Doing a job for a son/brother of a client and he was astounded by the fact that if I used my business account to buy material that I marked it up by 15%.
(yes, I get paid to get the material as well.)
What do you think is the best answer to him.?
Mine was that if I loan money out, I want interest.
Replies
"I could increase my labor if that'll make U feel better?"
Jeff
Buck Construction
Artistry In Carpentry
Pittsburgh Pa
It's not your son/brother. Why should the client expect special treatment for their fambly? Unless if client was giving you plenty of large jobs, consistently, and this was just a small job. Then maybe you could grease the wheels a little. But if it's just your average client, they haven't earned the royalty treatment.
~ Ted W ~
Cheap Tools! - MyToolbox.net
Meet me at House & Builder!
Ted W.—"It's not your son/brother. Why should the client expect special treatment for their fambly? Unless if client was giving you plenty of large jobs, consistently, and this was just a small job. Then maybe you could grease the wheels a little. But if it's just your average client, they haven't earned the royalty treatment."
I don't think this is a case of someone asking for special treatment at all. Maybe his client has done the same analysis I did and thinks this is profiteering. He said that he already gets paid for his time to acquire the materials so given that the public cries out over gas prices and screams about Exxon/Mobil raking us over the coals I can certainly understand the complaint of another 15% surcharge that represents pure Net Profit. FYI Exxon/Mobil Net Profit margin is only 9.8%. A 15% markup after all your costs are covered returns a 13.04% Net Profit. AND if he used a properly designed Loaded Labor Rate he already generated a Net Profit on his time! The shareholders of Exxon Mobil would certainly love to see those kinds of margins.
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jerrald.... you didn't read cutwooda's response
this is not a case of the customer complaining...it's the dumazz brother who doesn't know how to run a business that's complaining
wether youy use general markup''''or capacity based markup...the end requirement is the same... ALL costs and OVERHEAD have to be recovered in the pricing
and.... you ,nor the OP, have established wether his labor rate is sufficient to recover the costs and overhead
today .... one of my subs called and asked if i would figure a job for him that had already been completed... remodeling, stairs, trim,painting
they had agreed on a Tlabor rate and several progress payments had been made and.... now the owner wanted to renegotiate the deal
i let my sub know that trying to justify a price by soliciting other prices after the fact was never going to satisfy his customer... then i asked him what he was charging for a rate ....
$32/hr
i laughed.... man there are so many people in the trades who should not be working for themselvesMike Hussein Smith Rhode Island : Design / Build / Repair / Restore
There are many reasons to mark up materials, here are two.
1. You have to use your time, gas & truck to get the materials'
Of course if you don't use your truck, you would have to pay for delivery, but you still have shopping time.
2. You will be expected to stand behind the materials once installed.
The products may have some warranty but you will be expected to handle the rework and headaches.
Also you stated 15%. divide that out by your time, effort & gas and factor in protential warranty work, dosent go far.
Paul
No one should regard themselve as "God's gift to man." But rather a mere man whos gifts are from God.
also by you paying for the material its your problem if the client dosent pay you in a timely manner ( just got a cheque from a insurance co recently for exrras , took 5 months ,no intrest added on )
Some times i call it " the lifes a bitch add on " & i have enough scars to justify the add on
the discussion was about markup on material as i understood it and selling at your cost
the point i was trying to make was that ones cost is not just the invoice cost
when i tell a customer i am selling them something at cost i have my own definition of cost without a need to feel i am lying & if they dont like my system they can get somebody else is how i put it to them & i have been in this game 35 years
CardiacPaul — "1. You have to use your time, gas & truck to get the materials'"
Paul he already stated that he gets paid for his time to get the materials so that is partially the reason why I think his 15% markup might be considered exorbitant.
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Jerrald,
My bad,
Paul No one should regard themselve as "God's gift to man." But rather a mere man whos gifts are from God.
What's the significance of this client being related to another client?
What's the markup if you don't use your business account?
Those 2 points are probably red herrings, but I have to wonder why you mentioned them.
I don't mark up materials. It's not that I don't want to explain markup, I just find it simpler to factor shopping and delivery time into my bids. If I'm working T&M, I try to shop on "job time", but I'm ok with not being completely effective at that.
By the way, at what point were they astounded? When you bid the job or when you submitted your bill? They certainly should have known how you bill before they accepted your bid.
My explanation is that I'm in business. I don't know of any other business that re-sells something for the same price they buy it for. That's capitalism. I bill time and materials. I bill for all time shopping and delivering. Any time that is a direct activity for a job gets billed. Indirect costs, such as billing, tool maintenance, tool purchases, capital improvements, insurance, and any other overhead are partially, and only very partially defrayed by my 20% markup. In the last metropolitan market I worked in the markup on subs and materials was 60%.You don't need to justify making a living.Steve
You don't need to justify making a living.
Winner, winner, chicken dinner!
Now, how to convince outsiders of this concept?View Image
For many many years I figured as long as i make a paycheck, I am making a living. So I payed myself by the hour just like my previous bosses paid me for so many years. But I was crewing myself all the time with expenses of running my own business. Then I read "How to run s successful construction company" and realized how badly I was screwing myself. Marking up material is not profit..it covers business overhead.
