I am a specialty contractor (painting & drywall) who normally charges time and materials. I’m curious what other contractor’s do and why? Also, any good books or other resources you might recommend on the subject?
It’s time to make more profit .
I am a specialty contractor (painting & drywall) who normally charges time and materials. I’m curious what other contractor’s do and why? Also, any good books or other resources you might recommend on the subject?
It’s time to make more profit .
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Replies
Read "Markup and Profit" by Michael Stone. He also has a website at markupandprofit.com or somesuch. Very important for any contractor to read the book, see his presentations if possible, and consider what he is saying. He'll advise you to charge costs + 50% at a minimum, probably 67% if you're a remodeling GC.
Hi David,We've corresponded in the past. I'm on the mainland North of Seattle (Lake Forest Park). Thanks for the suggestion on the book. David Stone. I'm a specialty contractor (painting and drywall). I look forward to reading what he has to say.Thanks again.
Here's the site. Strongly recommend you come to the JLC Live show in Seattle this November, where Michael will probably give his 90-minute presentation. A bunch of us will probably meet up for dinner and drinks.
http://markupandprofit.com/
David,Another great tip. I'll look forward to being there in November. In the meantime, i'll get his book.Thanks.
davidmeiland - "Read "Markup and Profit" by Michael Stone. He also has a website at markupandprofit.com or somesuch. Very important for any contractor to read the book, see his presentations if possible, and consider what he is saying. He'll advise you to charge costs + 50% at a minimum, probably 67% if you're a remodeling GC."
David I've got to say I'm really sort of surprised to see you recommending the Uniform Percentage markup method. You got me wondering now as to why you think it's a better method to use than the Capacity Based method that Gerstel, Rohr, Irv Chasen, myself and many others here recommend?
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I'm not specifically recommending anything except that he read Stone. Main reason is that Stone is so adamant and blunt about the need to charge a LOT to survive... or at least he is in person. I think a percentage works for a lot of people and probably very well, as I have worked in some very well run companies and that's what we did. Every guy in this game has to figure out what a year's worth of markup is and find a way to charge it.
I'm a remodeling contractor who uses drywall subs and a painter.
I give a set price to the customer.
I like a set price from both the drywaller and the painter.
I don't like T and M. Shouldn't be anything my drywaller and/or painter couldn't look at and give me a firm price on.
even the plumber/electriaian give me a set price ... and bill for any additional/ unforeseen work they runs in to ...
in my mind ... T and M is used when U can't see thru the walls.
profit, overhead and mark up are all included in everyone's prices.
Jeff
Buck Construction
Artistry In Carpentry
Pittsburgh Pa
Jeff,By "set price" you essentially mean a bid, right? Except that you say you bill for "additional/unforeseen work" which precludes the strict definition of a bid. Maybe you're talking about "change orders" here? I've definitely run into instances as a paint contractor where I couldn't see through the walls, so to speak. For example, burning paint off the exterior of a house. I could write a small novella about all the variables that affect the rate at which the paint comes off (layers of paint, quality/density of the wood, etc.).I'm personally wondering how one covers oneself for overhead and profit. Material costs are never marked up by me; I actually pass along my contractor's price to the homeowner.
I'm personally wondering how one covers oneself for overhead and profit.
... simply charge for it.
Material costs are never marked up by me;
... I think they should be ... either direct or in your labor rates.
I actually pass along my contractor's price to the homeowner.
... I wouldn't do that.
Jeff
Buck Construction
Artistry In Carpentry
Pittsburgh Pa
i read most of the responses to this post and i am in a similar quandry with "bidding" jobs. call it bidding, t&m, cost plus. which ever way you do it.
homeowners always seem to question the markup. i tell them directly and have to explain to them that that is how we make our profit (i often reference fixing, buying tools, trucks, equipment etc.) our labor rates are set up to cover our overhead (insurance, rent, ira's, etc) i let them know that we dont mark up our labor but mark up all materials and subcontracts by 10%. this has always seemed fair to me. in fact we usually put a fixed price on labor (this only changes with change orders).
because of the issues surrounding markup and it confusion with the HO we have been talking about a cost plus fixed fee contract. this was explained to me in a JLC article. HO pays all labor (according to a fee schedule), materials, and subcontracts exactly as they come in and there is a fixed fee (a seperate line item) which is basically the profit to administer the job. we haven't tried it yet but am curious how it will work. it seems if the clients go for it you are guaranteed a certain profit.
