This is a question for all you seasoned general contractors out there. I am using sub contractors for the first time, and don’t want to lose my shirt yet still remain competitive, so I am wondering how much do you markup your subs work? thanks in advance for any replies.
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21% to 31% depending on how reliable and how much i need to clean up after them.. electricians are the worst....
how much money do you want to make ?
you can mark up direct labor
you can mark up materials
you can mark up equipment rentals
you can mark up subs
or you can add up all your direct costs and mark up the total... which is what i do
i read walt stoeppleworth a long time ago and took his advice to heart
now some disagree with this and mark up only labor..
no matter what, you have to cover your overhead BEFORE you can make a profit
if you are not making a profit, sooner or later you will go bust
take your overhead and add it up... that's your nut.. you have to break your nut
you can base it on a percentage of volume or you can base it on production hours.. or you can combine the two
Mike,
I use Walt's method of markup. He is now saying 65% markup should be used. I am assuming that is markup on everything. If not it should be with maybe a few exceptions.
If a long standing client asks me to re-roof his house and my roofing sub gives me a $10,000.00 estimate, I can't be competitive and charge the client $16,500.00. I should get something for overseeing the work and the time spent on the project. I break time down by the minute and charge accodingly.
We should be more like lawyers and the clock is running when I'm even thinking about how to do the job. Every minute should be accounted for. That's the only way to make it in this business. Gone are the days of picking up materials for free, and doing free estimates. I told a client the other day who questioned me about not charging him for the estimate I gave him for a minor repair job, Oh you got charged for it, I factored the ten minutes into the total price of the job.
Nothing is free any more. You can't even pick up a carpenters pencil and put it behind your ear on the way out of Lowes. They call it stealing now. We all need to tighten are billing practices like every other business does.
Just my three cents worth. Gotta go water the palm trees!Constructing in metric...
every inch of the way.
holy hammer the problem you describe:
Is one of the problems inherent to using the Uniform Percentage Markup Method that Walt Stoeppelwerth and Michael Stone advocate using.
We don't do any roofing (or plumbing or electrical for that matter) ourselves but we have clients that call us asking us to take care of their homes so we contract the roofing (or plumbing and/or electrical, etc) for them. Depending upon the simplicity or complexity of the assignment we have for our subs our supervision time can vary dramatically anything from no supervision at all to matching labor hour to labor hour.
In the case of one of the recent roof jobs we had we did something like 4 hours of supervision for a $10,800 24 square roof on a pool house. We figured for 8 hours (one days worth of time) and marked up the subs cost to come up with a project price of $13,400 still well below what a UPM contractor using the methods recommended by W.S. & M.S. and we generated a 15% Net Profit on the roofers work (1.17 markup) and because our Net Profit on Labor is figured into our Load Labor Rate did just fine there too especially considering we didn't even use all of the Labor Hours we had allotted to supervising that particular project.
A UPM contractor might have priced a project like that at around $18,000 and just plain not have gotten the work.
View Image
we mark up everything the same if our sub charges 100 per hour the client is going to pay 170 per hour. if we buy nails for fifty dollars the client is going to pay 85. everything is marked up the same. our company has 6 lead carps 2 laborers and an office staff of about 10.
we are a full service design build remodeler
Edited 1/8/2007 8:31 pm ET by sotabuilder
WOW... more people push'n paper than bang'n nails.... hard for me to ever buy into that... but if it works for you...
p
there are a lot of GC's out there with no employees where everything is subbed out. we do the smaller jobs 150k or less in house and most over that we sub out from a-z and just use a lead to supervise the work.
Your assuming the office staff of ten is all full time.
We have 4 carpenters, one journeyman, and two helpers full time.
One designer, two draftsmen(people), one administrative assistant and three part time showroom receptionists, plus the boss. The two draftmen are part time.
I have been following your posts as I do my usual lurking as well as posting here.
You are quite an expert at in a multitude of areas considering what you are currently involved in.
You have a lot more opinion than thoughtful advise to give in most situations.
