With a potential client who wants an itemized listing of material costs. I always break my proposal cost into two parts; material, and all else. Part of the material costs, of course, is the markup for the french door, window, etc. And as they know what the costs of the big ticket items are, they want a break down on why the material bottom line is so high.
In reality, the house is huge, the counters are granite, the cabinets to be replaced are being custom made, and they are losing sleep over my (relatively) small piece of the pie.
I have never itemized material costs for anyone, and in all honesty, it’s because of markup; I don’t want to have to explain why I’m jacking up the material by close to 40%. The reasons for doing so are valid, in my mind, but I’ve had arguements over it and don’t prefer to get into it. But this client is pushy, picky, and won’t let it go. So much so that the last time we talked and the subject came up, I told them that if there was a problem with my estimate, perhaps they should rethink using my services. They assured me it wasn’t a problem, but I just got off the phone, and now they want this itemized list.
They have not signed the contract yet, they keep changing the window size, what type of french door, etc. You get the picture.
My gut is telling me to bolt. The work would be nice, but there is plenty enough in the schedule to fill the void, which isn’t even scheduled yet. And I have a feeling the markup I added would not cover the PIA factor she might turn out to be.
What do you suggest? And how do you handle the markup costs? Hide them and hope no one asks, or ???
Thanks.
“I am the master of my fate, I am the captain of my soul.” Invictus, by Henley.
Replies
Nick,
Thats the reason we offer "fixed fee pricing" to some customers. If they want to track the costs down to a penny and don't want us to make any money on markup on them, we let them pay the subs and suppliers directly. BUT they also have some work to do as we let THEM setup the scheduling and ordering. We have all this written out ahead of time to prevent any headaches...And No, most people do not go for this option when they hear they may have to do some work. Most folks like turnkey projects.
Its not for every customer but it can work with some. If they balk at that idea, tell them thats why there is markup.
Mike
Nick,
We get the same thing in our business. Give them the itemized list and tell them the truth. The markup covers everything having to do with your supplying the materials as well as the fact that you will take care of any problems with the materials, and a reasonable profit. If the door gets messed up during installation, your profit is what pays to fix or replace it. If they cannot accept the fact that you have to make a living, then perhaps they really should not be your customer. Bill Koustenis
Advanced Automotive Machine
Waldorf Md
NickNukeEm whatever reason or reasons you may have for placing a 40% markup on materials may be sure as heck entirely valid but that doesn't mean your or any client for that matter is is going to agree with you or accept that.
This probably isn't going to help you with this client since you are already probably too far along in the process with them and haven't laid the ground work you would need but if you were using a Capacity Based Markup (like I'm always advocating) instead of a Estimated Total Volume Based Markup (which since you are marking up Materials 40% I am inferring you are using) you wouldn't be facing this dilemma.
In using a Capacity Based Markup you recover your Overhead Costs (both Fixed and Variable) by having what is often referred to as a "loaded" labor rate. Since you've then have covered your costs of doing business with your labor estimate the markup you put on your Materials (and other third party costs such as Subcontractors) doesn't need to be so high and can just be a figure that most typical customers can accept such as 10% to 16%.
What you are facing is just one of the real problems contractors face using an Estimated Total Volume Based Markup.
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Color me ignorant, but I don't understand how you can factor a markup into your labor rate if what you are marking up is a variable cost, or unknown. I haven't heard of this system, so I obviously don't understand it.
You jack up your rates and then don't charge a markup, is that it? How do you determine how much to increase the labor rate? Percentage of an annual material cost rated over a standard work year? I tried learning about the system through your links, but they just defined the terms, not how they are implemented.
Thanks for your response. And my present system has served me fairly well, until this client. And if I just gave a bottom line, instead of breaking it down, what would be the difference between your way and mine? Theoretically, the ultimate costs should be the same, right?
"I am the master of my fate, I am the captain of my soul." Invictus, by Henley.
NickNukeEm "...I don't understand how you can factor a markup into your labor rate if what you are marking up is a variable cost, or unknown." I'm not at all sure what you mean by "unknown" but when talking about markup and labor rates Variable Costs or Variable Overhead are defined as the costs that are generated by field personnel and that would otherwise not exist if those personnel did not exist. While there is a good JLC article by Shawn McCadden (Calculating Labor Costs February 2002) that explains Variable Cost in more depth you probably already recognize and think of Variable Costs as what we more often commonly refer to as "labor burden".
"I haven't heard of this system, so I obviously don't understand it. " If you own David Gerstels book Running a Successful Construction Company it's in there in Chapter 5 on pgs 167 through 168 but there is also another good book on it I often mention here by Ellen Rohr on the topic too called How Much Should I Charge?: Pricing Basics for Making Money Doing What You Love and if you have heard people talking about PROOF in these forums that's what they are talking about too.
"You jack up your rates and then don't charge a markup, is that it?..."
Well, I not so sure that's really a good or accurate way to describe the mechanics of coming up with a correctly loaded rate. You apply a markup to your Labor COSTS to come up with the rate but it's mathematically how what that markup should be is determined that is different between the Capacity Based and Estimated Total Volume Based systems.
