" Is this type of mark-up on materials an industry standard?"

Yes, and it's a good thing. This guy's not going broke in the middle of your job. Any good GC always makes sure his subs are making money. You need to do the same.

Seems excessive to me.

The boittom line price is what counts, how they get to it is irrelevant. It doesn't matter which line or combination of lines the builder's profit is added on to. They need to make enough money to survive and perhaps prosper, but keep prices low enough to be competitive.

10% is going out of business low markup. More industry standard is 30%. For larger firms, close to 40% would be more the standard. The ability to have employees with benefits, instead of subs, makes for a more predictable and smoother project for homeowners. But it has it's costs.

Regardless of whether or not the contractor "deserves" more profit or is going to go out of business, this is probably not allowed. California has some specific requirements for remodeling contracts that help eliminate surprise charges.

First, in contracts "cost" has a very specific meaning, it is the amount paid by the contractor after all discounts and rebates. So it is the actual amount of money (or trade value) that the contractor surrendered and not a penny more. Contracts don't have to use the word cost for there to be a legal inference of cost.

In California time and materials contracts are prohibited in remodeling projects. This essentially leaves only fixed cost and cost plus contracts available. In most states, including California, a fixed price contract must include the material selections necessary to complete the project. If you then choose to upgrade to a different material then the contractor will initiate a change order for the upgrade and can largely charge whatever you and the contractor agree to before the work starts. A change order, once agreed to, essentially becomes a fixed price addendum to the fixed price contract. However, if some type of allowance is used for materials then that portion of the contract becomes a cost plus.

In a cost plus contract, the contractor must charge his actual cost for materials plus the disclosed overhead and profit (often called builder's percentage). So if your contract states 10% for overhead and 10% for profit then the contractor is only allowed to charge his actual cost plus 20%.

California has additional requirements to prevent contractors from marking up the job after the contract is signed that are a bit more restrictive than the standard cost plus mechanism described above. My guess, without actually reading the contract, is that since you know the builder's percentage this is not a fixed price contract and the contractor is not allowed to mark up your selection an additional 24%. Again, this is just a guess inferred from the information provided and is not something you should rely on to take action. If you decide to take action start by reading the applicable statutes or finding some resources from the CSLB.

As for the going out of business thing... that's not your problem. If your contractor needs to break the law to stay in business then maybe he should consider a different business.

What I’m trying to understand is WHEN the builder’s cost is expected to be disclosed. Not whether he is allowed to make a profit.

So, did they give an estimate with 20% over cost to get the OP ‘s business/ attention, then add another 25% as a kind of “ gotcha” surprise in the submitted contract rather than just doing 30-40% in the estimate? That would bother me and confuse me.

Or, is the estimate or bid usually done in stages? So when do you know, ok, what’s
it cost for you to do it? Not even including unforeseen things that would legitimately be cost overruns.

What I’m trying to understand is WHEN the builder’s cost is expected to be disclosed. Not whether he is allowed to make a profit.

In a fixed price contract the total cost of the job must be disclosed at the beginning of the contract. Certain escalation clauses are allowed (e.g. materials escalation clauses) but they can be quite problematic to enforce. Unforeseen things require a change order to the contract.

In a cost plus contract, the builder's markup must be disclosed before the contract is signed.

The idea behind both types of contracts is that you should have some method of calculating the total cost of the job. Either that cost is stated in full in the contract or you could pick materials and add the markup to arrive at the total cost of the job. In California, contractors are not allowed to charge in hourly, daily, or weekly increments for remodeling or home improvement (time and materials).

ETA: Just to clarify. In a cost plus contract, the contractor can use variable markups as long as those are disclosed prior to signing the contract. So a contractor could charge 10% profit, 10% overhead, & 24% flooring markup if your original contract states that. However, they can't state a 10% profit and 10% overhead in the contract and then markup the flooring an additional 24% on top of that.

"As for the going out of business thing... that's not your problem."

Tell that to the hundreds of Houzzers lamenting same please. When he goes out on your job, you've got big problems, I promise.