Eric[email protected]
It's Never Too Late To Become What You Might Have Been
he never said anyone was part time...
everything i post is..... Opinion.... I'm not real big on huge staffs... I more than most understand the need for documentation, and all the paper that must follow every business... but...
it always gets my attention when it appears more are tracking and counting the income than are producing it.....
management has never been my strong point... which i'm pretty sure is the reason I don't have the jet today that I always wanted...
p
Most of the non production staff in our company is developing leads and eventual work for the production staff.
There is actually a LACK of magment currently.
Boss thinks he can do it all.
[email protected]
It's Never Too Late To Become What You Might Have Been
This is a long shot and completely off topic, but are you by any chance related to The Eric Paulson who was Shooto champion?
here is the breakdown
2 designers 1 marketing 1 estimator 1 OA 1 GM 1 owner 2 project managers and 1 speacialty project manager.
as i see it that means there is only the OA and project managers counting the dollars and the rest are directly involved in the production or pre production side 4 inside as you say tracking numbers versus the field staff previously mentioned. hmmmm i think your math may have been a litle off. and yes all of the office is full time and we also charge for our design contracts.
sounds like a company i know in col. oh? yes?no?
Well, I'm not a "seasoned" GC, and probably spend more hours wearing my carpenter hat than my GC hat, but here's my 2 cents worth...
The only thing I mark up is my labor...meaning that all of my overhead and profit is recovered through my labor rate. I do this for a multitude of reasons. First, I can reasonably estimate my overhead budget for the year (all business related, non-billable hours fall under this catagory as well), and I can reasonably estimate the number of productive, revenue producing hours I will work in the year...the math is easy. If I am relying on a sub markup to cover some of my costs, a couple of projects with a small percentage of sub work can throw things off for me.
One of the line items on my proposals for a project is for a "project management fee". I estimate how much of my time will be spent on working with my subs and other non-productive things related to the job and multiply by my labor rate. So I do recover the cost of my time for managing subs, but in a way that I feel is honest and I can communicate to clients.
Because I am the one selling to my clients, as well as the one managing the project and most of the work onsite, I can make recommendations based on what I think is best for them, as I have no financial incentive to suggest a higher priced product or sub. I think my bids can be more competitive as well. Recently, I had a basement remodel that included a complete rebuild of the radiant heating system. It was a $70,000 project with $28,000 of that going to my HVAC sub. Now I probably spent about 15 hours of my time managing and working with this sub, and $850 of my project management fee reflected this. If I had been using just a 10% markup, my bid would have been $2,000 higher. Maybe I would have made more money, maybe I would not have gotten the project because my bid was unnecessarily high based on my actual costs.
In the end, you have to decide what works best for you. Some projects are materials intensive, some are not. Some projects have a lot of subs, some do not. But I know that I am probably going to spend 30-35 hours a week directly related to my current project, and for me this is the best place to make my money.
average.... there is liability in using subs.... as the GC you are responsible for their work.. wether they finish.. wether they honor their warranties ..
so there is risk involved inusing subs..
yet , here you included a 28,000 cost with no reward.. yeccch
makes me shudder just to think of itMike Smith Rhode Island : Design / Build / Repair / Restore
If you have to breakout costs for various stages it doesn't always make sense to markup the same %.
For instance, I worked for a GC that had 3 carpenters, 2 laborers, a draftsperson and a few part time folks of various kinds. The jobs ranged from nicer remodels to nicer new construction.
The boss would complain that he hated to bid on finish work portions of larger jobs since our finish costs were much higher than others. Our carpenters were quite good so it wasn't our productivity or that of subs that drove costs up, but other firms were simply applying higher profit margins early on to rough carpentry and giving away the finish work at cost.
Our boss would pass on some projects to take advantage of the higher perceaved margins in rough carpentry. The result was we did fewer projects from start to finish, becoming known as a foundation, framing and remodeling firm. The custom homes with fat finish budgets that we would have been great at, were given to the competition that simply did more volume.
Other contractors that I currently know mark up everything more up front, so if things go sour in the later stages they will offer to let the client find another contractor to finish the project. Not that I agree with this.
One local plumber makes all his profit on the rough in and gives away installing fixtures at cost. This dissuades clients from "saving money" by installing fixtures themselves. This seems like good business.