If you need more profit, and you think the customer is prepared to pay more for your product, why not just charge more for your time?
What on earth is the justification for adding markup to materials? It can only be that you are not charging for the time required to purchase the materials.
If I was a homeowner who had a contractor proposing to make extra profit on the materials which I was paying for (that's what T&M means, right?) then I would be concerned that the more materials the contractor used the more money he was going to make. There would be no incentive for the contractor to be careful with the materials. I should think that the HO would be much happier paying a higher hourly rate without the materials being marked up
John
John ..if I understand your post. You are mistaken. T&M stands for time and materials. It doesn't mean you are necessarily marking up materials it simply means you are billing for your TIME spent and any MATERIALS purchased for the the job. There is some logic to your concern.. and you sound like a homeowner who thinks contractors make unjustified money. It is sometimes the case ..That is why the practise of marking up everything in the "COST PLUS" may actually be falling away. But that's different from a "FIXED PRICE" you can also look at it this way. Some homeowners or business' would rather know what its going to cost in advance.. and not worry about how slow folks are working etc. in which case a fixed price that includes risk mark up hence profit etc is understandable.Most of my work is T&M and most of our customers already know our deal when they come to us. I bill a high enough rate per man for every hour he or she works so that it covers all our overhead and includes profit. We do not mark up subs or materials, that cost is passed directly to the customer. This seems to allow more flexibility and transparency in billing.http://www.thesmallbuildingcompany.com
Tanks for the explanation, though it wasn't actually necessary. I already understand that T&M means time and materials, in other words the customer is paying T&M (rather than fixed price) and I thought I had said that.
I am not a homeowner who thinks that contactors make unjustified money. I am a contractor ( I make and fit kitchens), so I know how much money a contractor needs to make and ought to make. I only work fixed price, BTW.
I did say if I was a homeowner etc etc.... I should have stressed the if
JohnIf my baby don't love me no more, I know her sister will.
Hey john .. I did understand that you were not a homeowner. I was just confused by your wording that I understood implied that T&M meant you were marking up the materials...I think we are both straight now. How different is contracting in regard to these formats in England? I suppose its similar?arthurhttp://www.thesmallbuildingcompany.com
Ovolo,I think you're unusual in not marking up subs and/or materials. How much more do you have to charge to make up for the revenue that you aren't getting from subs and materials? Is it a substantial increase above and beyond your competition? Do you think this strategy (of not marking up) brings you more potential customers? Working T&M, are you generally pretty close at the end of the job as far as your estimate goes? Why have you decided to steer clear of bids? Liked your site; well designed.
Edited 3/25/2007 5:14 pm by redoak
Yes I know I'm unusual in this. But I found a simple formula that after 20 years building seems to be working for me for the last 6 years... After years doing carpentry working, starting NYC and up to the Berkshires for the manhattenites second homes, I changed the format. I discovered after a detour doing some large project management work that if I managed 6 or more carpenters spread between 2 plus jobs at a time and marked them up approx 45% of their total cost.. if I can always keep them busy on T&M, then the office and I can be covered and even some profit at the end of the year. I’m making it sound easy.I have a bookkeeper and on avg. 6 carpenters going. Within reason I handle all subs and coordinate all customer communications but importantly there is a good lead carpenter on each job. They are well-paid self-motivated carpenters who are serious about their work. That cuts down on my running around. We do some high end work, after paying myself I may not make as much money as some generals do but I enjoy my work I make a good living, most important to me was enjoying the process and who I work with daily. I do not have to sweat waiting for those big last checks. Have little risk AND most importantly I have satisfied customers who have carpenters giving the time care and pride in their work. One of the main reasons for me going this way was I have always had a problem with starting a fixed price job and then immediately from day one trying to cut corners, so often facing dilemma’s of conscience. Cutting corners is often what happens