"...How do you determine how much to increase the labor rate?..."
Short of giving you all the reasoning and explanations to all the math this evening you might just want to check out my PILAO Worksheet. It's a freeware Excel spreadsheet I designed that a lot of people use and refer to to help them set a correctly loaded labor rate.
"...Percentage of an annual material cost rated over a standard work year? I tried learning about the system through your links, but they just defined the terms, not how they are implemented"
Well I don't really have time to get into it all tonight but like I said if you happen to have Gerstels book it's in there but perhaps we can get into this further some other night. Hopefully too some of the other people here who use the method will jump in with their explanations of how to use it too.
"Thanks for your response. And my present system has served me fairly well, until this client. And if I just gave a bottom line, instead of breaking it down, what would be the difference between your way and mine? ..."
Most of the time the actual material costs really shouldn't matter at all to the client and they should be focusing on whether they think the total project is worth the bottom line cost but there are some occasions where clients can effectively use a breakout of the material costs to help them make better decisions regarding their projects.
"...Theoretically, the ultimate costs should be the same, right?"
That is correct (or the final bottom line project cost is "close enough" for all intents and purposes).
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Your situation is why I don't buy materials. Let the clients buy the stuff, you charge your labour rate. No markup made but none of your money or credit tied up in the mean time at risk. If a client can't pay for material they will have a hard time paying the labour bill. The banks like that line of business.
Have a good day
Cliffy
walk away. People like this only get worse
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
My thoughts as well. The sad part is, the husband has no problem with the proposal. He's caught in the middle, literally, often relaying to me over the phone what his wife is telling him to say or ask. At this point, if we do manage to reach some sort of working agreement, I think there will be anomosity either from her because she thinks I'm trying to rip them off, or from me for having to itemize a materials list when I don't think it's required, not that I intend to do so. It's just not worth it.
As my wife said, when the client takes the joy out of doing the work, it's time to ditch the client.
"I am the master of my fate, I am the captain of my soul." Invictus, by Henley.
Oak River Mike and cliffy, while I think having the right markup methodology in place (a Capacity Based Markup) is the real solution to NickNukeEm's problem in that the material markup in a Capacity Based scheme falls into a reasonable range if a client doesn't want you to make any money (i.e. Net Profit) on the materials you install or place I think you should really just ditch them and look for other clients.
The materials you work with and install really have no "added value" and are only worth their costs as materials until you work them into a project and you should be entitled to make a Net Profit on them since it was your work that added value to them.
Do you see what I am getting at?
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While you have a very eloquently worded explanation for your business procedures, forgive me for not adopting them. Oddly enough I have an Honours degree in business from my local university and find all the various jargon you use to be foreign. My suggestion merely states that I don't think it is worth my time, investment, or risk to buy materials, generally speaking. The projects I generally do are new custom designed houses or major remodels, and I'm there from design and drawing right through to finish carpentry. So I reason that the homeowner can shell out the hundred grand to buy the material. I sleep well knowing I earned every dollar I billed. I usually have about a 18 month to 2 year waiting list so in my small niche of the market, I'm doing fine.
Have a great day
Cliffy
I guess I was wrong, if you're having the client purchase materials for a new house or addition. I find that somewhat surprising, actually. Maybe. I guess there are those who like that sort of hands-on approach. And If you don't have to worry about the responsibility when things go wrong (wrong item ordered, not enough ordered, damaged material, etc.) I guess that's a few headaches you won't have.
"I am the master of my fate, I am the captain of my soul." Invictus, by Henley.
cliffy - "While you have a very eloquently worded explanation for your business procedures, forgive me for not adopting them. Oddly enough I have an Honours degree in business from my local university and find all the various jargon you use to be foreign."
Well I am certainly not making any of the terminology up and the markup methodology is not a new idea I made up either. I'm certainly not that smart. In fact I first learned about the method years ago when I took a JLC sponsored seminar taught by Irv Chasen who was the founder of a company called PROOF which is why so many people refer to the method as PROOF. I have just made it my business to really understand the method as best as I possibly can and recommend and teach it to others since first learning and understanding it was a seminal turning point in my life as a business owner.
"My suggestion merely states that I don't think it is worth my time, investment, or risk to buy materials, generally speaking...."
Well that okay and it is a free country and you can do whatever you want to do but I'm sorry but I (along with a lot of other people here and a lot of other professional business consultants too) don't endorse that kind of thinking. It's my opinion (along with those others) that by not earning at least a Net Profit on the materials incorporated into your projects you are leaving money on the table so to speak.
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I understand your way, but I don't think it would work for most instances, though I could be wrong. Not many clients want to be responsible for taking the time to buy, schedule delivery, and do a material check for even a small project, let along something somewhat larger, like a deck or bath remodel. Most prefer a turn-key project, not wanting to be caught up in any hands-on part of the deal. And to be honest, I've found that people supplying the material are prone to make mistakes, which ultimately screws with my schedule. So I try to talk people out of it.
"I am the master of my fate, I am the captain of my soul." Invictus, by Henley.