The guy I was referring to was hired by his brother to fix up an old farmhouse in the middle of nowhere....30 miles from civilization. He was going way to slow so they hired me to help out. I agreed under the stipulation that if I get material for the job, I would get paid time for getting it and there would be a 15% markup. The brother that signs my paycheck agreed. The brother doing the work did not know about it. When he found out about it he felt as though I was being greedy. He still thinks like i used to; that a paycheck is enough.
Later that day I had to renew my GC insurance and bond almost 600 and fill my gas guzzling truck up 62.00 and pay 500 to each lowes and HD....I am not cheating anyone by marking up. I feel my wife should get paid for handling my books.............................AND BY GOD! I DESERVE TO MAKE A PROFIT EVERY ONCE IN A WHILE!!!!!!!!That profit keeps me alive so they can call me back next year and the year after that.And quite honestly,..it is probably cheaper than him having to go to town and gewt it himself so I have material to work with.
you're doing nothing wrong. Anyone that works for the paycheck is working for someone else. You can't stay in business long if all you're doing is making wages.
DonCanDo while I do agree with your thinking regarding...
"...I just find it simpler to factor shopping and delivery time into my bids. If I'm working T&M, I try to shop on "job time", but I'm ok with not being completely effective at that."
I do still like to see contractors generating a Net Profit on the materials they provide although I think a 15% Markup/13.04% Net Profit might be a little on the high side for my taste.
However from the text we have (there could be a lot more to the story) it sounds to me like the client in this case had this all sprung on him rather than having agreed to it contractually before hand in which case he would have absolutely no justifiable complaint at all. We have to wit to find out if Cutawoda had it spelled out in his contract that he was going to charge $XX.00 per hour for his time spent procuring materials and also markup those materials an additional %15.
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Well in one sense that's a good healthy point of view for a contractor but on examining your pricing ethnology with a little bit more scrutiny from the standpoint of a customer I have to wonder about the value proposition you are delivering.
First of all provided you are working with a correctly designed Loaded Labor Rate with a Net Profit figure built into that rate and are getting paid for all your time involved in acquiring the materials your doing well right there. Any markup that you then place on materials is really just gravy or icing on the cake. If you aren't charging for the time required to acquire the material then you do have to make up for that time in the markup you place on materials but that not going to be nearly as accurate as charging/billing for you procurement time directly so I like what you are doing there. Once upon a time we used to markup materials 35% to account for the cost of procurement but found in some cases that led to us gross overcharging some customers while grossly undercharging others so we now estimate our procurement cost budgets or bill for that time directly.The markup we apply to materials now only represents the Net Profit we want to make on the materials we are providing (selling).
So when I see you are charging me for your time and also marking up the materials another 15% I would think that exorbitant profit taking. More power too you if you can get that without any complaints but if as a customer I knew that what was you were doing I would complain and give you the logic to my thinking like I just laid it out.
If you want to think of it as getting a return on money you are loaning to the customer your interest rate is usury. If you stated that thinking out loud to your client to explain your pricing you could even then possibly be getting yourself into a legal jam. In Texas (which is where I think I recall you come from) the legal rate of interest is 6% and interest does not begin until 30 days after an account was due. I hope your client isn't a lawyer. (And don't talk about it out loud as 'interest on a loan' any more.) And maybe he should hang on to your bill for six months before paying it to his money's worth on that 'interest rate' your charging him.
Personally and professionally I think as long as you are charging your client for all your time with a Loaded Labor Rate and don't need to recover for any Overhead costs with your markup on materials a markup of 6% to 11% (that will return a Net Profit of 5 to 10% on those sales) is pretty fair and more adequately represents the value you are delivering to your customer in providing those materials (i.e. standing behind your material choices).
No if you are using a Volume Based Markup system to figure your costs your labor rate is probably too low to cover your overhead and you do need that high markup on materials to cover all your overhead cost of doing business. That's one of the main reason I think the Volume Based Markup stinks in that it sets up these potential customer conflicts with the high markup on materials it requires. In fact if you are using a Volume Based Markup system your 15% markup is way too low.
So Cutawooda this labor rate you used to bill for your material procurement time, just how did you work it up? Does it cover your overhead and generate a Net Profit for you on jobs and or tasks that are labor only?
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Tell that customer that if he goes to the grocery store to buy 5 bags groceries, gets to the checkout and promptly tells the person at the checkout, "I want these 5 bags of groceries, but am only going to pay for three because that's how much it costs the store to buy them", and have him tell you if he thinks there's anything wrong with that.
I usually have a clause in my proposal that says they may supply some materials if they like, but I will not warrant them or their installation, and if it gets to be more than X dollar amount, my labor rate for the whole job will be higher.That's usually to shop for their own appliances and such, up to a point.
From: Jer — "Tell that customer that if he goes to the grocery store to buy 5 bags groceries, gets to the checkout and promptly tells the person at the checkout, "I want these 5 bags of groceries, but am only going to pay for three because that's how much it costs the store to buy them", and have him tell you if he thinks there's anything wrong with that."
