May 1, 2026
Restoration companies should typically apply a 15–25% markup on subcontractor costs to cover coordination overhead, liability exposure, scheduling management, and profit contribution. Companies that pass through sub costs at cost — or at minimal markup — are effectively providing free project management services and carrying liability without compensation.
The company was a reconstruction-focused operation doing approximately $4.2M annually. Heavy use of subcontractors — flooring, drywall, painting, electrical, plumbing, tile. Solid client relationships, good reputation, reasonable market position. The owner believed he ran a profitable business. When I ran the job cost analysis and broke out subcontractor billings as a line item, one number stopped me: $1.1M in annual subcontractor costs, billed to clients at cost.
Not at a small markup. Not at a reduced markup. At cost. The owner had made a deliberate decision — years earlier, when he started the reconstruction division — that passing subs through at cost was “the right thing to do” on insurance jobs. He believed marking up subcontractor work was ethically questionable in an insurance context. So he didn’t do it. For three years.
At the industry standard 20% markup on subcontractor work, $1.1M in sub billings generates $220,000 in gross markup revenue. At the company’s overhead structure, approximately $185,000 of that was EBITDA — because the overhead was already covered by direct labor and equipment billing. This was pure contribution margin from a billing practice that had simply never been implemented.
To put the number in context: the company’s total EBITDA in the prior year was approximately $310,000. The missing sub markup represented nearly 60% of annual profit that was being voluntarily left on the table because of a belief about what was fair — a belief that wasn’t accurate.
The owner pushed back when I presented the number. His objection was sincere: “The insurance company is already paying for the work. Taking a markup feels like I’m double-dipping.” This belief is common and wrong in a specific, demonstrable way.
When your company uses a subcontractor, you’re not simply passing work to someone else. You are: selecting and qualifying the sub, scheduling their work within the job timeline, coordinating their access to the property, ensuring their scope meets the quality standard your client expects, reviewing and approving their invoices, carrying the liability if they perform poorly or cause damage, and managing any disputes between the sub and the carrier. That’s project management labor. It has a cost. The markup is how you recover it.
The insurance industry acknowledges this through the O&P structure — overhead and profit on the full project scope, including subcontracted work. Carriers build sub markup into their payment models. The only party not collecting it was this owner, who had made an ethical decision based on a misunderstanding of how the economics were designed to work.
We implemented a 20% markup on all subcontractor work effective with new job estimates. The owner expected carrier pushback. There was essentially none — because the carriers’ own payment matrices already included sub markup as an expected line item. The estimates looked normal to adjusters because they were normal. The company had been the only party in the transaction leaving money uncollected.
First-year EBITDA impact after implementing the markup: approximately $190,000. Not all of the theoretical $220,000 — some jobs were mid-stream at implementation and couldn’t be retroactively repriced, and the company’s sub volume grew during the year which shifted the base slightly. But $190,000 of new EBITDA from one billing practice change. No new employees. No new equipment. No new marketing. One line item corrected in the estimate template.
One final note on what this meant for valuation. If the owner had sold the company at the end of the year the markup was implemented, that $190,000 in new EBITDA — at a 4x multiple — would have added approximately $760,000 to the enterprise value. The markup wasn’t just an annual profit improvement. It was a three-quarter-million-dollar change to what the business was worth.
Owners who are three to five years from exit should pay particular attention to billing practices that suppress EBITDA. Every dollar of EBITDA you voluntarily leave on the table costs you 3–5x that amount when you sell.
Industry standard is 15–25%, with 20% being the most common. The markup covers coordination overhead, liability exposure, scheduling management, and profit contribution. Insurance carriers’ payment matrices include sub markup as an expected component of project billing — it’s not an add-on, it’s a built-in part of how restoration project economics are structured.
Yes. Carriers’ own payment models account for sub markup as part of the O&P structure. When you manage a subcontractor — scheduling, coordination, quality oversight, liability — you’re performing a service that has a cost. The markup is how you recover that cost. Passing subs through at cost means providing project management services at no charge, which is not the intention of the payment structure.
Pull your total annual subcontractor costs from the prior 12 months. Multiply by your target markup percentage (e.g., 20%). That’s your annual markup revenue gap. At typical overhead structures, 75–85% of markup revenue flows to EBITDA. Multiply the EBITDA impact by your estimated exit multiple (typically 3–5x for restoration companies) to see the valuation impact of the missing markup.
The most common objection is ethical: “The insurance company is already paying for the work, and marking it up feels like double-dipping.” This objection is based on a misunderstanding of how O&P and project management billing work. The second objection is competitive: “Carriers will push back on the markup.” In practice, carriers rarely object to standard markup rates because their own matrices already account for them. Neither objection is a valid reason to leave a standard billing component out of your estimates.
Every dollar of subcontractor markup added to annual EBITDA increases enterprise value by 3–5x at exit. A company adding $200,000 in annual EBITDA through markup implementation is worth $600,000–$1,000,000 more at a 3–5x multiple. For owners within 3–5 years of a planned exit, correcting billing practices that suppress EBITDA is one of the highest-return pre-exit actions available.
Mike McCabe is a restoration business consultant and the founder of Profit Detective. He works with restoration operators to find and fix the margin leaks that don’t show up until it’s too late.
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