I generally look after acquiring material, I just don't pay for it. For example, the project I'm working on now is a 2200 square foot addition. The owner has his own account at the lumberyard I use. He has listed me on the account as authorized to buy. I make phone calls when needed and the material is there, what I need, when I need it. The lumberyard is happy, I bring them lots of business, the client is happy with good prices and good service from the lumberyard. My wife and kids are happy because I don't risk thousands of dollards on other peoples houses. I know this system isn't the answer for most people here, but it works great for those who use it.
Have a good day
Cliffy
Edited 7/31/2006 10:36 pm ET by cliffy
It sounds like Time & Materials - without the markup on the materials. So you buy nothing for the project out of your own pocket, then bill the client, is that it?
"I am the master of my fate, I am the captain of my soul." Invictus, by Henley.
I occassionally buy items but don't mark them up. So really i'm a time biller I guess!
I'm lucky I guess that I have lived in the same small town my whole life and know personnally the people I work for. Perhaps I do leave money on the table as Jerold states, but I'll sacrifice that knowing that I have work all the time, a waiting list, and all the overtime I desire.
Works for me!
Have a good day
Cliffy
that system works great for me...what lumberyard has great service though?
"I hate quotations. Tell me what you know" Ralph Waldo Emerson
I'd tell them that markups, my costs, and other such business maters are not discussed with clients or anyone else for that matter. Period. If that's not good enough move on.
And I guess it can also go back to the fact of does the client really have the right to know how much you pay for materials? The can ask but...
...does your doctor itemize the tongue depresser or cotton swabs he uses on you?
...does your mechanic itemize the cost of shop towels?
...does the restaurant you enjoy with your SO tell you how much they paid for the piece of meat they just sold to you for $29.00?
And would not all three probably laugh at you if you asked?
Just my added two cents...
I don't mean to pick apart your examples to start a fight but
"...does your doctor itemize the tongue depresser or cotton swabs he uses on you?"
Well to tell you the truth some do. But most doctors and hospitals do itemize the costs of things such as x-rays, blood testing etc.
"...does your mechanic itemize the cost of shop towels?"
Well not the shop towels but my mechanic does present me a bill with the itemized costs of the parts he used.
"...does the restaurant you enjoy with your SO tell you how much they paid for the piece of meat they just sold to you for $29.00?"
That however is a good example.
But going back to the mechanic example for a second it was in researching information regarding the two basic forms of markup methodology a while back that I discovered a automotive maintenance business consulting firm that was teaching shop owners how to correctly price their work and what they were teaching was what I (and others) call a Capacity Based Markup only they called it an "Indexed Markup". The idea was you used a properly computed loaded labor rate to cover your Burdened Labor Costs, your Fixed Overhead costs, and with something figured for Net Profit in that rate too. You then would charge the client the List Price for the parts you installed and the Net Profit you would earn on the parts would come from the difference between the List Price and the Wholesale Price the shop would actually pay for the part.
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Edited 8/1/2006 12:06 am ET by JerraldHayes
Jerrald,
One of the things I don't see CBM handling is the Risk assumed in handling materials.
I suppose one could add a line to OH to cover that Risk for normal materials, but what of unusually high Risk items?
SamT
SamT - "One of the things I don't see CBM [Capacity Based Markup] handling is the Risk assumed in handling materials.
I suppose one could add a line to OH to cover that Risk for normal materials,..."
In our case the Risk involved in providing materials (i.e. something goes wrong with the refrigerator we provided and it leaks and damages a newly installed floor) is covered by Liability Insurance. If you want to tie some recovery of your liability insurance costs directly to materials you could conceivably figure that into the markup you do place on materials if you haven't accounted for it in the Fixed Overhead Cost part of your markup figuring which would put it into your loaded labor rate.
"...but what of unusually high Risk items?"
Unusually risky? We have a couple of clients where part of the work we do for them involves handling or hanging artwork that I know know is worth hundreds of thousands of dollars. Even though that is still what insurance is for we pad for that risk by just adding a line item to the estimate/quote to cover what we feel taking the risk is worth to us.
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Jerrald,
I wasn't thinking so much of liability to cover incidental damages as I was of damaged material that has to be replaced.
What if that refrigerator got scratched going thru a door? Or a Sub Zero got a dent in the front when someone tripped over his shadow?
Little stuff, a rick of 2x's are wet when delivered and 30% are unusable? There is a cost incurred in handling those issues, too.
Big stuff, a $3000 window gets dropped 2 stories, will liability cover the window? Suppose the job was only to install that window?
And. . . Maybe. . . It's the gambler in me. As I understand your explanation of CBM and PILAO, you set your profit goal and adjust your hourly rate to achieve that goal.
I don't understand why, but that seems limiting somehow.
BTW, thank you for PILAO.SamT
SamT - "I wasn't thinking so much of liability to cover incidental damages as I was of damaged material that has to be replaced.
What if that refrigerator got scratched going thru a door? Or a Sub Zero got a dent in the front when someone tripped over his shadow?"