That's a cute analogy Jer but from what I am getting from cutawooda's story here is it probalby wasn't contractually clear as to what he would be charging so a better anaology might be that after you buy your 5 bags of groceries the checkout clerk then tells the customer that there is also a charge for bagging them.
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My usual stance is, if he wants to buy them himself, he's welcome to. I'll be billing for the time waiting for him to get the stuff he forgot, of course. No warranty on those materials, too, of course.
The responsibility for defective materials (and the trained eye to reject them at the yard) is probably the best argument.
You may also get a discount on your business account that he won't get, so your price after adding 15% is probably only 5-10% more than his cost if he bought the same items (lumber/hardware-wise, anyway). Things like fridges, ranges may not be any cheaper for you, of course.
In the end though, it usually simplifies things to roll it into your hourly rate. depending where you're doing business, there may be sales tax due on your markup.
k
p.s. how did he find out your markup rate?
....dang, you guys are business scientists.
Talk to me like I am a three year old would ya?
Am I wrong or right?
I only charge $25.00 per hour. I supply a trailer full of valuable tools and skills with them. I come with experience and educated advice. I do not know it all, but others say I am too cheap.
If I go to town that is 1 hour (30 minutes and 30 minutes drive time). One hour at the store. I feel that those 2 hours are paid to me for my labor and, as one reply said, a skilled eye picking and choosing material.
If I am using my account to front the money for these goods, should nt I get a overhead costs for that, regardless if they pay me back or not?
This is a memorial moment for me!!! I have NEVER been known to make a good profit. Finally! Someone has labeled me a profiteer! I must be learning something after all.
I think materials markup is a sore subject for both sides of the deal. As a homeowner/builder/customer I see a markup percentage as a poor way of making a profit in your business model. It is hard to justify to me the markup on materials that are not held in your inventory or in which you have a cost basis to cover. You are in fact operating on the store account and the retailer's money - not "your" money until you have paid the store and are waiting to get paid from the customer. Retailers demand a markup (another rant) based on providing a service of storage, procurement, and distribution. A contractor is NOT a retailer in that sense.Getting paid to drive to and from the job are also sticky subjects, why not just charge what it takes to cover your overhead and make a profit and explain that your rate is what is necessary for keeping you alive?If you have experience and skills to provide a service, explain that and price yourself accordingly. That is a much easier position to start negotiations from than trying to "sneak" in a percentage based markup in my opinion.In my "real job" I have to deal with market and commodity prices and am basically a "price taker" so the concept of markup w/o value addition is a sore subject...
>>why not just charge what it takes to cover your overhead and make a profit and explain that your rate is what is necessary for keeping you alive?<<Because most customers are not willing to pay that "wage" but most are willing to to pay if you break out the indirect cost in some other way. The real key in my mind is not to try and hide your markup or your profit, but to explain that you need to cover your overhead, pay yourself and wage, and make a profit in order to keep the business viable.Steve
It all starts with knowing how much money you need/want to be making. How much would you would be need/want if you were working at a job that had no expenses that weren't re-imbersed by your employer?Forgetting all about everything connected with being a carpenter, how much money a year do you want/need to earn? 30K? 60K? 90K?When you are all done with your taxes what is your Adjusted Gross Income? Divide that by 2000 hours and that's what you are making per hour if you worked 40 hour weeks and took two weeks off. If you are charging 25 an hour then you are probably really taking home less than 10 dollars an hour, or less than 20K/year.When you are running your own business you have a bunch of fixed costs that are not really billable to any one client. The cost of a truck, gas and maintenance for the truck, office expenses, accountant fees, biz insurance, health insurance, tools, advertising, misc. supplies, the cost for storage space and heating and lighting your office and storage space, internet access, etc.You have to find a way to recoup those costs. One way is to roll all your indirect costs into your hourly wage. You can figure out what all your indirect costs are per year, divide them by 2000 hours and roll that into your wage, then decide on a reasonable amount for profit, and roll that into your wage as well. Often trying to recover all those costs in your hourly wage will put your wage above the prevailing wage for the area you are working.So the challenge is to make your wage look lower, but still make a living. You can accomplish that by marking up your materials and subs and charging a lower hourly wage. Or you can charge a percentage for a "contractors fee" on every job or a percentage for profit and overhead, or any other way you can think of to recoup the indirect costs and make a decent living without charging what people will think is an unreasonable hourly wage.It's not rocket science, but you have to now what your total costs for being in business are, what you need/want to earn above and beyond those costs, and how much you want to grow the business, save for retirement, etc.Steve
If I go to town that is 1 hour (30 minutes and 30 minutes drive time). One hour at the store. I feel that those 2 hours are paid to me for my labor and, as one reply said, a skilled eye picking and choosing material.
