Agency Markup on Contractors: Price a Subcontracted Project

Start with what you are selling

An agency may sell a finished deliverable while a contractor supplies only one part of it. List the work your agency still performs: briefing, schedule management, review, client communication, integration, and correction of issues within the agreed scope.

A client paying for an integrated result is buying more than the contractor's production hours. Your estimate still needs to identify those costs so you can tell whether the fee funds them.

This article uses a business supplier invoice as its starting point. That assumption does not determine whether a worker legally qualifies as independent. Resolve the employment relationship separately; IRS federal tax classification considers the facts of control and independence. IRS worker classification guidance

Worked example: a subcontracted design package

Assume these illustrative inputs:

The contractor-to-client multiplier is $3,450 ÷ $2,000 = 1.725x. The multiplier on all direct costs is $3,450 ÷ $2,400 = 1.4375x. Both describe the same job, but their denominators differ.

The modeled profit margin is $690 ÷ $3,450 = 20%. Adding 25% to cost does not create a 25% margin on revenue.

Put each cost in one place

The $60 internal rate above is an assumed delivery labor cost. If it already includes shared software and management overhead, adding a second allocation for those same expenses inflates the model.

Conversely, using a contractor quote as the entire cost base leaves your five management hours unfunded. The arithmetic can be correct while the cost list remains incomplete.

Use a cost note for each item: where it came from, what it includes, and whether it changes with project size. A contractor's fixed fee may include two revisions; your own review time still needs an estimate.

Test the likely revision

Suppose an approved scope expansion adds $400 to the contractor invoice and two management hours at $60. Extra direct cost is $520. With the same illustrative overhead and markup policy:

$520 × 1.15 × 1.25 = $747.50 additional quote.

That price preserves the model's 20% margin on the added work. It does not mean the client already owes $747.50. Present the changed deliverable, fee, and schedule for agreement before treating the expansion as purchased.

If the additional work instead corrects your own error under the original scope, absorb the cost in the project's actual-results review rather than labeling every overrun a client change.

Use the right calculator base

In the Agency Markup calculator, enter $2,400 direct cost, 15% overhead, and 25% profit markup for this project-unit example. Treat its dollar result as a project amount, not an hourly rate, and ignore hourly revenue projections unless you are actually pricing hours.

If you prefer to target a percentage of the selling price directly, use the Cost-Plus Pricing calculator with $2,760 total cost and a 20% target margin.

Before sending the quote, confirm whether you are offering a fixed total, actual supplier cost plus a fee, or a capped allowance. Explain who approves supplier overruns. That commercial choice matters more than choosing a multiplier that looks familiar.