A significant number of freelancers who use subcontractors undercharge for the work. They calculate their margin as an afterthought, accept whatever rate the sub names, then charge the client a modest markup that feels “fair” but leaves them operating at 15-20% margin, which disappears entirely once they factor in the time they spend managing the relationship.
The reason for the undercharging is usually discomfort with the idea of profiting from someone else’s work. That discomfort is misplaced. You’re not a middleman skimming a fee while delivering nothing. You’re providing client management, project scoping, quality review, revision handling, scope protection, schedule coordination, and business continuity. A client who hired that subcontractor directly would have to provide all of those things themselves, and most clients lack either the time or the expertise to do it.
Your markup is the price of that service layer. It’s not optional. It’s the business model.
The Formula (and Why You Must Use It Forward, Not Backward)
Most service business owners calculate markup incorrectly. They take the subcontractor rate and add a percentage: “$80/hour sub plus 25% = $100/hour client rate.” That math is wrong, and it systematically undercharges.
Adding a percentage to a cost is not the same as achieving a target margin. Margin is calculated against the selling price, not the cost. If you charge $100 and your sub costs $80, your margin is 20% ($20 ÷ $100), not 25%.
The correct formula to achieve a target margin:
Client rate = sub rate ÷ (1 - target margin)
At a 40% target margin:
- $80/hour sub → $80 ÷ 0.6 = $133/hour client rate
- $100/hour sub → $100 ÷ 0.6 = $167/hour client rate
- $120/hour sub → $120 ÷ 0.6 = $200/hour client rate
At a 30% target margin:
- $80/hour sub → $80 ÷ 0.7 = $114/hour client rate
- $100/hour sub → $100 ÷ 0.7 = $143/hour client rate
Check the math: at $167/hour and $100/hour sub cost, your gross profit is $67. Divide by the client rate of $167: 40.1%. Target achieved.
If you were using the “add 25%” method on a $100/hour sub, you were charging $125 and achieving a 20% margin, half your target. That gap compounds across a $50,000 project.
Why Your Overhead Justifies the Markup
When clients ask about markup (and some will), the conversation goes better when you’ve internalized what you’re actually charging for. Here’s the service layer your markup covers:
Client management: You manage the client relationship, scope expectations, and communication. The sub doesn’t talk to the client. That’s not free.
Quality assurance: You review every deliverable before it reaches the client. If the sub’s work misses the mark, you either fix it or send it back for revision. You absorb the cost of that friction.
Scope protection: When a client asks for “one small change” that’s actually outside scope, you handle that conversation. The sub doesn’t. Scope management is a full-time activity on complex projects.
Business continuity: If the sub has an emergency and can’t deliver, you’re responsible to the client. You manage that risk. That risk has real value.
Coordination overhead: Briefing the sub, answering their questions, reviewing drafts, managing their timeline relative to the client’s timeline, that’s typically 3-6 hours per project that isn’t billed anywhere else.
Add up the 3-6 hours of coordination at your effective hourly rate and compare it to the margin you’re charging. For a 10-hour sub project at $100/hour: client pays $1,667 at 40% margin, sub receives $1,000, your gross profit is $667. Your 4 hours of coordination at $150/hour effective rate costs you $600. Actual profit after your time: $67.
This is why anything under 30% margin makes the work unprofitable once you account for your own coordination time. 40% is the minimum viable target. 50% is better.
You are not a pass-through. You’re a service layer that adds management, judgment, and accountability on top of a deliverable. The client is not paying for 10 hours of a subcontractor’s time. They’re paying for a managed outcome. Price the outcome, not the inputs.
The Disclosure Question
Do you have to tell clients you’re using subcontractors? The short answer: not proactively in most cases, but tell the truth when asked.
Most service agreements include language giving the service provider the right to engage other professionals or contractors to fulfill the engagement, this is boilerplate. If your contract has this language (and it should), you’re operating within those terms when you use subs.
Some clients care about this. A client who hired you specifically for your personal expertise may feel deceived if they find out the work was done by someone else. That’s a relationship risk, not just a legal one. The mitigation: position yourself honestly from the start. “I have a team of specialists I work with on different project types, you’re engaging me to manage and deliver the outcome, and I bring in the right expertise for each component.”
This framing is true. It’s also better positioning than “I do everything myself”, because it implies scale and specialization.
When a client asks directly: “Are you using subcontractors on this project?”, tell the truth. “Yes, I work with a team of specialists. [Name or type] is handling [component]. I’m overseeing all the work and responsible for quality and delivery.” That’s an honest and professional answer that most clients respect.
What you should not say: “No” when the answer is yes. Legal exposure aside, clients who discover a lie erode trust permanently. No margin makes that worth it.
What to Say When Clients Ask About the Rate
Occasionally a sophisticated client will ask: “What portion of this fee goes to your subcontractors versus your overhead?” This is more common in enterprise or agency relationships than in standard freelance work.
Here’s the script:
“I don’t break out the project fee by internal cost allocation, I price based on the value and outcome of the work. What I can tell you is that my rate includes not just delivery but full project management, quality review, and my accountability for the outcome. You’re not managing a contractor team, I am.”
That answer is true, positions your value correctly, and deflects the question without lying or being defensive. Most clients who ask this question are checking whether you’re gouging them, not conducting a cost audit. Reassuring them about value is the right response, not defending your cost structure line by line.
Setting Rates Before Engaging a Sub
The common mistake: you hire a sub first, then try to figure out whether the margin works. Do it in reverse. Determine your client rate first, then set the maximum sub rate you can accept.
The formula run in reverse:
Maximum sub rate = client rate × (1 - target margin)
If your client rate for this type of work is $180/hour and your target margin is 40%: maximum sub rate = $180 × 0.6 = $108/hour.
That’s your ceiling. Find a sub who can do the work at or below $108/hour. If the right person for the job charges $130/hour and you can’t find equivalent quality at a lower rate, your options are: raise your client rate (ideal), accept a lower margin on this specific project (acceptable occasionally), or don’t take the project (the right answer if the margin consistently won’t work).
Never let a subcontractor’s rate determine your client rate. Your client rate is set by your market positioning. The subcontractor rate is a cost you manage against that client rate. The sequence matters: client rate first, then find a sub whose rate fits. Not the other way around.
Protecting Margin Over Time
Subcontractor rates increase. Annual rate increases of 10-15% are normal in skilled services. Build this into your client pricing:
- Include annual rate review clauses in retainer contracts
- Build 5% annual cost escalation into your internal projections
- Increase your client rates before you need to, not in response to a sub’s rate increase
If a sub’s rate increase would push you below 30% margin, have the conversation before accepting the increase: “I need to hold 35%+ margin on this type of work. I can either adjust the client rate to accommodate your increase or restructure the scope. What would work for you?” Most long-term contractors will work with you on timing and structure if the relationship is healthy.
Ready to send stronger proposals?
Build, send, and track proposals in one place so follow-up is easier.
Start your free trial →