(Underlines added by me for emphasis)
I'm confused. Do you "feel" that those 2 hours are paid to you, or are they paid to you? Your time is your time, and has nothing to do with markup on materials. If you're driving to the dump, do you "feel" you get paid for that time, or do you actually bill it?
feel me? ;)
k
p.s. I have no problem with marking up materials.
when a tradesman says he will sell material to you at cost you figgure his expenses dont include a truck and its assoiated expenses ?
My hourely rate is for me and my tools no truck included
if you believe in working for free i probouly l can fit you in if you have some ability !
The invoice is not your cost really if you have a brain !
Dude, what on earth are you talking about?
k
i knew it....<<<<
....dang, you guys are business scientists.
Talk to me like I am a three year old would ya?
Am I wrong or right?
I only charge $25.00 per hour. I supply a trailer full of valuable tools and skills with them. I come with experience and educated advice. I do not know it all, but others say I am too cheap.
If I go to town that is 1 hour (30 minutes and 30 minutes drive time). One hour at the store. I feel that those 2 hours are paid to me for my labor and, as one reply said, a skilled eye picking and choosing material.
If I am using my account to front the money for these goods, should nt I get a overhead costs for that, regardless if they pay me back or not?
This is a memorial moment for me!!! I have NEVER been known to make a good profit. Finally! Someone has labeled me a profiteer! I must be learning something after all.
>>>>
go back and read the book again....
you are NOT covering your costs and paying yourself a decent wage
i'd venture a guess that you were making more money when you were working for your old boss
Mike Hussein Smith Rhode Island : Design / Build / Repair / Restore
And Mike, as far as I can tell, no one's gotten a straight answer out of him as to whether his time for materials runs is billed or not billed!
I wasn't even going to touch the $25/hr. issue...
k
I read it as his time for pickup and delivery is billed.
Maybe I missed it (always a definite possibility, lol). Did he actually come out and say that?
k
>>Did he actually come out and say that? <<from the original post:>>(yes, I get paid to get the material as well.)<<Steve
You are correct, sir. Upon re-reading, he repeated that in a later post, too.
Apologies to all concerned.
Something about the way it kept coming up and the language he used made me wonder if sometimes he does and sometimes he doesn't. But I'll take him at his word.
Shouldn't have anything to do with the materials pricing either way, obviously.
k
No apologies needed...my wife has a term for it...the impediment of perception. Sometimes what we perceive blinds us to what is there...Happens to me all the time.
I try to own up if I'm demonstrably off-base. Saves everybody energy in the long run...
I guess the apology is for the OP as much as anyone. Maybe he only brought up the travel time three times because people kept pestering him about it...
I'd still bet there's more to that story, but what do I know? Nuthin.
k
agreed....that is why i have no problems marking up material.
My hourly wage has been up for dispute for years. I work alone so there is no labor I have to deal with. I dont feel like a crook nor greedy nor a dick..I think it is fair.
I dont want to open it up for debate either. I have decided that what I make now gets me in the door, keeps me working, pays my bills, keeps my comfort zone happy, and makes me feel important..end of discussion. Most of my clients now consider me "their" contractor. I like that. They wont screw me and I would never screw them.
Sounds to me like some mark up thier material and some mark up their wages.
I am proud that I have started a good discussion and I am impressed with how smart some of you are. I have now spent 2 hours on this subject so one of you owe me $50.00
so....cuta.... do you always bill hourly ?
if you bid jobs...you never have to explain anything... yup....
"well, sir, i've looked over your needs, and here's my proposal.... $12,900 "
it can include markups of whatever you need... it can include a labor rate of whatever you want ....
you are currently penalizing yourself because you are afraid to charge what you are worth
if we do T&M (which i dislike )...we charge $60/hr
AND we markup subs and materials 25% (commonly ACCEPTED by insurance companies )
but i'd much rather bid Fixed FeeMike Hussein Smith Rhode Island : Design / Build / Repair / Restore
Mike, On T & M jobs do you bill 60 for every carpenter or do you differentiate for skill levels?edit to add: what's your typical total labor burden per man?Steve
Edited 4/18/2009 10:36 pm by mmoogie
steve.. there are 3 of us right now and our burden is 0.6one rate for all.... i'd think about changing it if i had some unskilled peoplebut mostly, we do fixed feeMike Hussein Smith Rhode Island : Design / Build / Repair / Restore
yes I bid jobs. But I cannot bid an old farmhouse job. Especially one that I came into late in the game.
You mentioned "we" charge. I am only "me". I am in a city in North Texas and $60 is unheard of.
Edited 4/18/2009 11:10 pm ET by cutawooda
"But I cannot bid an old farmhouse job."
Can't or wont?
It is a 100 year old house where each exposure of lumber presents more challenges. Also, the brother that started the project has changed direction many times. There would be no way to efficiently bid.
A great thread and a timely discussion.I was in the middle of an excel spreadsheet working towards a bottom line price and I remembered this thread.I've gleaned a lot out of these discussions over the years and the first thing that changed for me was my perception of myself and my business. This ain't a hobby- I work hard to deliver a great product and service and deserve to make a decent living that includes profit
on every project.