Well that still would or could fall under the realm of insurance but if you still wanted to "self insure" your company against that you add a percent or percent and a half to your markup somewhere. Otherwise you just pay for that kind of risk damage out of what you earned as Net Profit which is another good argument for not letting materials and or subcontracting move through your realm of influence without earning a Net Profit on those items.
"And. . . Maybe. . . It's the gambler in me. As I understand your explanation of CBM and PILAO, you set your profit goal and adjust your hourly rate to achieve that goal.
I don't understand why, but that seems limiting somehow."
I not sure just what you might think the limitations are to that kind of thinking? What would be the alternative? In fact I think most people here online (or at least a lot of them) will try tell you that you can't really set a "Net Profit Goal" in that Net Profit is entirely controlled by the marketplace. That may be true to some degree in that if I happen to decide I want to earn a net Profit of 30% on Sales I may price my company right out of a lot of work but we certainly still have a lot of latitude within the range of what the market will give us to set Net Profit Goals.
"BTW, thank you for PILAO."
Well to tell you the truth I can't take credit for the idea of the PILAO worksheet. It wasn't an original idea on my part. I took a flawed idea that another fellow online had for a PROOF based Excel worksheet and fixed it up so it would work correctly and then just ran further on down the road with it's development.
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Jerrald,
I think most people here online (or at least a lot of them) will try tell you that you can't really set a "Net Profit Goal" in that Net Profit is entirely controlled by the marketplace. That may be true to some degree in that if I happen to decide I want to earn a net Profit of 30% on Sales
IIRC, there is a cell on PILAO.xls for Total Annual Net Profit, (by some name or another,) that is reflected back in the hourly charge rates. In fact the entire workbook is nothing more than (OH+Profit)/Billable Hours, or CBM.
Now, OH is readily estimatable, with only Billable Hours to be "guessed," but Net Profit is just a number we pull out of our ar. . .uh. . . hat.
Please note: I am only an armature. I reserve the right to change my views at any time (|:>)
>>I don't understand why, but that seems limiting somehow."
>>I not sure just what you might think the limitations are to that kind of thinking?
Me neither. If I knew, I wouldn't be talking. I would have been better servedto have said "Feel" vice "Seems," as that better indicates my mental state.
Thinking. . . . . . . . . . . . . . . .
OK. Given two kitchens almost the same in layout and square footage, one owned by a retired teacher and the other by the guy who sold Windows to Bill Gates. LOL. (Ref.)
The first estimate is $50K with $25K labor and the other is $250K with $30K labor. I have to 'finance' both jobs.
With CBM I figure to Profit $5000 on the first and $6000 on the second for an ROI of 10% and 2.4% respectively. With an ETVBM Markup, I would see closer to the same ROI on both.
The Risk on both is about the same percentage of each total bid, why shouldn't the ROI be the same?
an Estimated Total Volume Based Markup contractor (to cover all overhead costs as a function of labor capacity) the markup on materials (and subcontracted costs) only needs to earn a Net Profit so it can be lower and more acceptable to the general public. (Emphasis by ed)
How about with CBM???
Don't get me wrong, I will be using a pure CBM type, for as long as all I'm doing is concrete. When I get to the point that I have to worry about appliances and finishes, I will be using some as yet unknown hybrid system of Markup.
Both systems, CBM and ETVBM are based on the same stipulation and guess. Stipulate the desired Net Profit and guess the coming years work either in total Volume or in total Billable Hours.
I see where CBM should work very well for someone whose Material:Scope ratio is fairly constant, and, where ETVBM should work for the contractor whose ratio is all over the chart.
No method can work very accurately for someone just starting a business, although both those methods need to be evaluated and used to develop a good Business Plan.
If this was easy, anybody could. . . .
SamT
I don't want to hi-jack this thread but do any of you guys get alot of folks asking to see all your numbers? We don't and I guess I do have a bit of distain for it as I know it is their money but I don't do that to other folks so I don't like it done to me. NONE of the subs we ever used would do this for me as the contractor as everyone is so busy around here, they would just tell you to call another plumber, electrician, etc.
My plumbing invoice says "Rough plumbing"... x number of dollars and thats it! And its hard to get THAT guy to show up and do the work as hes plumbing 200 houses at a time so my one-off project is more headache than profit for him.
Oak River Mike - " I don't want to hi-jack this thread but do any of you guys get alot of folks asking to see all your numbers? "
To tell you the truth Mike I don't think I have ever had any client ever ask to see all MY numbers,...ever. However on occasion they have asked to see THEIR numbers for what their cost are in regards to particular projects. In other words we have broken it out so that they can compare the relative cost of a Wood Shingle Roof vs. a 30 yr Architectural Shingle vs. a 50 yr Architectural Shingle or wood balusters vs. plain metal baluster vs. brass and iron balusters this door vs. that door, etc.
We give them useful numbers they can use to make decisions.
The problem is some contractors out there give them all their internal numbers for some bloody stupid reason and 99.99% of the time that just confuses and clouds the issue for those clients and sometimes even calls them to doubt your logic behind those numbers.
