What Is the Typical General Contractor Markup on ADUs?

Understanding General Contractor Markup on ADU Projects

When you receive a bid from a general contractor for your ADU project, one of the most common questions homeowners ask is: "How much of this bid is the contractor's markup?" It is a fair question. Understanding how contractor pricing works helps you evaluate bids, compare quotes, and make informed decisions about who to hire.

The challenge is that contractor markup is often misunderstood. Many homeowners assume the markup is pure profit, but the reality is more nuanced. A general contractor's markup covers business overhead, insurance, warranty reserves, project management, and yes, profit. Understanding what is included in that markup, and what a reasonable range looks like, is essential for evaluating whether you are getting a fair deal.

In this guide, we will break down how GC markup works on ADU projects, what percentages are typical in the California market, how to distinguish between markup and margin, and how to evaluate your contractor's pricing without compromising on quality.

Markup vs. Margin: Understanding the Difference

Before discussing specific percentages, it is critical to understand the difference between markup and margin, because these terms are often confused and can lead to significant misunderstandings about contractor pricing.

Markup Defined

Markup is the percentage added to the cost of a product or service to arrive at the selling price. If a contractor's costs are $100,000 and they apply a 20% markup, the selling price is $120,000. The markup is calculated as a percentage of cost.

Margin Defined

Margin is the percentage of the selling price that represents profit (or gross profit). Using the same example, if the selling price is $120,000 and the cost is $100,000, the margin is 16.7% ($20,000 / $120,000). The margin is calculated as a percentage of the selling price.

Markup vs. Margin Comparison

When a contractor tells you their markup is "20%," ask whether they mean 20% markup on cost or 20% margin on the selling price. The difference on a $200,000 project is $8,000, which is not insignificant.

Typical GC Markup Ranges for ADU Projects

General contractor markup on ADU projects in California typically falls within the following ranges:

Overhead and Profit (O&P) Breakdown

The industry standard for residential construction in California is a combined overhead and profit markup of approximately 15% to 25%. ADU specialists, who focus exclusively on accessory dwelling units and have streamlined their processes, may operate at the lower end of this range due to volume efficiency. General remodeling contractors who take on occasional ADU projects may be at the higher end because they lack the same efficiencies.

What Affects the Markup Percentage

Several factors influence where a particular contractor's markup falls within the range:

• Volume and specialization: Contractors who build 20 or more ADUs per year can often operate with lower markups because they have established subcontractor relationships, bulk material pricing, and efficient project management systems.
• Business size: Larger companies with office staff, marketing budgets, and showrooms have higher overhead costs, which translates to higher markups. Solo operators or small crews have lower overhead but may also build fewer units per year.
• Insurance and bonding: Reputable contractors carry general liability insurance, workers' compensation insurance, and often a contractor's bond. These costs are significant and are factored into overhead.
• Warranty obligations: Good contractors build warranty costs into their markup. If they guarantee their work for one to two years after completion, they need to reserve funds for potential callback repairs.
• Project complexity: Complicated projects with hillside lots, difficult access, or custom design elements may warrant a higher markup because they carry more risk and require more management attention.

What the Markup Actually Covers

Many homeowners assume that the markup is mostly profit, but the reality is that a large portion goes to legitimate business expenses. Here is a breakdown of where a typical 22% markup actually goes:

Overhead Components (10% to 15% of project cost)

• General liability insurance: 1% to 3% of revenue. This is the insurance that protects homeowners if something goes wrong during construction.
• Workers' compensation insurance: 3% to 8% of payroll. Required by California law for all employees.
• Office and administrative costs: 1% to 3%. Rent, utilities, software, phone, accounting, legal.
• Vehicle and equipment costs: 1% to 2%. Trucks, tools, trailers, fuel, maintenance.
• Licensing and continuing education: 0.5% to 1%. Contractor's license fees, bond premiums, continuing education required by the Contractors State License Board (CSLB).
• Marketing and business development: 1% to 2%. Website, advertising, referral programs.
• Project management time: 2% to 4%. The time the contractor and their team spend managing your project, coordinating subcontractors, ordering materials, and handling inspections.

Profit Component (5% to 10% of project cost)

After all overhead expenses are covered, the net profit for a typical residential contractor is 5% to 10% of the project cost. On a $200,000 ADU project, that translates to $10,000 to $20,000 in net profit. This may sound like a lot, but consider that a single ADU project takes 4 to 8 months to complete, meaning the contractor's annual income from your project is a fraction of their total business revenue needed to sustain their operation.