I'm from northwestern ontario-not a booming economy but holding it's own. A few years ago after reading every business thread I could get my hands on and getting a grasp of the basics, I raised by rates from 35.hour to 50.hour and I started marking up material 25% and labour 60%. I'm not starving...in fact, we are busier than I have ever been.However,the price adds up and I've shocked quite a few customers with my prices. In the past I thought I had to nail every job that came in the door.But now I just want the plums, the folks who have the dough and are willing to pay the price.I just lost several jobs so I know I'm at the top end of the market-but I'm too old to leave money on the table. I try to sell every job at top dollar. I try my best to deliver a top dollar product and service.I've got lots to learn-I've always been weak on the business end of things and this thread has several great references I need to review-I thank Jerrald for his post and the way he simplified things-But what got me started was-I was dropping my markups to 50/15 and seeing what difference it made to the bottom line. In my case it was a couple hundred bucks and when you have what folks want...that unique product and service that they feel only your company can supply because they are already sold on you, a couple hundred bucks is chump change.geez-I sound like I've been mainlining too much Zig Ziglar but he would be the first guy to say-If you're thinking is stinkin', your business is sinking.cheers and thanks to everyone for a great discussion.silver
Hey Stranger
You new around these parts?
I haven't seen your moniker at the top of a post in a long time.
I'm glad Min let you have the computer tonight.
Rich
I'm not that strange-been thinking about you...one of your last questions-was about profitability... better than it's ever been but still room for improvement.I was on a cargin inspired excel sheet by the waysil;ver
Phil
Good to hear from you again.
Work is starting to heat up around here.
May is going to be crazy month.
I have a big volunteer project coming up, DD graduates, we have to get her enrolled in the community college, I have a rental unit coming open that needs alot of work and this is the season that the estimates come fast and furious.
And some of the best fishing is in May. A guy has to have his prioritites in the right place.
It's good to hear that you are profitable and that you have plenty of work.
Time for me to get plenty of sleep.
Rich
Hey Rich,Sounds like your spring is coming together nicely...I'm looking forward to walleye season as well...my son,Sky and I have a new fishing buddy
with a great tourney boat...My Dad and his wife are moving up here in July-pass the paper bag -I'm going to hyperventilate-so we need to whip our sauna into shape so they can live in there.I have a new finish carpenter working with me...Min who continues to amaze me with what she is capable of-so that is helping LOTS!Phil
Phil and All
I have been in the office from 7 AM till 9AM. I worked on estimates and looking at jobs most of last night.
It just blows me away how I can kill 2 hours in the office organizing men, jobs and materials.
Even more time if I am active in a BT discussion. LOL
I don't think most of us take into account the amount of time it takes to estimate, organize, order and bill for the work we love doing in the field.
I have been accounting for that time in estimating and billing over the last 2 years, but still time slips thru your fingers.
That being said we all need to make money on all phases of the business. Proper hourly wage, billable hours, materials markup, overhead and profit.
Just letting off steam.
Rich
I am proud that I have started a good discussion and I am impressed with how smart some of you are. I have now spent 2 hours on this subject so one of you owe me $50.00
LOL... if nothing else, I like your attitude.View Image
this could be a very good discussion so I'll throw out on thing I think may be important as far as "hourly" ... and trust me, I know of where U speak ...
but ... keep in mind ... me and Cath ... paid $30K for this old house.
when people say they can't charge $60/hr .. doesn't mean they're going broke.
for what it's worth ... I fight to charge a steady $45/hr.
If I hit that ... I'm golden.
I also have a buddy who works as a captive sub ... from what I know he charges $25 ... might have bumped it to 30 ... but at a solid $25 for 2000 hrs/yr ... he's doing OK for his particular situation. Not really any room for growth ... but no risk involved and less stress than a real job. Makes his own schedule and life goes on.
if he's at $30/hr ... that's $15/hr ... divided by our regional cost of living ... he's way ahead of the game vs a carp in your area making $20-25/hr on the clock.
Jeff
Buck Construction
Artistry In Carpentry
Pittsburgh Pa
captive sub is a euphemism for "illegal employee without benefits"....so... start with his $25...... now deduct 8% because he has to pay both parts of social security tax and he buys his own tools
and he drives his own truckand he pays his own insuranceand he ain't paying into unemployment.. so when he gets laid off he isn't eligibleand his annual income is very low so his social security benefits are goig to be low when he finally collectsif he's a "sub" to someone for $25 , i doubt he's making $15just another guy getting screwed by the systemMike Hussein Smith Rhode Island : Design / Build / Repair / Restore
"captive sub is a euphemism for "illegal employee without benefits"...."
no it's not. The IRS can't tell you who you can work for and how long you can work for them. He's given a task to complete. It's up to him how he does it. He's got no set hours, no set end hours and no set daily hours.
he's also not directed how to perform the task.
he's given a task ... and materials.
again, $25/hr ... usually 8 hrs a day ... 5 days a week ... 52 weeks/yr ... work is available. He's got his own tools and his own van.
he's making easily $15/hr ... and works with complete and total freedom.
around here ... $15/hr is the average for a paid carp ... with taxes taken out of that ... and usually no benefits. Maybe health care you can buy into.
and remember ... a fixer upper house an hour away from the jobsite doen't run a minimun of $300K.
as his particular situation is, coupla times a year he makes a point of taking "outside" work so he has more than one 1099 ... but that's not necessary. There is such a thing as a legal captive sub.
