Sub-Trade Margins in AU Residential Building

What it is

Sub-trade margin is the difference between what a residential builder pays a subcontractor for a piece of work and what they charge the owner for that same piece of work in the contract price. It is one of the main ways a builder makes money on a job alongside the project management fee and any markup on materials.

In Australian residential building the margin shows up differently depending on the contract type. On a fixed price contract it is invisible to the owner because the builder quotes one number. On a cost-plus contract it is visible as a stated percentage applied to each invoice from the subbie.

Markup versus margin (and why it matters)

Builders quote markup. Accountants report margin. The two are not the same number and confusing them is a common way to under-price a job.

Markup is the percentage added to cost to get to the sell price. Margin is the percentage of the sell price that is profit.

A worked example. A bricklayer quotes the builder $10,000 for a wall. The builder applies a 25 percent markup and charges the owner $12,500. The margin on that sale is 20 percent ($2,500 profit on a $12,500 sale).

To convert one to the other: markup = margin / (1 - margin). A target margin of 20 percent needs a markup of 25 percent. A target margin of 25 percent needs a markup of 33 percent.

Builders who price using a target margin number but apply it as a markup figure end up consistently under-quoted by several points.

Typical sub-trade markup ranges in AU residential

The numbers below are industry-typical ranges, not legal requirements. The right number for any particular builder depends on overhead structure, job mix and the size of the trades being marked up.

Volume builder (project home builder)

A volume builder running 50+ homes a year typically applies 10 to 15 percent markup on trade work. The numbers are low because the head office runs lean on overhead per job and the trades are usually long-standing supply chain partners on pre-negotiated rates. Margin compression is the trade-off for scale.

Custom builder (one to ten jobs a year)

A custom residential builder typically runs 20 to 25 percent markup on trades. The job count is lower so each job needs to carry more overhead. Trades are often selected per job rather than locked into long-term supply agreements.

Renovation and small builder

Renovation specialists and small builders running two or three jobs at a time typically run 25 to 35 percent markup on trades. The work is more disrupted, more variation-heavy and harder to schedule, so the per-trade markup needs to absorb more inefficiency.

These ranges reflect industry practice in Australian residential construction. They are not regulated and individual builders should price based on their own cost structure.

What the markup is paying for

The markup on a sub-trade invoice is not pure profit. It is paying for several things the trade does not do.

Trade supervision

The builder supervises the subbie on site. That is supervisor time, vehicle costs and the cost of fixing what the subbie gets wrong before the owner sees it.

Coordination

The builder sequences the trade against every other trade on the program. A tiler that turns up to a slab that is not ready costs the builder money even if the subbie is happy to walk away and come back.

Quality and defects risk

The builder owes statutory warranties under each state Home Building Act for residential work. Under the NSW Home Building Act 1989 the builder owes statutory warranties for major defects for six years and minor defects for two years. If the trade does substandard work and goes broke before the defect appears, the builder wears the rectification.

Cash flow

The builder typically pays the trade on 30 day terms and gets paid by the owner on progress claim dates. The builder is funding the trade in the gap and that working capital has a cost.

Office overhead

Estimating, contract admin, accounts and director time get spread across the job. The trade markup is one of three channels that pays for this (the others being the PM fee and any direct fixed price margin).

Cost-plus disclosure

In a cost-plus contract the builder must disclose the markup percentage in the contract terms. Under the HIA Cost Plus Contract the markup on trade and material invoices is stated as a percentage and applied to each invoice. The contract has a default of 20 percent if no percentage is specified.

Some state laws require additional disclosure. In NSW residential cost-plus contracts are restricted in their use under section 7AA of the Home Building Act 1989 which limits cost-plus to specific defined circumstances. Builders running cost-plus need to confirm the contract is legally permitted before relying on the trade markup as a margin channel.

Where builders lose margin

Three common failure modes cost residential builders trade margin.

Trade quotes coming in over the allowance with no contract mechanism to recover. The builder either eats the difference or has an awkward variation conversation with the owner. The fix is allowances generous enough to absorb realistic price movement and a variation clause that bites for actual changes in scope.

Materials being supplied through trades without markup discipline. If the plumber buys $5,000 of fittings on his account, the builder may only see the plumber's invoice with the plumber's own markup baked in. The builder gets margin on the plumber's invoice but not on the items the plumber on-charged.

Programme blowouts that increase trade costs without increasing trade margin. If a job goes from 20 to 26 weeks, the trades quote based on access windows and may charge for return visits. Margin on those costs needs to be applied consistently or the extra cost lands as a margin hit.