At least one electrican I'm aware of also makes more profit on the roughin than the final.
Similarly, at the end of each of our jobs when budgets get tight I'm beginning to see the value in making a larger percentage of profit earlier in the project, so we can be more lax later on and still squeeze in the details that make the results WOW the client.
It would be nice to eventually get clients that are less impacted by sticker shock so we don't have to dance around so much.
Beer was created so carpenters wouldn't rule the world.
20%
Romania wasn't built in a day.
My current practice is 0% markup on subs (which by the way I like to refer to as "Independent Contractors") and here are two reasons why. One: I am very comfortable with the current list of guys in my rolodex. I have one or two guys from the different trades (electrician, plumber, drywall, painter, roofer, tile guy, vinyl guy, dirt guy, foundation guy, slab guy, tree guy, etc. ) that I will call every time. I have gotten to know them, like them, trust them, and can count on them almost always. I do not have to chase them around, worry about beer cans falling out of their truck when they show up, or apologize for their behavior around the clients teenage daughters. I know who is doing the work, and do not worry about getting dinged without good reason. It's taken a long time to build these relationships but it's been worth it. Two: I make it abundantly clear in my proposals that I do not markup my independent contractors, and I tell them why (see above). My clients appear to appreciate this, a lot!
Yes, I recognize that a more sophisticated business guy might argue that I am not taking due compensation for my risk. I would argue that my actual risk is low, and that I have contracts to deal with any quality issues. Some might also argue that I am missing an opportunity to make money by not marking them up. Maybe, but I also build in a project management fee (usually 10% of my actual labor) to cover non-billable time spent on a project.
This may not work for everyone, but I don't have an office staff of 10 to keep afloat and for the time being, it works fine for me.
I do something similiar and with the same type of subs.
I often take it one step further and arrange that the contract is between sub and owner. Takes the liability off me , I charge hourly for managment/oversight. This reduces my Liability insurance premiums because the costs don't run thru my books.
Owners percieve great money savings from not having to pay the 10%-20%I do charge them if it runs thru my books, and I don't have to deal with the bookeeping at all. Bills go directly to the owners.
I think this thread makes it clear why so many small general contractors eventually fail. If they do understand the intricacies of running a business, using sound business practices, they are in competition for a limited amount of available work with so many contractors that don't factor in the real costs of doing business.
It's a great hobby though and it's been good for groceries.
If there were truly any great opportunites (from a business standpoint), then their would be a big box store that only sold General Contracting services. Obviously, that's not going to happen.
Are their any GC's on Wall Street?
blue"...if you just do what you think is best testing those limits... it's pretty easy to find exactly where the line is...."
From the best of TauntonU.
Well said Blue
Reading this thread sort of makes my head spin.
I reply to you because you've given me great advice before, a lot of which from this site and rec. reading, when I started working for myself last year--got a license and bond as a GC, an LLC, and just started doing smaller projects for a long list of of clients that were waiting for me to quit my other job. A couple remodel projects that ran a couple months or more and then a lot of smaller jobs--repairs and whatnot. About 5 deck and patio cover jobs done in days each...
My first year appears to have gone alright grossing in the 70,000 range and netting somewhere around 30 ( I haven't tally'd it all yet). I saved about 40% for taxes and after looking over everything my accountant says my wife and I filing jointly should be able to keep a great chunk of that. I'm able to cover my overhead, buy what I need to run the business, estimate correctly for these smaller jobs and make decent money.
So far I have worked exclusively by myself--I like it that way--but mostly I think I'm afraid to take on too much responsibility. I don't want to have an employee who's depending on me for income, and to deal with insurance and tax burden for that employee.. And I haven't needed to hire any subs. I have told a couple friends that want to work with/for me that they should just get licensed and we can work on jobs together without partnering and then they wouldn't be dependent on me...
Coming up are a couple larger remodels--2nd story addtn. over garage, and another addtn. off the back of a house--that I could likely walk right into that would require extra labor.
I know this is turning into some type of pathetic "Dear Abby" plea but do you think I should ramp up or keep churning along by myself? Are there other angles to increasing the manpower? I know there are others in my situation--asking questions about startup and whatnot. But I don't have as much experience as a lot of these guys and I don't want to get in over my head.