I've been one myself in the past ... trust me ... I have a sub mentality all the way.
Been self employeed for too long to have anyone tell me how to do my job.
Jeff Buck Construction
Artistry In Carpentry
Pittsburgh Pa
I moved from Calif. to a small town in Colorado. Probably to an area similar to the OP. It's astonishing how much lower the wage scale can be. Guys are working for what I did in 1970. And are pretty ignorant of the facts Mike just laid out.Sadly, you can run all the business formulas you want, but you cannot get anywhere near $60 per hour if you want to actually work. Fortunately, I'm half retired so I don't really care.John
Mike, the "captive sub" is being sold an illusion. He is essentially an hourly employee that maybe made $20 normally (which may cost the employer as much as $32 on a legitimate basis) and he is instead being tricked to think that he can be a permanent sub and earn "more" now that he gets $25. But he does not realize the expense that he is paying.... assuming he is doing his end legitimately.-->-->-->
I refuse to accept that there are limitations to what we can accomplish. Pete Draganic
Take life as a test and shoot for a better score each day. Matt Garcia
Edited 4/21/2009 9:12 am ET by PeteDraganic
"Mike, the "captive sub" is being sold an illusion. He is essentially an hourly employee that maybe made $20 normally (which may cost the employer as much as $32 on a legitimate basis) and he is instead being tricked to think that he can be a permanent sub and earn "more" now that he gets $25. But he does not realize the expense that he is paying.... assuming he is doing his end legitimately."
You shouldn't read too deeply into situations that you have no direct understanding of. I know both the GC and the captive sub in question. Have known the sub for about 8 years, the GC around 3 or 4. I introduced them to each other.
The sub ... will only work under that situation. He's worked as a freelance sub, but prefers to be "captive".
The GC ... has offered him FT employee status more than once. He doesn't want a boss. He likes the freedon of working as a true sub.
He also likes not having to go look for work. He shows up every Monday knowing he'll have a full week of work sitting and waiting for him.
There's nothing wrong with their situation. No one's being "tricked".
For this particular guy ... work's not about making the very last penny he can ... work's about paying his bills in the most stress free environment he can set up form himself.
His hours are tracked, he gets a 1099 each and every year. He files and pays taxes.
Have you ever looked at the IRS list that give the difference between legit and fake sub? As someone who's done alot of sub work in the past, I have.
He's a legit sub in most every catagory.
Here's a Q for both you and Mike?
How do you set your hourly rate?
I know Mike's isn't based on working 2000 hrs a year.
Really hope yours isn't.
I base mine on working 1,500 production hours a year, and as I've mentioned before ... only working 1,250 might be closer to reality.
The hourly rate goes up because of lost time. The rate goes up due to the time needed to run a business and drum up work. The rate somehow also has to cover advertising/marketing, whether that be in hour hourly rate or add as a P and O %.
This guy ... doesn't have "downtime". Like I said ... there's at least 40hrs of work waiting for him 52 weeks a year for the last coupla years. He's got no advertising/marketing. And there's no real business costs to cover aside from tools and truck.
He's making at least $20/hr ... close to top pay around here for a working carp ...
with no stress. No boss to worry about. No schedule. He comes and goes as he pleases ... as long as as his work moves along ... everyone's happy.
Nothing illegal ... and no one's being tricked.
Jeff Buck Construction
Artistry In Carpentry
Pittsburgh Pa
to clarify, I was speaking as a generality and without specificity to your friends. Typically the "sub" is working just as I said... under an illusion of making more. Then again, I can say that there are many subs not paying their fair end of expenses either, such as insurances and taxes, for starters.I wish I could work 2000 hours per year and I wouldn't want to change my rates. If other guys are happy with working for barely more than the hourly rates you could get elsewhere, that is your decision but I think it is a great disservice to them. I have a family to raise, college to pay for soon, insurance to account for, retirement to plan for.... it is hard to get there as a self-employed person if I am earning what I could be earning by the hour anywhere.... with their benefits. Not to mention what happens if I am disabled and cannot work.I have found that most contractors are terrible business men. Myself included. I am learning though and wish I had wised up a lot sooner.
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I refuse to accept that there are limitations to what we can accomplish. Pete Draganic
Take life as a test and shoot for a better score each day. Matt Garcia
my point is by working steady at a lower hourly rate ... he's making more than most other carps I know.
it's not what the hourly rate is ... it's the year end total.
and the plus side for him ... he is a terrible businessman.
but he's taken that part out of his equation.
very little risk ... lower reward ... but all reward.
it's not for me either ... I like wondering if I'll be able to feed the kids from month to month ... but for some ... captive sub ... done right ... is a viable option.
and completely legal.
