Ask Kathy: How much contractor markup is too much?

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Question: My contractor just handed my contract to me, and I’m in shock! He wants 22% of the cost of materials, 22% over the cost of labor, 22% for subcontractors and 22% for labor management crew. I think this is way too much. First, the subcontractors are making a profit, and now the builder wants 22% on top of that for the same job. I feel if he can’t do the job and he has to subcontract out, then it should be no more than 5% for babysitting. That also goes for paying his employees’ wages. I have no control over the employees he hires. What if they are slow and lazy at my expense at $30 per hour plus 22%? No way! What should a contractor charge?

Answer: Oh my, where to start! First of all, I can understand your frustration. Every dollar the contractor charges for markup is another dollar you don't have to upgrade your project. So if you don’t like the markup, don’t hire the contractor. It’s so simple. There’s no need to get upset, just find someone else whose numbers are more to your liking.

That being said, what’s the obsession with contractor markups? What kind of markups do you think Wal-Mart or Home Depot make on that stuff they import from China? I’m sure it’s a lot. And contractors are people from your own community, hiring your neighbors, purchasing from local lumberyards. By the way, subcontractors are not hired because the contractor's employees cannot do the job. Subs are usually hired because they are state-of-the-art experts in what they do. Professional plasterers or masons or plumbers are often elegant artisans in their respective crafts, and that's who you want doing the work.

I think the confusion over markups is based on misunderstanding how a good contracting business works. There is an office and office staff to maintain, and bookkeeping, and employee benefits, training, insurance, licenses, certifications. And there should be money for callbacks when things go wrong. You can find a guy with a pickup truck and a dog in the back who won’t charge any markup. He’s scrambling from one job to the next barely making wages. And if something goes wrong later on with your job, he won’t have time to take care of it.

Also, you don’t want your contractor undercharging and then going out of business. The most important issues to consider when hiring a contractor are the company’s reputation, staying power and quality of work. Focusing too much on saving money on the markup just brings grief. If you think “babysitting” subcontractors is what a contractor does, you might consider acting as your own contractor and hiring those subs. Then you could save the 22%.

Am I being too harsh? From the disasters I've seen when markups are challenged, and sub-standard contractors are hired, I get a little riled up about this topic. Any answers for this person that are more sympathetic than mine?

(Photo: www.istockphoto.com)

Comments

[Carl Heldmann]

22% is a good deal!!!
Carl

[riley]

IMHO 22% is crazy! Most of these guys don't even have a college education. Most of these head honchos show up on the site a couple hours to create more work or tell the carpenters they did the job all wrong and to do it again ($30hr). The head contractor's absence also allows the hired hacks to cover up the bad carpentry.

An ad agency makes 17.5%. And that is to pay the designer, ae, materials, etc. Not to mention rent.

Get everything in writing. Get referals. Don't pay a cent until "everything" has passed inspection! Oh and get signatures from all workers on site that they have been paid in full.

[Timothy]

I agree 22% isn't bad. It's not great either but the minimum you'll ever see is 20%. 10% usually goes to cost and another 10-15% for profit. But definitely shop around and if all things are even go with a contractor you feel comfortable with who communicates well and check those references.

[Jared]

I second that (both Carl and Kathy). 22% is good. As I understand it, standard overhead for a construction company is around 15% and average net profit is 5-8% for the entire job. Remember he can't take any loss to hit those numbers. $5k for every $100k of helping people like you that often don't appreciate the work that is being done for them. Many of whom that see only what they DIDN'T get, and none of what they DID. These are the homeowners that complain without compliment, and jayhawk the laborers, who then in-turn are so afraid of making a mistake they won't make a single decision (for fear of chastisement). So then the workmanship plummets, because all they can think of is getting off your job and on to the next one. Guess who takes the fall for the poisonous environment that the homeowner created.

If hammering them on price is how you start the job, the GC is likely begrudgingly taking the work because he needs it even though he can smell the problems coming down the road. My advice, talk to more people that have had "successful" remodels, with reputable contractors. You will see that paying when invoiced and allowing the professional to do their job will make your remodel run much smoother. So long as they came from a reputable source. You should have inspected their work and spoken with a few referrals. If you trusted their replies then you should trust your contractors numbers. I'm curious as to where this person came up with 22% being too much. Was it just their GUT feeling? Get real.

I strongly agree with Kathy's notion of hiring local people in your community. You should hire people you trust and like, and pay them generously, and be happy about it - you're feeding their families. That contractor is probably just trying to stay afloat right now (hence the discount), most are out of work. Lots of people are without paychecks, that means without food on the table. Food for thought.

Sincerely,

Small construction Co.
Project Manager
J. Bockoff

p.s. my apologies for the rant. Godd night.

[College Educated]

Riley clearly hasn't done much construction. In the contractors defense it's a 4 year minimum to take the contractors license test. Don't put too much weight on formal education. Most of the foremen in the field are smarter than a lot of college educated idiots that can't figure out how to wipe their own backsides.

[pyt]

If you are worried about his employees being "slow and lazy", then I believe it's fairly common practice to have a clause in the contract whereby the contractor is financially penalized for not finishing the project on time.

[sheila]

i weighed in on this last time you asked it. i like the system where the contractor flat fees HIS/HER work (coordination of subs, oversight, sourcing and ordering materials, etc.), and does a straight pass-through on subs and materials. this removes the sneaking suspicion of all clients that the contractor is not looking for the best prices, nor ordering the subs to be cost and time efficient. it also fairly compensates the contractor (change orders are extra, of course).

a good contractor, like all professionals, is worth money, but not worth a percentage, because that does not truly reflect the value of his/her work, which value they should be able to fairly quote at the beginning of the project. a contractor should not be dinged for finding cabinets at half price and rewarded for a sub who takes 3 times longer to do the work than someone better, so i believe that percentage deals totally reverse the proper incentive models.