We may tell the client that we put a 12% markup on materials (it that number is spelled out in the contract on the Time & Materials option for Change Order work) so they know if they go to XYZ Architectural Hardware and select the $39.95 door stay vs. the $11.99 one we will be charging them $44.74 (plus tax) for that hardware instead of $13.43 (plus tax).
They also can see our various labor rates in that same section of the contract agreement too but as for how we came up with those rates and how much is Net Profit they don't (nor should they ever) see that. It only confuses the issue and can potentially create tension and mistrust.
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Jerrald,
OK, I gotchya. We have folks do that with things like decking (wood vs composite) or trim (painted vs oak or cherry).
Mike
Oak,
Back in April I posted a question asking the same question, do I need to give my materials and labor costs to a potential client. The client happened to be a billionaire and I was negotiating through his attoney. The prevailing response here was, heck no!
So based on the conventional wisdom on Breaktime, I called the attorney and said, "My materials and labor costs reveal my profit and that is between me and the IRS." I shut up and waited what seemed like a year and he replied, "OK, fair enough, just do a good job.
I felt like I looked into the face of the devil and called his bluff. Constructing in metric...
every inch of the way.
SamT - "Now, OH is readily estimatable, with only Billable Hours to be "guessed," but Net Profit is just a number we pull out of our ar. . .uh. . . hat."
Exactly what you want to or should make in Net Profit is something of an arguable subjective topic. After reading the Business Consultant George Hedley's article-How Much Profit Is Enough? a while back I brought up the topic here on Breaktime and JLC of How Much Profit is Enough here you will recall. He (Hedley) presented what I thought was some real logical thinking rather than subjective emotion on the topic but I don't recall anyone chiming in either here or on JLC about what he had to say. He thought you should see Net Profit as a Return on Equity (Equity defined as the net worth of a company or what kind of money the owner has invested in getting the business up and rolling) and I thought that made real good sense.
What I wrote at that time:
But that is neither here nor their now. I think that idea flew right by everybody here because I don't recall anyone picking up on it and continuing the discussion in that regard.
"OK. Given two kitchens almost the same in layout and square footage, one owned by a retired teacher and the other by the guy who sold Windows to Bill Gates. LOL. (Ref.)
The first estimate is $50K with $25K labor and the other is $250K with $30K labor. I have to 'finance' both jobs.
With CBM I figure to Profit $5000 on the first and $6000 on the second for an ROI of 10% and 2.4% respectively. With an ETVBM Markup, I would see closer to the same ROI on both.
The Risk on both is about the same percentage of each total bid, why shouldn't the ROI be the same?"
Why only $6000 Net Profit on the second one? Why lower you profit expectations for that job? I wouldn't do that.
Ignoring what you say you want in Net Profit if it was me I and I wanted a 10% Net Profit return I would be looking at those projects this way:
Labor
Matls
Total
NetProfit on Labor
NetProfit on Materials
NetProfit Total
Net Profit as % of Sales
First Estimate
$25,000
$25,000
$50,000
$2,500
$2,500
$5,000
10%
Second Estimate
$30,000
$220,000
$50,000
$3,000
$22,000
$25,000
10%
In my way of looking at those projects the ROI is the same in terms of percentage.
Why did you change your Net Profit expectations for the two different projects?
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So you're saying that CBM works for you because you mark up materials the same as labor?!?!?!?
Edited 8/1/2006 8:54 pm by SamT
"Whatever"
What ever what? That's an old SLykos cop out expression.
Why only $6000 Net Profit on the second one? Why do you lower your profit expectations for that job?
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"Whatever." What do you expect when you insult someone by acting like they're a complete idiot.
Jerrald, I spent over an hour creating that post. I refered back to yours and my previous posts several times. I really tried to have an intelligent, curteous conversation with you
and
you cut and paste from my post and talk as if I had said something completely opposite from what everybody can see for themselves.
Don't misspeak me. I didn't "lower my profit expectations." Those are the projected profits from CBM as I perfectly and clearly expressed as shown in this cut and paste from your post quoting me;
With CBM I figure to Profit $5000 on the first and $6000 on the second for an ROI of 10% and 2.4% respectively. With an ETVBM Markup, I would see closer to the same ROI on both
How does CBM address the issue? All you said in your previous post was that ETVBM gives equal ROIs.
Funny, that's exactly what I said.
PS: I had edited the original "Whatever" to a more curteous reply before I ever saw your post #39.SamT
SamT - "Whatever." What do you expect when you insult someone by acting like they're a complete idiot."
Geez what in hell are you talking about? How in God's name did I insult you. Listen Sam, I typically find your posts incredibly hard to decipher and read. I took the time to sort out what you might be getting at in your post and gave my response as best as I possibly could. I really don't know what you are talking about half the time you post to me and in the past I've even gotten a few e-mails from others asking me just what you are talking about and I have to tell them I don't really know.
"Don't misspeak me. I didn't "lower my profit expectations." Those are the projected profits from CBM as I perfectly and clearly expressed as shown in this cut and paste from your post quoting me;"
Okay Sam I will try again. I'll very carefully rephrase the question and God willing maybe you wont find my question insulting:
Why are you willing to make less Net Profit percentage-wise on the second project?
