 jobs. What percentage did labor hours actually run over your estimate? That’s your real contingency. If you’re running 20% over, price 20% contingency, not 8%.
Material contingency: Pull your material takeoff waste data from the last 10 jobs. Not estimated waste. Actual waste. What percentage is material costing you over hard material costs after accounting for waste, breakage, and shortage replacements? That’s your real number.
Schedule contingency: How many days do your jobs actually slip from your original schedule? Why? Permit delays? Weather? Client changes? Price a schedule buffer that matches your real data.
Structural contingency: Do a pre-construction walkthrough on every project. Budget specifically for what you might find. Don’t add a 1% mystery contingency and hope nothing weird happens. You know it will.
Track it by job type too. A kitchen remodel has different bleed patterns than a whole-house renovation, which has different bleed patterns than a bathroom-only job.
Once you know your real contingency by category, your bids become solid. You stop leaving money on the table. Your “tight” years stop being tight. Your margin becomes predictable because it’s actually priced for reality.
The Chicago contractor I mentioned? He repriced his contingency at 11% on his next 6 quotes. One of those jobs came in under estimate by 1.2%. Another ran 9.8% contingency, almost exactly his new pricing. No more surprises. No more wondering why the year felt profitable or tight.
Know your numbers. Price for the reality you’re actually experiencing. That’s where your margin lives.
—
