Hey Guys (and Gals),
Looking for some info and opinions about mark-up to help settle a long standing argument between my hubby (aka Scooter) and me. Scooter is an independent contracter who works as a G.C. he has
steady crew but they are also independents He does frame to finish custom homes, timberframes and renovations.
Here&
#39;s the kicker. Scooter does not mark up materials! I say he is crazy he says he feels like he is gouging the client. Advice on common practice would be appreciated. Thanks, Scooter’s Wife
Replies
Scooter is being disrespectful to his wife for NOT marking up.
He's providing a service that has value to a customer. His customer expects to pay a markup. Scooter's wife has to live a lower standard of living due to Scooter's misplaced generousity.
Should Scooter start to mark up and allow Mrs. Scooter to live in the style to which she would like to be accustomed, I'll bet that Scooter would experience a similarly improved standard of living. (In more ways than one.)
I'm a pretty well known advocate or proponent of the Capacity Based Markup type of system (also know as PROOF, Indexed or Labor Allocated) as opposed to a Traditional Estimated Total Volume Based Markup.
To properly use a Traditional Estimated Total Volume Based Markup you absolutely have to markup materials since the markup is essential toward recovering your overhead. In fact in a Traditional Estimated Total Volume Based Markup system you apply the same markup to Labor Materials and Sub Contractors.
Job Cost = (Labor_Cost x ETVB_Markup)+ (Matls_Cost x ETVB_Markup) + (Sub_Cost x ETVB_Markup)
or
Job Cost = (Labor_Cost + Matls_Cost + Sub_Cost) x ETVB_Markup
Using this system you typically see markups ranging from 1.33 to 1.67. However using such a system will leave you short whenever you have a project with low Material & Sub Costs or no Materials & Subs at all. See my paper Potential Problem Using a Volume Based Markup. So I always recommend using a Capacity Based or PROOF/Indexed/Labor Allocated markup methodology (aka PILAO)
(Internal_Labor_Cost X PILAO_Markup) + Sub_Cost + Materials_Cost = Sales_Price
Since the markup on Labor alone recovers the contractors overhead it is typically very much higher than the markup in the Traditional Estimated Total Volume Based method. Capacity or PROOF type markups typically are in the range of 1.9 to 2.23. In theory or pure practice when using a Capacity Based or PROOF/Indexed/Labor Allocated markup you don't need to markup Materials or Subs at all to recover your overhead since you recovered it as a factor of your labor.
That said however it's still good and common practice to markup Materials for Net Profit. Typically in the range of 6%-12%. You as a contractor are taking the "risk" in supplying the materials (if the material fails you'll be the one replacing it for instance) so you can think of it as what you should reward yourself for taking that risk. It could also be looked at as the "Value Added" you are giving to that material too. A 2 x 4 is just a 2 x 4 but when the 2 x 4 is part of a straight true and plumb wall assembly it has added value.
Regardless of how you look at it your hubby has problem and need a psychiatrist if he's worried about gouging. You are right and he is wrong on this issue.
I would suggest that you and your husband get Ellen Rohr's books Where Did The Money Go?- Easy Accounting Basics for the Business Owner Who Hates Numbers and How Much Should I Charge?: Pricing Basics for Making Money Doing What You Love. You should also download my freeware Excel spreadsheet I've been calling the PILAO worksheet to see if the hourly rate he's charging in the first place is correct too.
By the way having a crew that is all independent contractors (1099's) is inviting trouble from the IRS. Are you sure they qualify 100% as independent contractors in the eyes of the IRS? See the 1099 topic here to check out the qualifications.
View Image
ParadigmProjects.com | Paradigm-360.com | Mac4Construction.com