"With CBM I figure to Profit $5000 on the first and $6000 on the second for an ROI of 10% and 2.4% respectively. With an ETVBM Markup, I would see closer to the same ROI on both"
Parenthetically let me say that I find your tendency to want to always use acronyms also makes your posts confusing and difficult to read and sort out. While everyone knows what ROI means since it's in common usage when you first used CBM a few posts ago I had to take pause to figure out just what they hell CBM was. With that out of the way I still don't understand what you are getting at in that sentence. How does using a Capacity Based Markup give you Net Profits of $5000 and $6000. Do you look to generate the same percentage of Net Profit on Materials as you do on Labor. Just how am I supposed to know whether that is what you are doing? You don't provide enough information for me to figure out just what you are doing. All I can do is then plug in some of my own figures and hope that that might help sort things out and then you throw a tantrum saying I'm then "misspeaking" you or misrepresenting what you are saying.
"How does CBM address the issue? All you said in your previous post was that ETVBM gives equal ROIs."
I again don't know what you are talking about. I never gave an example using an Estimated Total Volume Based Markup. The examples in my table are only about the Net Profit component of the markup so that's why they are the same and perhaps that is what has you confused.
None of this however addresses NikNukeEms problem and I dare say is only confusing the whole issue of markup. I think instead of hijacking this topic or anyone else's discussions regarding markup for that matter you will probably be better served putting the issues and ideas that you have in their own dedicated thread.
And I still don't think I get at all what your point is or what you are getting at.
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Listen Sam, I typically find your posts incredibly hard to decipher and read
Jerrald, I am sorry about that.
I figured that a wordsmith like you would understand me better.
It won't happen again.
SamT
I find it easier to read and understand you than I do jerald
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All of it's over my head.
That's why I'm poor.
blue
Piffin - "I find it easier to read and understand you than I do jerald"
I'm not joking, I really do have an incredible difficult time sorting out what Sam is getting at in his posts. I re-read and re-read what he's written here now, in particular his post msg# 76802.28 and since he still hasn't answered me I'm thinking perhaps you then might be able to explain just what it is I am missing and not understanding.
Why would he be earning less of a Net Profit (when using a Capacity Based Markup) on the second project. I don't understand or see the logic and math he is using.
Piffin - "I find it easier to read and understand you than I do jerald"
And ya know Piffin if there is something you don't understand that write about you only have to ask for an explanation. I think if you look at my history here I give some pretty thorough well worked out explanations of just what it is I am talking about.
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Interesting conversation...But this always begs the question..at least for me..of 'How do you know you are getting 30% profit' (or whatever) in your materials when you give an estimate to a client?In other words..on a $10G project w/ an estimated $4G materials list, a contractor may end up spending $5G on mats when all is said and done. But if you've put to pen and paper (itemized mats) in a contract at $4G and THAT was w/ the 30% up-charge, and the actual cost came to closer to $5G, your 30% was vaporized. It seems like a materials mark-up is always a gamble, no?In your system, is the materials profit always a guaranteed profit, or is it a function of how good an estimator the contractor is?
pinko - "Interesting conversation...But this always begs the question..at least for me..of 'How do you know you are getting 30% profit' (or whatever) in your materials when you give an estimate to a client?"
Maybe this is our first conversation since I don't recall your screename but you can probably bet if you if you use the word "Profit" in a sentence in a business forum discussion here I will invariably ask you are you talking about Gross Profit or Net Profit?
Given that Net Profits of 30% in this business are very rare I'm going to assume you were referring to Gross Profit but answering your question you can't be 100% sure of what kind of Gross Profit you will earn on a project but the whole idea behind good estimating and really getting a handle on understanding and allocating overhead is that you can start to make better more precise predictions as to just how much Gross Profit you should generate on a particular project.
"In other words..on a $10G project w/ an estimated $4G materials list, a contractor may end up spending $5G on mats when all is said and done."
Well that kind of overrun of the materials portion of an estimate should really be avoided. Material requirements for any project are so much easier to quantify and predict than your Labor or SubContracting Costs. Mistakes do happen in performing material takeoffs or entering quantities in an estimate, I know I personally just missed a 5 square roof by 2-1/2 squares on a tennis court cabana we recently built, but other than that I'm anecdotally thinking that we are probably hitting all our material estimates within ± 1-2% accuracy.
"....But if you've put to pen and paper (itemized mats) in a contract at $4G and THAT was w/ the 30% up-charge, and the actual cost came to closer to $5G, your 30% was vaporized. It seems like a materials mark-up is always a gamble, no?"
Well if you have a ±30% margin for error in your material quantity estimating yeah it's then a gamble but you should really hit material quantities pretty close to right on.
"In your system, is the materials profit always a guaranteed profit, or is it a function of how good an estimator the contractor is?"
By my system I take you mean a Capacity Based Markup System. Yes it is a guaranteed NET Profit (provided we haven't made a terrible error in our Labor or Subcontracting portion of the estimate). That is because we plan on recovering all our Costs of Doing Business aka Overhead as a function of our loaded labor rate.
