The '10 and 10 rule' is a pricing shortcut used by some contractors: add 10% for overhead and 10% for profit to your direct costs. On a job with $10,000 in direct costs, the formula gives $10,000 + $1,000 overhead + $1,100 profit = $12,100 total. It is simple, easy to remember, and dangerously wrong for most small contractors. The rule originated in insurance restoration and high-volume commercial work where thin margins are offset by steady, large-volume contracts. For a solo plumber, electrician, or painter running a small operation, real overhead is typically 25-45% of revenue, not 10%. Applying the 10 and 10 rule means you recover less than half your actual overhead on every job, slowly bleeding money while thinking you are profitable. This page explains when the rule works, when it fails, and what to use instead.
The rule adds 10% for overhead and then 10% for profit, which compounds to a 21% markup and about a 17.4% margin. It is common in general contracting and insurance restoration, where it is often the accepted allowance for a general contractor coordinating subcontractors.
✓ Why it often fails for trade contractors
The rule assumes overhead is 10% of job cost. For most service trades it is not: a plumbing or HVAC business with stocked vans, insurance and office support often runs overhead of 20% to 40%. Use 10% anyway and the profit line quietly pays for overhead instead.
Example: a $20,000 job priced at 10 and 10 comes to $24,200. With 22% real overhead and a 10% profit target the price should be $26,840. The gap of $2,640 is the difference between a profitable job and one that barely breaks even. Find your real figure with the overhead calculator.
✓ Frequently Asked Questions
What is the 10 and 10 rule for contractors?
The 10 and 10 rule is a pricing method where you add 10% of direct costs for overhead and 10% for profit. On $8,000 in direct costs: $8,000 + $800 overhead + $880 profit = $9,680 selling price. The rule produces a margin of about 9% and an overhead recovery of $800. For contractors whose actual monthly overhead is $3,000-5,000, this formula recovers far too little. The rule works only when overhead is genuinely low (high-volume commercial work, insurance restoration with guaranteed volume) and fails for most residential contractors.
Why does the 10 and 10 rule fail for small contractors?
Small contractor overhead is typically 25-45% of revenue, not 10%. A contractor with $4,000/month overhead doing $15,000/month in revenue has 27% overhead. The 10 and 10 rule would only allocate $1,500 (10% of $15,000 direct costs) to overhead, leaving $2,500/month unrecovered. Over a year, that is $30,000 in unrecovered overhead, which comes directly out of the profit the contractor thinks they are earning. The rule works for big operations with high revenue relative to overhead, not for small shops.
When does the 10 and 10 rule actually work?
Three scenarios: insurance restoration work where the carrier sets pricing and volumes are high enough that 10% overhead recovery covers costs. Large commercial contracts ($500K+) where total overhead dollars are substantial even at 10%. And high-volume service businesses running 20+ calls per day where per-job overhead allocation is naturally small. In all three cases, the volume of work compensates for the low per-job overhead recovery.
What should contractors use instead of the 10 and 10 rule?
Calculate your actual overhead using the Overhead Calculator and your actual billable hours using the Billable Hours tool. Divide overhead by hours to get your true overhead per billable hour. Add that to your labor cost, then apply your desired profit margin. This produces a rate based on your real numbers, not an arbitrary 10%. For most small contractors, the correct markup is 35-60% total (overhead + profit), not 20% (10 + 10).
How much profit should contractors target instead of 10%?
Target 12-20% net profit margin for residential work, 8-12% for commercial. That translates to a markup of 15-25% on top of fully-loaded costs (costs that already include properly allocated overhead). The total markup on direct costs alone (before overhead allocation) will be 40-70% for most small contractors, which sounds high but simply reflects the reality that overhead is a major cost of doing business. Check your target against the Profit Margin benchmarks.