One of the only reasons I started working for myself is so that I could have the time to move should a piece of real estate pop up that I could buy to rent or flip. And I know you know about that too! And also to gain more control of my own schedule to be available to my family more, etc... And that's all playing out well so far...
Thanks blue,
Pat
I saved about 40% for taxes and after looking over everything my accountant says my wife and I filing jointly should be able to keep a great chunk of that.
Congrats to you!!!!! You stayed alive after your first year!
I think I'm afraid to take on too much responsibility.
Stop being a afraid. Instead of fearing responsibility, manage it.
I don't want to have an employee who's depending on me for income, and to deal with insurance and tax burden for that employee.. And I haven't needed to hire any subs.
I don't want employees either, if I don't have an entire management team and office to deal with them. So, we've chosed to rely on subs.
Coming up are a couple larger remodels--2nd story addtn. over garage, and another addtn. off the back of a house--that I could likely walk right into that would require extra labor
Now you need competent help in the form of employees or subs. You already stated that you don't want employees, so keep that in mind as you make your next selection: use subs!
I have told a couple friends that want to work with/for me that they should just get licensed .
Stop encouraging your friends to get licensed and go into business. If they were truly interested in doing business, they already would have gotten licensed. They aren't you. They have different needs and goals. They want a boss and a paycheck.
Now, forget about your friends and start interviewing competent subs, that have all the licenses and insurance for you expanding business.
Thanks for the compliments.
blue
ps See how easy this contracting is?!!!
"...if you just do what you think is best testing those limits... it's pretty easy to find exactly where the line is...."
From the best of TauntonU.
Blue,
I agree that I should stop telling my friends to get licensed! Now my only trepidation is looking for subs.. I'm afraid they'll know more than I do and I'll look incompetent but I guess that's the point, right? I shouldn't have to know all the ins and outs to hire somebody to accomplish something that might be more daunting to me.
A year into it and I'm still feeling pretty hungry--not ready to kick my heels up at all! But you're right, contracting can be pretty easy. See, I came from being a bicycle mechanic and parts buyer for a bicycle frame manufacturer to contracting. I've always worked on houses (while I had a boss and a much smaller paycheck!) but I have this complex about whether I know what the hell I'm doing or not.
I think anyone can succeed however, if they have the desire to do things right and do them efficiently to produce a respectable income.
On this thread, I think the worst trap to get into is to be "cheap." You need to figure out what you need/want to make to be profitable and stand by it. If you lose jobs for expense--you didn't want that job anyway because it wasn't worth your time! I passed up plenty of work even in my first, hungry, year.
Thanks for not tellin' us greenies to go figure it out ourselves! Now tell me how I can buy my 1st investment property without losing my current house and family in this slackening market!
Cheers,
Pat
Pat,
Don't be afraid that your subs might know more than you. They do, and they should, at least within their speciality. Be honest with them, tell them you're just starting out and are trying to build a network of subs. Treat them with respect and pay them on time. Don't shop in the yellow pages. Do the same thing that your clients do, ask around and get references, and follow up with the references. Ask the guys at your lumberyard (hopefully you have a good relationship with someone where you are buying materials, and hopefully it isn't at a big box). For electricians go the your local elect. supply house and get a couple of names, get a couple of painters names at the paint shop, when you find a painter you like, ask him if he knows anyone who does drywall. It takes time, and you'll run into a few dodo heads along the way, but eventually, you'll have all your bases covered, and with any luck, they'll start referring folks you. It's all about networking!!!
Good luck.
Pat, getting that house, without risking your house, or anything is simpler than you think.
Write the most outrageous contract ever thought of. Include the most ridiculous language that you think would get the contract tossed in the can. Insert said language in one of the tedious amendments, or whatever they call them (conditions). Find a motivated seller. Fix their problem (take their payments). You own the home, they own the debt.
In real estate law, they call that non-recourse clause. Sellers don't care if it's non-recourse to you.....if you can't keep it, neither will they. They'll thank you for trying.....