Ya know I seemed to have forgotten to mention in this discussion that there is another good JLC article on this topic of Capacity Based Markup that was written by the fellow I first learned it from years ago Irv Chasen entitled Allocating Overhead to Labor Makes Financial Sense that you might want to check out too.
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I get you, but I have to work to do it, like taking a class in school
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
Piffin - "I get you, but I have to work to do it, like taking a class in school"
Well that's good, but then again aren't you the guy who says "Welcome to the Taunton University of Knowledge FHB Campus at Breaktime."
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LOL, Touche`!
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
I read David Gerstel's "Running a Successful Construction Company" and now play it straight down the line. I show my material's at their actual cost and then my fee for labour, overhead and profit. Your mark-up for the risks you take is reflected in your fee. My fee always turns out to be a fair reflection of the work I do - if the client is not willing to pay what you ask for your work then you don't want to work for them. It's sometimes amazes me the clients expect you to do the work at a loss.
Sit down with both of them for a half hour and explain a) you don't take advantage of your customers, b) you don't normally document your markup, just as a restuarant doesn't document theirs, and c) there IS a markup, because you have costs involved in handling the materials. Explain these costs. Offer to let them handle the materials, or pay you to do it.
Then sit there with a pleasant smile on your face and let them decide. Its their money and their call. Either way doesn't hurt you...
Brooks
Nick,
I've learned to trust my gut in affairs both personal and business related. Sure, you could take the risk and the job may end up fine - but I've always tried to live simply by not adding additional stress where I don't have to.
Question for you though: 40% strikes me as a high markup on materials, and I'm just wondering (without you having to go into elaborate detail) why the markup is that high? I work alone, but I typically mark up closer to 20%, so you've got my interest...
Justin Fink - FHB Editorial
Your Friendly Neighborhood Moderator
JFink - "Question for you though: 40% strikes me as a high markup on materials, and I'm just wondering (without you having to go into elaborate detail) why the markup is that high? I work alone, but I typically mark up closer to 20%, so you've got my interest..."
While your question is directed at NickNukeEm I'm going to interject and ask why you think 40% is so high, or too high. Indeed for a contractor using an Estimated Total Volume Based Markup strategy (where the same markup is applied across the board to labor, materials, and subcontracted costs) 40% may not even be high enough.
When someone says they apply a 40% markup to anything they are saying they are taking 40% of the cost of of that something and then adding that to it. So if something costs $100 you then add 40% of that, $40, to it's cost to come up with the marked up Price of $140.
That $40 is just 28% of that total sales cost. ($40 divided by $140).
While new home builders typically have a much lower ratio of total overhead costs to their total volume remodelers and trade contractors typically have total overhead costs (total costs of doing business) of 33% to 50% of sales so in that context 28% might not be enough.
For the contractor using a Capacity Based Markup methodology since the markup applied to labor is dramatically higher (1.90 to 2.35 aka 90% to 135%) than the one used by an Estimated Total Volume Based Markup contractor (to cover all overhead costs as a function of labor capacity) the markup on materials (and subcontracted costs) only needs to earn a Net Profit so it can be lower and more acceptable to the general public.
In the work that you do what do you rely on to cover your Costs of Doing Business? Is it coming out of your labor rate?
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I'll try this again, I tried to post a reply once, and received a message stating I hadn't entered any text, so I went and watched some tv.
My markup is actually 36%, that is based on covering the costs of the material, some reasonable risks, and making a profit on the transfer and incorporation of that material to the project. It is the number that I found works for me - for the most part. Actually, my wife tells me whenever the subject comes up that I should be charging 50%. She attends the business seminars at the JLC Live conferences, and tells me about the speakers whose markups are 100-300%. Should I attempt to charge that much, I'd have a lot of time on my hands to wonder why I had so much spare time. I assume that markup is different based on everyone's own set of conditions, and different people will require different parameters to make a profit.
As Jerrod mentioned, the material to cost ratio can be laden toward the material side, especially on smaller projects. I've found the a large deck or BR remodel might not require the full 36% for profitability, yet changing out a single door could required increasing the markup to 40%. I'd like to give you a preset equation that delineates how much markup for a given project cost, but I have to be honest and say it is a matter of experiance and just a gut feel. I'm not nearly as sharp on the business aspect as Jerrod, or anyone else, for that matter, I can only speak what works for me. And I realize that although it might work for me now, that's not to say it can't be better.
"I am the master of my fate, I am the captain of my soul." Invictus, by Henley.
Nick are you a solo operator? Meaning is your company just you in the field and your wife maybe part-time with some of the office functions or do you have any employees?
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Just me. Every once in a while my son will help, but that's less and less every year. Seems I don't pay as well as those defence contractors he has an internship with.
Why you ask?
"I am the master of my fate, I am the captain of my soul." Invictus, by Henley.
I ask because since I find myself putting in some time at my desk this week I thought I try and put together an example case of a pricing scenario that I think would work for you using the systems I'm always talking about.
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Sounds great, thanks. Never too late to make things better. My business, that is. Thanks again for the input.