Common Bid Structures for ADU Projects

Understanding how different contractors structure their bids helps you evaluate what you are actually paying for:

Fixed-Price (Lump Sum) Bids

The contractor provides a single total price for the complete project. The markup is built into the total and is not separately disclosed. This is the most common bid structure for ADU projects. The advantage is price certainty; the risk of cost overruns is on the contractor (within the scope of the agreed work).

Cost-Plus Bids

The contractor charges you the actual cost of materials and subcontractor labor, plus a fixed markup percentage. This structure provides full transparency into costs but shifts the risk of cost overruns to the homeowner. Typical cost-plus markups range from 15% to 25%. This structure works well when there is a high level of trust between homeowner and contractor.

Hybrid Bids

Some contractors offer a Guaranteed Maximum Price (GMP) with cost-plus transparency. You see all the actual costs, the markup is disclosed, but the total will not exceed a set maximum. Any savings below the GMP may be shared between homeowner and contractor, incentivizing efficiency.

Red Flags: When Markup Is Too High or Too Low

Signs of Excessive Markup

• Total markup exceeding 35% without a clear justification (such as extreme site difficulty or premium service guarantees).
• Vague line items labeled "project management" or "supervision" that seem disproportionately large.
• Material costs that are significantly higher than retail pricing at home improvement stores.
• Unwillingness to provide a cost breakdown or answer questions about pricing.

Signs of Dangerously Low Markup

• A bid that is 30% or more below competing bids for the same scope of work. This often indicates the contractor is underpricing to win the job, which can lead to cutting corners, change orders, or abandoning the project mid-construction.
• No mention of insurance, bonding, or warranty in the contract.
• A contractor who is not licensed or does not carry workers' compensation insurance. You can verify any California contractor's license status at CSLB License Check.
• Unusually low subcontractor quotes that may indicate the use of unlicensed or uninsured subcontractors.

How to Evaluate Your Contractor's Pricing

Rather than fixating on the exact markup percentage, focus on the total value you are receiving. Here is a practical framework for evaluating ADU contractor pricing:

1. Get at least three bids for the same scope of work. This gives you a market benchmark. If all three bids are within 15% of each other, you can be confident that the pricing is in the reasonable range. If one bid is dramatically different (higher or lower), investigate why. Read our full guide on how to compare ADU contractor quotes for detailed guidance.
2. Compare scope, not just price. A lower bid may exclude items that a higher bid includes. Common differences include permits, engineering, landscaping, and finish quality.
3. Ask about their subcontractor network. Experienced ADU contractors have established relationships with reliable subcontractors, which often means better pricing and fewer coordination issues.
4. Verify insurance and licensing. The cost of proper insurance is built into the markup. If a contractor does not carry adequate insurance, their lower price is not a savings; it is a risk transfer to you.
5. Evaluate their warranty. A contractor who includes a meaningful warranty (one to two years on workmanship) has factored warranty reserves into their pricing. This protection has real value.

Can You Negotiate the Markup?

Yes, but be strategic about it. Here are approaches that work:

• Bundle decisions early. Contractors who know you are decisive and will not endlessly change your mind can price the project more efficiently because they know the scope will not shift.
• Commit to a timeline. If you are ready to start immediately, a contractor may offer a small discount because they can schedule your project efficiently without gaps in their workflow.
• Offer referrals. Some contractors will reduce their markup by 1% to 3% in exchange for a commitment to refer friends and family. Word-of-mouth referrals are the most valuable marketing for ADU contractors.
• Do not try to eliminate the markup. Asking a contractor to work at cost is asking them to work for free. A sustainable business needs reasonable profit to survive, invest in quality, and stand behind their work. The cheapest contractor is rarely the best value.

The Bottom Line on GC Markup

A reasonable general contractor markup on an ADU project in California is 15% to 25%, consisting of 8% to 15% overhead and 5% to 10% net profit. This markup covers essential business expenses that protect both the contractor and the homeowner, including insurance, licensing, project management, and warranty reserves.

Rather than trying to find the contractor with the lowest markup, focus on finding the contractor who delivers the best value: fair pricing, transparent communication, quality workmanship, and reliable project management. A well-run ADU project completed on time and on budget with a 22% markup is far more valuable than a troubled project with a 15% markup that results in delays, defects, and stress.