Oh, I forgot in my instructions: Have seller sign your ridiculous contract.
blue
ps It's done every day. "...if you just do what you think is best testing those limits... it's pretty easy to find exactly where the line is...."
From the best of TauntonU.
I think this thread makes it clear why so many small general contractors eventually fail. If they do understand the intricacies of running a business, using sound business practices, they are in competition for a limited amount of available work with so many contractors that don't factor in the real costs of doing business.
As there have been a number of different views expressed in this thread, perhaps you would make it clear which are those that you disagree with
JohnIf my baby don't love me no more, I know her sister will.
I have to jump in on this. 30% across the board. Subs, materials, professional fees, equipment rentals. I still spend some time with my tools on each job because it keeps my insurance down if I do some of the work. Granted I'm 99% commercial any more but this number works for me. When I do the occasional residential; job I still use that formula. I find my pricing is in line with most of the mid sized contractors. I am rarely the low bid. I don't want to be. At this mark up I make enough to cover the little things ( 2weeks ago when we found an electric transmission line under the slab where the addition was to go was not a little thing, that was a change order), pay my bills, pay me, pay taxes & put some money away. IF I can't do that I may as well be working for some one & not have to think so much.
IF I can't do that I may as well be working for some one & not have to think so much.
Right on brotha!
blue"...if you just do what you think is best testing those limits... it's pretty easy to find exactly where the line is...."
From the best of TauntonU.
As there have been a number of different views expressed in this thread, perhaps you would make it clear which are those that you disagree with
I'm not disagreeing with any of the different contractors, or their approach to markup on their subs or materials. I'm just observing that I cant think of another business sector that mirrors how small contractors do their business. As a result of these "unorthodox" methods, it's understandable why so many small general contractor operations fail to thrive. When you look at the business of contracting from an outsiders point of view, you'd probably think "that business is easy....sell $1,000,000 worth of product in a year and pocket $200k profit, as well as a year's worth of labor....and a years worth of sales commissions....It looks like a sure bet to net out 300 to 400k on one decent tradesman eh?
blue"...if you just do what you think is best testing those limits... it's pretty easy to find exactly where the line is...."
From the best of TauntonU.
With all due respect, your business outline is that of an employee and not a business owner. You work for wages. I would suggest that you take a business course.
What Mike said.
You really can't just give a percentage. It depends on what you include in overhead.
One guy can say he needs a 50% markup and another a 30%. Often if you look closer you will find they don't include the same cost's as overhead.
The majority of contractors go out of business within five years. It might be instructive to just ask those who have been in business for 15 or more years if they markup everything. We do, and we are here to fix problems for our clients of years ago. They also calll us back to do more work.
Our markup also allows us to visit all of our projects one year after completion to look for problems that may have cropped up that the client may of may not be aware exist. Clients appreciate this, and for many it is not until the call to schedule that visit that it really sinks in that we are looking out for their best interests.
The majority of contractors go out of business within five years. It might be instructive to just ask those who have been in business for 15 or more years if they markup everything. We do, and we are here to fix problems for our clients of years ago. They also calll us back to do more work
In my days, when I tried to ask a contractor that had survived for more than five years, how to mark up, they just laughed and told me to go on my own and figure it out. I think I remember these words from my boss when I started yapping at him "If you think it's so easy, why don't you go in business for yourself?"
I did: I wish I had this forum as my advisor back then. You'll actually get a straight answer from guys that have survived 15 years.
My vote is to mark up everything...do it walt's style or Sonny's style or whatever...just charge MORE! If you're not losing some sales, you aren't charging enough LOL!
blue"...if you just do what you think is best testing those limits... it's pretty easy to find exactly where the line is...."
From the best of TauntonU.
blue,
I thought you did have empoyees and ran crews. At least that is what I have understood from some of your posts. I haven't read anywhere near all of your post but those that I have read seems to indicate that to me. Your posts in this thread seem to indicate you do not. Am I wrong here?
Yes and no Dove. I've employed up to about 25 guys at one time and didn't like it a bit.
At this point I'm left with one employee on one crew.
I do have two thousand idle subcontractors to choose from here in MI though.