[Susan]

Hello All -

Many thanks for this valuable information! We're about to embark on a major remodel of a 70's tract home that we just bought. Our budget is about $700,000 to do everything, including adding about 1200 sf, and we expect to go mid to high range on all details.

We've found a good, local contractor who has great references and he's saying (without seeing our architectural drawings, which aren't yet ready) that he can do high end jobs for about $200/sf, which seems very inexpensive to me. He also says he charges 18% as his percentage, which he charges on top of everything and everyone (subs) that come into the house.

We want him to make a fair wage and good profit and will be happy to pay him well if the work is being done right and on time, but we are more comfortable with a flat fee than a percentage given all the reasons Sheila states above.

Also, what does the percentage really cover, besides his profit and a very small overhead? He has no employees since he subs everything out, and he charges an hourly wage for his time. He has a bookkeeper (I think it's his wife). I realize that he has insurance, but what else is covered in his percentage? The way I see it, he stands to make about $120,000 on our 8-10 month job, plus his hourly wages, if we go with the percentage deal. Am I looking at this wrong?

Also, if we want to go back to him with a proposed flat fee instead of his percentage, is there a method for calculating this?

Thanks,
Susan in San Diego

[Sabrina]

Remodeling is a business like any other. Any reliable contractor is going to have the same types of overhead, and responsibilities as other businesses in addition to those items that are specific to his field.

I've read over and over again how concerned everyone is with the contractors mark ups because everyone thinks that their overhead is so little. But I think many of you are actually not understanding how extensive construction overhead is on a job done right, by a reliable company.
Here is a small sampling of what the even smallest reputable contractor's operational overhead consists of:
1. Contractor State License Fees
2. Bond Fee
3. Workmans Comp Insurance
4. Liability Insurance
5. Vehicle Insurance & Maintenence
6. Gas
7. Tools & Tool Maintence (I guarantee you drill bits and blades don't magically appear)
8. Advertising Budget (website, online directories, google adwords, hardcopy ads, phone book ads, direct mailings, jobsite signs, truck signs, t shirts etc.)
9. Cell Phones
10. Office Phone/ Fax
11. DSL/ Utilities
12. Office Lease--(although I'll give you that the smallest guys base their office out of and extra room in their home.)
13. Office Supplies/ Equipment
14. Office Staff (in the smallest operation this is generally one person that wears many hats, sometimes a family member or an employee either way their work isn't free.)
15. Accountant
16. His Own Salary (even if the contractor you choose subs most of the work out, he's working on and off the jobsite as he coordinates the diffrent trades, organizes or completes purchasing & delivering of materials, waiting for inspectors, addressing your concerns and questions on a daily basis etc)
16. The cost of all those free estimates they spend their time driving out to, that they don't win
ETC.

Not to mention the liability involved in the job. If something goes wrong on a project whether that project is large or small, whether that blunder was massive or minor, YOUR CONTRACTOR WILL BE HELD LIABLE FOR DAMAGES UP TO THE TOTAL CONTRACT PRICE-- NOT JUST UP TO HIS/HER MARK UP OR PROFIT ON THE JOB.

There is a significant difference between a glorified licensed laborer you contract with because you need the cheapest price and are hoping for decent work, and a Reliable Licensed Remodeling BUSINESS aka the professionals (small or large) that you contract because you want the best project quality and have determined their cost within your budget.

In th past four years I've done well for myself and family succesfully flipping REOs and I can tell you once I figured out there was a difference between the former and later type of contractors my stress went down and my profits went up. You stand to lose alot more from a contractor that can't manage your project correctly to begin with than by paying the professionals fee.

FYI My contractor is a professional who took over my first flip from a licensed laborer 3 1/2 yrs ago. I consider him to be a paper tiger he subs most things out and puts a 35% mark up for overhead and profit on the original project scope, then charges me 25% mark up on additional work orders. He's been in construction since 1989. And I'm secure in the knowledge that when I pay him 90K for a project if something goes awry, he'd fix it or god forbid if I had to sue him, I wouldn't get a judgement only to find there was nothing to attach it to!

I hope that helps to put this mark up question in perspective.

All that being said, "Susan in San Diego" I suggest you review the proposal you have and then ask your selected contractor to provide you with a flat fee contract which includes his profit and overhead in the price and sets specified capped material allowances for finish fixtures etc that would be invoiced seperately and subject to your selections (i.e if you select marble from algeria for your foyer, you acknowledge you'll be breaking your allowances cap) If you've provided him/her with a set of plans for your remodel and can specify all sorts of things from the type of drywall texture you want to how you want your tile laid etc. At that point the only items that would be subject to mark ups would be change work orders--which don't kid yourself even the tiniest projects have--
and for which your contractor can specify in his ORIGINAL CONTRACT the rate (percentage) of Mark Up he will charge on those orders.

In regards to Riley: Not paying the contractor until everything has passed inpection is ridiculous! It's tantamount to expecting the contractor to complete your project on credit! Again get a flat fee for the scope of work outlined, make sure the contract is detailed. Make sure the contract details your payment draw schedule: 10% or up to $1000.00 down; Start of work; Progress Payment paid at a defined point (i.e. Completion of framing) & a Completion draw upon Final Inspection or if its a repair upon completion of a punch list.

And the paper you need signed is called a "Conditional Waiver & Release Upon Final Payment" and you don't need it from all workers that worked on the job, just the licensed subcontractors and your general contractor.

Its a conditional waiver because they retain their right to put a lien on your house until your check clears their bank.

Hows that for some free info.? Good Luck on your projects all!
Sabrina
reveler80@hotmail.com