in spite of best intentions. Worse is ignorant customer complains about paying markups for things they could have bought cheaper somewhere else. I was usually losing money but having happy customers. NOW I have satisfied customers who come to us knowing our reputation for meticulous follow through and we are always getting paid. I did get pretty good at estimating and a large part of my work is educating the client. I am usually on budget or below (but I almost always use up the contingency line…dam). I explain to the client..before taking on or estimating the project how I work. I say to them something like "you realize that we cost more per hour then the other guys but I don’t mark up anything else?" and that by doing this I can give them very transparent billing. I have found that we are actually competitive given the actual end value they get, but I think the percentage more that customers often spend with us is reflected in that they are satisfied, feel well served and we enjoy our work. I decided to stop bidding if I can help it. (of course that’s easy to say as long as there is work out there) I can understand budget needs, but I want us to be hired because they want us for whatever other reasons NOT because we are the cheapest. I also think that bidding is never fairly handled. I do it for non-profits etc who need 2nd bids etc. But it’s often unrealistic and unfair. This is all sounding easy and I know that some readers markets and customer types are very different...sorry that turned into a long-winded answer. .forgive me.. did not mean it to be. Must be this glass of white wine.. Sunday night and all…arthurhttp://www.thesmallbuildingcompany.com
Didn't get a chance to respond to your post. Just wanted to thank you for your reply. I like how you work and find myself in agreement with your approach (and why you don't like to bid your work). Can you be more specific about what you unrealistic and unfair about bidding? What do you make of Jerrald's capacity based markup vs. uniform percentage markup?
Its funny but there is so many different ways to arrive at a similar number. For me it’s a balance between staying competitive, keeping it simple to manage but most of all for me it’s about making the customer feel comfortable while doing it. Jerrold’s system makes total sense to me. just hard to explain to a customer.. When you are talking about renovations.. most customers don’t mind allowing some profit but they feel much better if they can understand or rationalize it.This conversation can also get out of hand because the approach can differ greatly with different scales of construction. e.g. residential vs. commercial and new homes vs. renovation. Renovations under 100K and over etc. all influences how this stuff can be handled. I don’t think anyone thinks that the builder or carpenter should be denied profit, its just a matter of how you are getting to that number if you are doing T&M, fixed price, cost plus etc.. and then what exactly you call profit. The customer needs to be able to find a way to be sure to not be overcharged but as soon as a prospective job is not completely specified by a fully paid Architect, its subject to interpretation and opinion. There is nothing stopping the customer from trying shopping or getting him or herself in trouble with it. I have not seen a grand solution for this problem, but I think as a professional builder we should not allow the average customer to actually price shop with it.I do not mean that bid fixed price jobs are bad at all. I think there is definitely a place for it. Especially if the bid process is between two or more established reputable builders or when the jobs are easily defined. But in general I have found that bid jobs eventually cut corners. Its capitalism simple math. Innovation will be in the direction of cutting costs, not necessarily quality or sensitivity to the environment or health. sorry all .. that turned into a longer post again and barely answered your question. arthurhttp://www.thesmallbuildingcompany.com
I haven't read all these posts so excuse anything thats already been said.
Keeping it simple..to me a fixed price is the way to go..to me. Prospective clients for the most part get three estimates/proposals?
So its apples for apples. Dead on. The only thing the client has to be concerned about is the level of expertise in craftsmanship and if they do their homework......
T&M seems to me...well...if I didn't know the builder I wouldn't know if I was being soaked for time. It'd only be natural for me to think they'd go slower than they might otherwise.
It'd probably also irk the client everytime I took a break.
If I make my labor prices higher to fit my possible lack of material costs and those labor prices get compared to other craftspeople that offer lower prices....
I donno...six of one half of the other. A set price is a set price.
Sorry if this has already been said.