What do you need done?
blue "...if you just do what you think is best testing those limits... it's pretty easy to find exactly where the line is...."
From the best of TauntonU.
blue,
nothing I can't handle myself. lol
contractors on wall street... yep... Haliburton (sp) ? Bechtel (sp)
Markup... I don't see that you can ever have a set in stone "markup" for over 15yrs I was a partner in a company that I and my wife started in a garage.... 8088 10meg harddrive dos computer for $7k if that dates it for anyone...
within 5 yrs we had sales of over 5mil with just 3 people (her bro came to work with us) (within 3 yr we'd purchased our own building to work out of to get out of the garage) we were mostly self funded... we had little to no overhead... and worked our butts off... point being... we didn't have 10 people eating out of the bucket... we could make as much ("make" meaning after all was said & done what got to stay with us in the bank)... the whole theory was "MIP" money in pocket ... that is what in my opinion you have to look at on each and every deal... we could at times make great money on 2% deals... $102k contract and cost of goods being 100K... if we never touched the product... had 30day billing on both ends... with a 2% discount from the manufacturer for us paying our bill in 10days... we could "clear $4k" with less than 30 min worth of work and book keeping... BUT on top of that it could very well put us in the "best pricing area" with this manufacture for the year (many manufactures give you discounts/rebates/ free goods once you reach a certain level of sales with them for a 12mo period) so for the next 12 mo we could bid product at what would appear to others as though we were selling "at cost" when in fact we were getting a 10% rebate on every dollar spent with the manufacture... plus our 2% "fast pay" discount... still might not sound like alot... but it was these type deals that would pay all the expenses of the business so that the rest could gravey....
I had a contract in hand for 4000 electric motors... I knew what the distributor cost on these was... I went to a local distributor and offered him 10% above his cost AND offered to pay for them in advance of him placing the order... would have been about 18k in his pocket for making a phone call...
I'll always remember him telling me.... "son i can't open my doors for less than 20%... if i did what you're ask'n I'd go broke"... he wasn't mean... he wasn't offended by my offer... he said it to me like a father would to his son... I thanked him... called a distributor 100 miles away who i'd never had dealings with before... he in turn called the factory... got himself a better price and sold them to me "at cost" or 10% less than i'd offered the local guy...
when my mom would come home from shopping all happy that she purchased something for 50% off ... I'll always remember my dad say'n "50% off of WHAT?"
p
I LOVE THAT STORY ponyti! It illusustrates the "art" of markup and profit.
blue"...if you just do what you think is best testing those limits... it's pretty easy to find exactly where the line is...."
From the best of TauntonU.
blue_eyed_devil - "In my days, when I tried to ask a contractor that had survived for more than five years, how to mark up, they just laughed and told me to go on my own and figure it out. I think I remember these words from my boss when I started yapping at him "If you think it's so easy, why don't you go in business for yourself?"
That was basically my experience too. I would ask contractors I was working with how they estimated projects and how they priced or marked up their work and it was like it was some big huge trade secret that they just didn't want to divulge or give out.
Now as I gotten older, gained my own wisdom and experience, and done tons of my own research I've come to realize the only real secret they were hiding was that they didn't really have a good idea of what they were doing at all. They just did it and hoped it worked out. I was talking to one of our plumbers the other day about estimating software and after talking to him for a while I began to think I can't really give him any real kinds of worthwhile recommendations because he doesn't really have any kind of methodology in place in the first place. He's just winging it and by virtue of how flush the building and remodeling markets have this last decade or so has survived, even flourished, in spite of himself!
"My vote is to mark up everything...do it walt's style or Sonny's style or whatever...just charge MORE! If you're not losing some sales, you aren't charging enough LOL!"
The problem with that is that is that the flush easy days are falling behind us now and even for those of us in the wealthy affluent markets things are going to tighten up and actually start to get competitive. Remember Sonny is sitting in perhaps one of the plushest, easiest, most active markets in the U.S. The just "charge more" method of management only goes so far and wont work at all in a depressed region or area.
My vote and our direction here in my company is a better understanding of the numbers and the nature of the work we do and to develop and deploy the modern management methods that work to increase throughput and reduce waste.