Stay cool.
"I am the master of my fate, I am the captain of my soul." Invictus, by Henley.
I have a question (as a HO): How do you guys know that the very clients you are working with aren't, in fact, reading your posts here at Fine Home Building? Even if you know for a fact they don't do Internet forums, they might have friends that do who might put two and two together. Now, supposing the somewhat unlikely, but possible, fact that they could be reading, how do you think they would they react to the defensive-sounding, "I jack up material ..."?
On the subject at hand, I always figured that a GC would charge me what the lumberyard would charge me, but the GC gets a volume-buying discount, which I believe he is entitled to for his efforts involved with buying the material. Using the auto mechanic analogy works for me. I expect an auto repair bill to include the same cost for the part that I would pay at the parts counter, even though I know the mechanic pays somewhat less.
Good point Mike however in my area, I don't get any discounts from my lumber yards or big boxes. I pay the same price anyone else does. They all tell me I have to spend over $100k a year before they'll consider discounts.
I do get a "contractor rate" on more special order items I buy over the internet when I provide my contractor's license than I do at any of my local suppliers.
Mike
mikeingp - " I have a question (as a HO): How do you guys know that the very clients you are working with aren't, in fact, reading your posts here at Fine Home Building? Even if you know for a fact they don't do Internet forums, they might have friends that do who might put two and two together. Now, supposing the somewhat unlikely, but possible, fact that they could be reading, how do you think they would they react to the defensive-sounding, "I jack up material ..."?"
Well I can't speak for everybody else but I don't say anything online that I wouldn't say to my clients if they were to ask. I myself don't and wouldn't ever use the slang colloquial phrase "jack up materials".
"On the subject at hand, I always figured that a GC would charge me what the lumberyard would charge me, but the GC gets a volume-buying discount, which I believe he is entitled to for his efforts involved with buying the material. Using the auto mechanic analogy works for me. I expect an auto repair bill to include the same cost for the part that I would pay at the parts counter, even though I know the mechanic pays somewhat less."
Well that fine in cases where the supplying vendor does give you a significant enough discount on the material so that you can then charge list to make your Net Profit but that doesn't always take place. For instance Home Depot charges me the same price it charges you for building materials. The point I've been making in putting a markup for Net profit on materials is you and I can buy materials for the same price at Home Depot. But you buy a couple boxes of tile they are only worth what you paid for them. When I buy a couple boxes of tile they are worth more to you because I've added value to them by installing them and in doing so I added intrinsic value to them.
I could hand you a pile of electronics parts and components and it would only be worth what the value of those parts as parts are. However if I have someone put them all together and give you an Apple Computer those electronic parts and components then have added value that they didn't have before.
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Mikeingp:
Do you expect the lumberyard to sell you materials at the same price they bought them? Contractors are in business to make a living - part of this is buying, handling, and installing material. There is risk associated with all of this, both financial and personal, and it is normal to add a percentage to material costs, and a percentage to overhead (tools & trucks), a percentage to labor costs (workers comp ins etc) and a percentage to profits. Still, most builders are not getting rich, most are honest and not ripping anyone off.
Treat every person you meet like you will know them the rest of your life - you just might!
Mike -
I used the auto mechanic comparison a few weeks ago during a conversation about my billing rates. The customer had just had some work done on his Lexus and a light came on when I pointed out that my rate was well below the mechanic's shop rate - and that I came to his house to do the work - lol.
That "contractors discount" doesn't always apply either. I'm a one man operation and get a 5% discount at one hardware store and pay full price everywhere else.
Right, it varies a lotI deal with three places. One is straight ten percent
second is 6-7% depending on my volumn
Third gives no discount, but a much longer time frmae before payment is due.The first two discounts disappear if I don't pay by the tenth of t5he month, sometimes tricky to do when they send the bill out anywhere from the thirtieth of previous month, to the sixth of the month due
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
Say what? I don't understand how you managed to come up with the thought that I might not be forthright with the clients. You will have to explain that for me. I can't connect the dots between my initial post and your response; sorry. If not electing to disclose all aspects of my estimating/billing procedure is construed as some sort of subterfuge, then color me guile-ty.
"I am the master of my fate, I am the captain of my soul." Invictus, by Henley.
Relax.
I did not suggest that you were at fault. I asked you to examine the situation. I said that, if you do examine, and satisfy yourself that you are correct, you have a very good chance of success by being up front with the client.
Thanks for stimulating a lot of great posts and a wide array of opinions.
I generally favor using Jerald's approach of using the labor rate to cover overhead and profit. We still mark up materials 10% to cover damage, etc. If the owner buys materials, they have to cover the loss.
I think you should stick with what works for you. In this case, use your markup as a test. By all means show your markup. You might even underline it. If they are not happy with it or with you, now is the time to find out. For both of you.
As an aside, there is one very legitimate reason for getting a cost breakdown. This can be used by the homeowner to make decisions about how the spend their money by choosing materials and methods that will support their budget and their building goals. It sounds as if that may not be the main goal of these customers but it is possible. They may just be very nervous about spending a huge amount of money. That I can understand.