Your ADU is a significant investment in your property. Choose a contractor whose pricing reflects a sustainable, professional operation that will be there to stand behind their work for years to come.

How to Evaluate Whether a General Contractor Markup Is Fair

Not all contractor markups are created equal, and the lowest bid is not always the best value. Here is how to evaluate whether the markup you are being quoted is reasonable for your ADU project.

Compare the Scope of What Is Included

A 20 percent markup that includes project management, scheduling, material procurement, permit coordination, and warranty coverage may be a better value than a 10 percent markup that covers labor coordination only. Ask each contractor to itemize exactly what their markup covers. Reputable ADU builders will provide a transparent breakdown of their overhead and profit margins.

Check the Base Cost Accuracy

A contractor with a low markup percentage but inflated base costs can end up more expensive than one with a higher markup on accurate estimates. Request itemized bids that list material quantities, unit costs, labor hours, and subcontractor quotes. Cross-reference material costs with suppliers like Home Depot or local lumber yards. If material prices seem 30 to 40 percent above retail, the contractor may be padding costs before applying their markup.

Evaluate Experience and Track Record

Contractors who specialize in ADU construction often deliver better value even at higher markups. Their experience with plan check requirements, local building department processes, and common ADU challenges means fewer costly surprises and change orders during construction. Ask for references from recent ADU projects and verify their contractor's license status through the California Contractors State License Board.

Red Flags in Contractor Pricing

• No written contract or vague scope of work. Every legitimate contractor should provide a detailed written agreement specifying materials, labor, timeline, payment schedule, and warranty terms.
• Requesting more than 10 percent upfront. California law limits contractor deposits to $1,000 or 10 percent of the contract price, whichever is less. Any contractor asking for more is either uninformed about the law or operating outside it.
• Significantly lower bid than competitors. If one bid is 30 percent or more below others, the contractor may be cutting corners, underestimating the scope, or planning to recover costs through change orders.
• No itemized breakdown available. Contractors who refuse to provide line-item pricing make it impossible to compare quotes fairly or understand where your money is going.
• Pressure to sign immediately. Legitimate contractors understand that homeowners need time to review bids, check references, and make informed decisions. High-pressure sales tactics are a warning sign.
• No proof of insurance or bonding. Every general contractor in California should carry general liability insurance, workers' compensation coverage, and a contractor's bond. Ask for certificates and verify they are current.

Frequently Asked Questions About GC Markup on ADU Projects

Is it cheaper to hire subcontractors directly instead of using a general contractor?

Acting as your own general contractor can save 15 to 25 percent on total project costs, but it requires significant time, construction knowledge, and project management skills. You will need to coordinate scheduling between trades, manage material deliveries, handle permit inspections, and resolve conflicts between subcontractors. For most homeowners, the DIY approach works best for simple projects where you can manage a limited number of trades.

Do GC markups vary by region within California?

Yes, markup percentages tend to be higher in markets with strong demand and limited contractor availability. Los Angeles, San Francisco, and San Diego markets typically see markups of 18 to 25 percent, while less competitive markets may see 12 to 18 percent. The overall cost of ADU construction also varies by region due to differences in labor rates, material delivery costs, and local permit fees.

Should the GC markup be calculated on materials, labor, or both?

Most general contractors apply their markup to the total project cost including both materials and labor. Some contractors use a cost-plus pricing model where the markup is a flat percentage on all costs, while others use a fixed-fee model where the markup is a set dollar amount regardless of final costs. A fixed-fee arrangement can protect you from cost overruns since the contractor's profit does not increase if the project goes over budget.

How do change orders affect the GC markup?

Change orders are one of the most common ways that total project costs exceed initial estimates. Most contractors apply the same markup percentage to change order costs. To minimize change order exposure, invest in thorough planning and detailed plans before construction begins. Clearly define the scope of work in your contract and establish a change order approval process that requires written authorization before any additional work begins.

What is a reasonable payment schedule for an ADU general contractor?

A typical payment schedule for a California ADU project includes: 10 percent at contract signing (or $1,000, whichever is less per state law), 20 percent at foundation completion, 25 percent at framing completion, 25 percent at rough-in completion (electrical, plumbing, mechanical), and 20 percent at final completion and inspection sign-off. Never pay the final installment until all work is completed, inspections are passed, and you have received lien releases from all subcontractors and material suppliers.