View Image
Speaking of Naples
yesterdays Wall Street had a page 1 (?) on the market in Naples. That has been one of the hottest markets in the nation. Now it is going the other direction.
Told the story of an "investor". She is a Canadian. Liked the area. Went in with both feet. 3 examples. Buying in 04 and 05. Buys 2 lakefront homes and a duplex. 435k and 690k for the SFR. 621k for the duplex.
Sounds like she is renovating some of these also. So market turns. ie: can't make the payments. Can't pull out cash on a refi. Rentals are negative cash flow. All of a sudden she is "tired of landlording". (yeah, me too)
So she is starting to sell. Can't sell fast enough so it's auction time. The real estate agent that sold her all these homes gets into the buy side on the auction. High bids are 275k and 400k for the SFR and 250k for the duplex.
Countrywide says they are in foreclosure proceedings on 2 properties. Canadian says isn't in financial difficulty.
ummmm.. OK
myself I'd be a little PO at the real estate agent
myself I'd be a little PO at the real estate agent
Why? Did the agent do something wrong?
blue"...if you just do what you think is best testing those limits... it's pretty easy to find exactly where the line is...."
From the best of TauntonU.
When somebody replies to the "How much do you markup work done by subs" question with an answer of XX% or a range of XX% or YY% without qualifying what the basis of those numbers are it's meaningless if not useless information. And not marking up subs at all, while maybe okay if the contractor has his/her own labor marked up sufficiently, is giving away "value" for nothing and I think is a bad business practice that hurts all contractors as a whole.
I think the real answer to this question is "it depends" but that "it depends" answer can be looked at on two fronts, based on the two main viable methodologies for pricing projects. The Uniform Percentage Markup Method or the Capacity Based Markup Method. The two methods will give you two very different answers and knowing how they are different is important too.
With the Uniform Percentage Markup Method your are supposedly distributing your Costs of Doing Business, your Overhead evenly across your Labor Material and SubContracting costs but therein lies a problem. Those costs are rarely even and just as rarely are they in the same proportion to each other so your recovery of your Overhead can vary widely. In fact it can vary from severe under-recovery (see The Potential Problem Using a Volume Based Markup) to over-recovery which will make your job overpriced which will lead to your proposal being rejected and cost you your bid on the job.
Assuming Net Profit has been figured into the markup figure the formula or equation that represents how the Uniform Percentage Markup Method works is represented below:
Job Price = (Labor_Cost x ETV_Markup) + (Matls_Cost x ETV_Markup) + (Sub_Cost x ETV_Markup)
which if you recall your math from 9th grade can be rewritten as:
Job Price = (Labor_Cost + Matls_Cost + Sub_Cost) x ETV_Markup
Typically markups for this method (depending on just what the contractors Overhead costs are) will fall in the range of 1.5 to 2.0 with the average falling around 1.67. Since some jobs are more or less material cost intensive than others and some jobs may not require any subcontracting at all this method fails in the extreme case where you have a labor only, no material cost and no sub cost job because 1.67 x $0.00 is Zero so your markup on materials and subs contributed nothing towards your Overhead costs. And in cases where materials and sub costs exist but are low it doesn't contribute enough. And again in cases where materials and sub costs are higher than normal it over-prices your project proposal as I already mentioned and you just don't get the job.
On the other hand the Capacity Based Markup Method is designed so that you recover your Costs of Doing Business, your Overhead as a function of your Labor or "consumption of capacity" to do the job. In the Capacity Based Markup Method you take all your Costs of Doing Business and build them into what is sometimes referred to as a Loaded Labor Rate (it's loaded with your Costs of Doing Business).
Using this methodology the formula or equation you would use in it's simplest form looks like:
Job Price = (Labor_Cost x CBM_Markup) + (Matls_Cost) + (Sub_Cost )
but taking into consideration that you still want to generate a Net Profit on the materials and subcontracting you are providing it really should look like this:
Job Price = (Labor_Cost x CBM_Markup x NetProfitMarkup) + (Matls_Cost x NetProfitMarkup) + (Sub_Cost x NetProfitMarkup)
Net Profit is the company owners reward for the risk of being in business for themselves (and if anyone thinks they think have little or no risk they are fooling themselves) and it is also and perhaps more importantly is the "Value Added" for the contractors expertise in picking qualified subs and the right materials.
