Estimating as a method: takeoff, labor units, materials, overhead recovery, markup versus margin, contingency
In one paragraph
An estimate is not a guess with a margin on top. It is six steps in a fixed order: take off the quantities, apply labor units to get hours, price the materials with tax and waste, recover overhead per billable hour, add profit as a margin on the selling price (not a markup on cost), and add a contingency sized to what you cannot see. Skip the overhead step and the job looks profitable until the truck payment. Confuse markup with margin and a 20% target quietly becomes 16.7%. Here is the method, with the arithmetic.
The rule
The contract amount on a home improvement contract must include the entire cost of the contract, including profit, labor and materials (B&P 7159.5(a)(1)). Sales tax paid on materials is part of your cost (CDTFA). Markup is profit as a percentage of cost; margin is profit as a percentage of selling price; a 25% markup is a 20% margin, and a 20% margin requires a 25% markup.
Why it matters
The underpricing death spiral starts with an estimate that recovered wages but not overhead. The contractor is busy, the bank balance grows for a while, then insurance, the bond, the truck and the April tax bill arrive and the busy year turns out to have paid less than the job they left. The fix is arithmetic, applied the same way every time.