Jeff Buck Construction
Artistry In Carpentry
Pittsburgh Pa
"I have found that most contractors are terrible business men. Myself included. I am learning though and wish I had wised up a lot sooner."I wish the same-but as Tony Bennett sings-the best is yet to come.silver
....dang, you guys are business scientists. Talk to me like I am a three year old would ya?
haa haaa... I hear ya, bro! =)
I'm a lot like you, charging a relatively low hourly rate and happy to be working for a handful of really nice customers. Unlike you, I don't mark up materials, except that which I get at a contractor's price. In that case I get a reciept from my suppliers (2 local hardware stores) showing the regular retail price, and that's what I charge my customer. I charge my regular hourly rate for all the time I spend taking care of their job, including shopping time. ~ Ted W ~
Cheap Tools! - MyToolbox.netMeet me at House & Builder!
cutawooda — "....dang, you guys are business scientists.
Talk to me like I am a three year old would ya?
Am I wrong or right?"
cutawooda as I read more of your story and gleam more information about just what you are charging on the one hand you are right but then again you are also wrong,... twice. I'll explain.
You are right in that you need to charge enough to make a living and run a small business professionally but you are going about pricing all wrong (twice). If this guy is complaining about your marking up materials after he's been paying you just 25$ for you labor he is a pathetic cheap joke.
A little bit of research (Salary.com) tell me the average wage for atop level skilled carpenter in the Houston area (I think I recall that is where you are from) is $22.77 to $25.05 depending upon whether we are talking about an average of 40 or 44 hours a week for work. The lowest 10% of skilled carpenters make only 18.94 per hour and while the top 10% make $31.44 but the average works out to between $22.77 to $25.05. If you are billing yourself out at only $25.00 per hour you are not running your operation like a business and are more like a temporary employee and a very inexpensive one at that.
When mmoogie says to you "If you are charging 25 an hour then you are probably really taking home less than 10 dollars an hour, or less than 20K/year." he probably very close to the hitting the mark.
Back tracking to your post where you said "How to run s successful construction company" I'm going to assume you were referring to David Gerstels book Running a Successful Construction Company. but I think you missed a lot of the points he made in his chapter 5 Estimating and Bidding where he explains things like Labor Burden and Markup.
To give you a simple short lesson here after you have decided what you want to pay yourself as a real wage you first have to markup that wage for what is known as Labor Burden. I would suggest reading Shawn McCadden's excellent JLC article Calculating Labor Costs to get yourself a solid understanding of just what that is. The markup rate for burden can vary based on a lot of things like employee benefits and productivity but a bare bones burden rate is typically around 20% so if I markup your $25 per hour real living wage 25% I get a Labor Cost of $31.25 per hour.
The next stage in the process is you have to markup COSTS to cover your fixed company overhead. Your costs of doing business as a business and this is where the professional contractor/business people take two different tracks. On pages 167 through 168 Gerstel talks about two different kinds of markup strategies. He refers very critically to one method that he calls Uniform Percentage Markup which is where you apply a uniform percentage to the total of all your costs to come up with a price for your project and another more robust method he calls Capacity Based Markup.
From the sound of what you are saying here where you talk about having to markup materials to cover your costs of doing business you ignored Gerstel's admonitions and criticism of Uniform Percentage Markup and decided to go with that method anyway. And the funny thing is in doing so (and funny might be the wrong word, sad might be better) you didn't really go far enough and still way below what you need to markup by using that method. Typically contractors who do use that method need to markup the sum of all their costs at least 35% and more typically 50% to cover there fixed costs of doing business. Your only marking up your costs 15%.
If you want to insist on your 15% markup you need to markup your Labor Cost of $31.25 per hour that 15% to come to a billing rate of $35.93 per hour. But as I've said that not really professional realistic. If you are going to use the Uniform Percentage Markup method you really need at least a 35% markup over costs and even more realistically something around 50%. That works out to a billing rates of $42.18 per hour and 46.87 per hour and those rates will only work for you if you still markup all your materials and subcontracting 35% to 50% too.
The problem with that method is customers tend to freak out when they see you are charging them $2025 (marked up 35%) to $2250 (marked up %50) for a Exterior Entry Door they know they can get at Home Depot for only $1500. So what do you do? If your using the Uniform Percentage Markup method you need that markup to cover your overhead costs!
Well a Capacity Based Markup contractor doesn't face that problem because he or she is covering ALL of his or her overhead with the markup they place on their labor cost with what is known as a Loaded Labor Rate with a Net Profit figure built into it. That markup is typically a lot higher than the one you see in the Uniform Percentage Markup method since it is carrying the whole load of recovering overhead costs on your labor. On the plus side however is that if you do a labor only job where you are not providing any materials or subcontracting your overhead costs are still fully covered.
There is a very good way to figure out precisely what that rate should be but rather than going into length here to describe it I suggest you read Ellen Rohr's How Much Should I Charge?: Pricing Basics for Making Money Doing What You LoveView Image and check out my shareware Excel workbook called the Capacity Based Markup Worksheet.