That said Capacity Based Markups (the markups placed on Labor Cost alone) vary from 1.90 to 2.35 with the average being 2.12. And while the average Capacity Based Markup is higher than the 1.67 average for the Uniform Percentage Markup Method the markups the CBM user places on Subs and Materials is dramatically lower that the UPM method.
One obvious advantage that falls to Capacity Based Markup contractor is that when the consumer compares lets say what they are charged for the door they know they can get at Home Depot/Lowes for $1000 they see that the CBM contractor is only going to charge them $1100 for it where the UPM contractor is going to charge them $1670!
And in the case of a subcontractor lets say an electrician that the consumer knows costs $80 per hour the CBM contractor is only charging them $110 per hour for providing them while the UPM contractor is charging out that electrician at $167 per hour!
The Uniform Percentage Markup contractor might then argue that the consumer will also compare the labor rates of the two different types of contractor and see that the UPM labor rate is only $66.80 ( a Labor Cost of $40 x 1.67) vs. the CBM contractors loaded labor rate of $84.80 (a Labor Cost of $40 x 2.12). But the consumer in most cases will find the CBM contractors $84.80 per hour rate palpable and acceptable given what they know of the rates for plumbers and electricians.
Getting back to your core question as to "How much do you markup work done by subs" it depends on what markup method you are using to come up with your project price and labor rate in the first place and you haven't said what method your using.
My advice to you would be that since you are asking this kind of question in the first place I going to guess your labor rate is probably based on what you have heard other contractors around you are charging and not on any real methodology or computation. If that is the case I think you should get a copy ASAP of Ellen Rohr's book How Much Should I Charge?: Pricing Basics for Making Money Doing What You LoveView Image and read it real quick and then read it again. Then with the understanding you gained from reading that download my Capacity Based Markup Worksheet (also known as the " PILAO" Worksheet). Then what you find on Line 103 of the Overhead Cost Worksheet (F103) and the chart that is right there will show you what Percentage of Sales you figured for your Net Profit. Then figure out what you need to markup Materials and Subs to achieve that percentage.
Remember if the worksheet says your Net Profit is 10% of Sales you can't just multiply a cost of let's say $100 by 1.10 and expect to get a 10% Net Profit. $100 x 1.10 = $110 and that $10.00 divided into the $110 Sales Total is only %9. To get a return of 10% of Sales you would need to markup the $100 by 1.1. I got to believe there are posts in the archives here that explain that math so I'm skipping over and long explanations of that for here now.
Typically in the long run you will see markups on Subs & Materials for contractors using a Capacity Based Markup system of 8% to 16%. That percentage (for Net Profit) then really then depends on just what your market will bear.
Oh and before I forget and in case anyone challenges me on the logic as far accounting for the supervision of any subs you should figure that based on your assumptions of just how many hours you will put in directly supervising them where you wont be able to concurrently perform any of the task work (labor) you need to perform and charge your loaded labor rate for that dedicated supervision time.
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Edited 3/3/2007 1:10 pm ET by JerraldHayes
Any thoughts on this? Its an ongoing debate at work. Theres a main owner who advertises and used company name to get work. He than sells the leads to lead guy. For 40% of jobs profit. But it gets weird. Ill use A B C for example. A is owner B is leadguy contractor c is subcontractor. The contractor B goes to the calls inspects the job quotes it and than hires the C subcontractor to do the job. C gets a job description with approximate total payout and approximate materials needed cost. Example Materials approx/ 2200$
Total job payout approx/1400$. C the subcontractor goes and buys all materials needed for job goes and does all the work himself finishes it. Payout time example Customer got billed 10,000 total for job. Materials costed 2200$ 10,000 -2200=7800$ left. The subcontractor C gets to keep 30% of the 7800$ wich is 2340$. Than the remaining 5460$ gets split 40%-60% from A and B. A/owner=2184$
B/sales inspection contractor 3276$
C subcontractor=2340$