That said labor markups in the Capacity Based Markup method run from 85% to 135% over labor cost. If I take the low end of that range and apply it to your 31.25 per hour labor cost that tells me your loaded billing rate really needs to be $57.81 per hour. Over twice what you are charging now. It is key for you to remember though that with a loaded labor rate (Capacity Based Markup) you don't need to markup materials and subcontracting to cover your overhead costs. The are taken care of with that loaded labor rate. You then only need to markup your materials and subcontracting for whatever you want to earn on them as Net Profit (icing on the cake).
Does that help clear things up any for you? I have tried to make this as simple as possible to understand. Again I would suggest you go back and read Gerstels book again and pay particular attention to what he's saying on pages 167 through 168 and do yourself a big huge favor and get Ellen Rohrs book ASAP so you understand this all better.
"This is a memorial moment for me!!! I have NEVER been known to make a good profit. Finally! Someone has labeled me a profiteer! I must be learning something after all."
If you were doing it right, using a loaded labor rate (Capacity Based Markup) for your billing rate and you charged a 15% markup on your materials after getting paid for the procurement time yes that could be very easily called profiteering but as it turns out you really don't know what you are doing with either the Uniform Percentage Markup method or the Capacity Based Markup method (that why I called you wrong twice) so instead of calling you a profiteer I could call you something else but I wont.
Yes you are right in wanting to get your 15% on those materials but in a sense you are right for all the wrong reasons.
View Image
I think the hardest part of being in business is valuing yourself and your company. Self esteem, if you will.
When I first looked at the fact that I wasn't charging any more than anyone else, I couldn't figure why I wasn't making much, even though I was adding in profit to the job. I was always afraid that I was going to be putting money in a competitor pocket, not mine. When in reality, I was just leaving money in the customer's pocket.
It wasn't until later when realized that most other companies were marking up on materials, that I was able to put myself in more of a comfort zone. Also, I was giving myself a cushion for material waste that open my eyes and started this whole ball rolling. Every little underestimate was taking money directly out of my pocket, and my family's... The light started to come on.
In the end, the my basic logic was that when you figure out what your costs are, then they are just that, your costs. But, when you add in the additional figures (profit, mark-up,etc.), you are really adding to your overall worth of you and your company.
This is when you are able to say if it is worth the risk of being in business for yourself, not just working for someone else whether it is a boss or a customer.
Once I was able to tackle this, I then started to work on exactly what is overhead and how to apply that when it comes labor, materials, down time etc.
This my not be totally business savoy, but the best I can explain it.
Edited 4/22/2009 6:31 pm by migraine
I had this same problem when I did a job for a friend. His wife wanted an analysis of a $600 bill and questioned my 10% markup on $200 in materials that I had to pick up. This after I discounted my labor 50%. I told her that that's my policy, no exceptions. She is the only customer I've ever had question anything on a bill. If they ever call again, I'm just to busy to do any work for them.
You could always tell them that they are more than welcome to buy their own materials in advance.
I refuse to accept that there are limitations to what we can accomplish. Pete Draganic
Take life as a test and shoot for a better score each day. Matt Garcia
You could always tell them that they are more than welcome to buy their own materials in advance.
that all depends on what the job is.
most of the time that's a recipe for disaster.
Jeff Buck Construction
Artistry In Carpentry
Pittsburgh Pa
I did! But if they don't get it then I have to. I could care less who gets it. I have work to do...someway, somehow I need material. If I get it through my account...I am charging extra for using my account.
In the end, it comes down to how much money you are willing to make or lose. I always question price, it's amazing how often you can get it to move just by asking.You can take the nail biter jobs ( low margin) to generate activity and hopefully some positive cash flow. Often enough, my former employer did this and it turned out to be "death by a thousand cuts". He was too occupied to generate enough leads to find enough well paying jobs. He bid what clients said they were willing to pay to stay busy and has the tax liens to prove it.I lump sum my proposals and tell folks as they shower me with compliments of the work I did for their friends... "I'm the last guy you want feeling underpaid while working on your home." Some bite, some don't, that's business.Jim
The awful thing is that beauty is mysterious as well as terrible. God and the devil are fighting there, and the battlefield is the heart of man.- Fyodor Dostoyevski
I was being a little facetious though... because like Buck just said, it is a recipe for disaster. Part of the value of the markup, in my estimation, is that you understand the materials so well that you are picking out the correct stuff and a better quality of material than the homeowner might.Another question comes to mind.... if I get a 10% discount because I buy in such volume.. or just because the supplier likes me so much due to my excessive charm and good looks.... who should benefit from that savings? Should the customer get the items at my cost or the going rate? Shouldn't I benefit from the savings that are a result of my hard work?
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I refuse to accept that there are limitations to what we can accomplish. Pete Draganic
Take life as a test and shoot for a better score each day. Matt Garcia
to start with, isn't your liability insurance based upon your sales and isn't materials a part of your sales figures?
doesn't every other business mark up materials?
Does the carpet company only make profit/income based on labor?
etc, etc.
That's part of the business. You're being paid to select,order & deliver material, personally, I think he's getting a deal! As I've gotten older I try harder to keep that info. to myself.