You know, not to generalize, but the 29% of people who still support President Bush are the ones who love to pronounce themselves more patriotic than the rest of us. But just saying you're patriotic is like saying you have a big one. If you have to say it, chances are it's not true.
http://WWW.CLIFFORDRENOVATIONS.COM
Yes Andy I agree it’s simpler for some. In many cases it works well and for some contractors its perfect. I just don’t know how often you are really truly getting apples for apples situation. I don’t know if it allows easy report and flexibly between you and the customer, once you are started and he/she wants to add another window or decides to do stain instead of paint, how easy is it to calculate the true cost of that change order and maintain the changes. I found I could often blame those hassles on the stress load of building for homeowners. With regards to estimates Nick, you’re right. They really need to be able to figure their budget and they need to know that your costs are competitive and realistic. That is the trickiest part. I don’t have this down to any science.. and like I said it’s different for so many factors, but I have to be strict with myself when meeting the new call. If I can establish early whether they are calling to price shop is key. In my business I don’t get cold callers from the phone book looking for smaller size jobs. That is definitely an application I think for setting some flat fixed fees. It becomes a chicken or egg thing. Long story short, I always provide a very detailed breakdown estimate of the entire job in writing before I start. The trick is not doing the full blown T&M estimate without the job committed or for a comparison. I have done many in the past, and not done the job and that’s usually because the customer was not admitting that they were comparing prices. My estimate will usually be higher because its allowing for variables and contingencies. The bottom line for me is this. I have years of satisfied clients who continue to give references to me. My ‘estimates’ are usually higher because mine are given in the context of what they need to realisticly budget for to get evrything done right. I am not giving an estimate to get the job. In the end it’s been my experience that most contractors end up with strained communications, things left undone and over budget. I agree; six of one half a dozen of another.arthurhttp://www.thesmallbuildingcompany.com
how easy is it to calculate the true cost of that change order<<<I may get jumped all over for saying this by some people but I really don't think its the customers business how I arrive at the figure I give them. The figure is the figure. Take it or leave it!!
What I try and do is break down the job into to as many segments that "I'm" comfortable breaking them down into. I don't necessarily even show them the break down unless I have to which I try to avoid...reason being..."it's cheaper by the dozen". The more work they give me... the broken down projects become cheaper than if they were executed alone simply because I'm already there. My tools are already there. I have to still clean up, set up, break down etc etc. It really depends on the given project but thats the game I play in my head for myself. Also...I know from 30+ years of experiance that just because something takes me an hour it doesn't mean I can't charge $500. Depends what experiance it may take. Like finding a roof leak for instance. I've made some seriously good and fast money with those projects cause I can see through a house and I know how to go about getting that done pretty easily. Why would I charge them for an hour???Or manufacturing 2' of paster crown. I've made some quick serious money doing that too a whole lot of times. There;s a LOT in reno and resto I'm not going to explain why I'm charging what I am. Don't like it...find someone else.
Look at other trades...applicance guys for instance..They ALL get paid big bucks just for an estimate and no one asks them once the stove or fridge is apart why......Either the mechanic has a good reputation and you can trust him or not.
In renovation and restoration work its all about experiance not about sq footage all the time or how long it takes...I'd leave that to the drywall guys and trim guys and roofers and siders...they go in and bang out the squares and footage. Thats how I started in this over thirty years ago. Roofing and "aluminum" siding and we loved walls where we could bang those squares out.
Renovation work for the most part is different. I wanna get paid for all those years I put in crawling through, over and under houses and paying attention to what was happening when I ripped walls and roofs and floors apart and rebuilt them.
Its time we get our due and no one's business why I ask for what I think I'm worth. They don't like it...fine...hire a newbe.
Same with by the hour I guess,,,if you can get what you REALLY think you're worth that way...cool.
You know, not to generalize, but the 29% of people who still support President Bush are the ones who love to pronounce themselves more patriotic than the rest of us. But just saying you're patriotic is like saying you have a big one. If you have to say it, chances are it's not true.
http://WWW.CLIFFORDRENOVATIONS.COM
I hear you and I totally agree with getting paid for your accumulated knowledge. Its a really good question. I can totally relate to getting paid for the value of what you did. Its a pisser to get paid $75 for an hour consultation; by moveing some flashing saving them thousands on the roof or whatever when the less experienced guy might have recommended an expensive repair and cost them thousands.arthurhttp://www.thesmallbuildingcompany.com
You know, not to generalize, but the 29% of people who still support President Bush are the ones who love to pronounce themselves more patriotic than the rest of us. But just saying you're patriotic is like saying you have a big one. If you have to say it, chances are it's not true.
One always knows that when one sees the words "Not to generalize" that the following paragraph will be filled with made up statistics and generalizations. Ie., liberalspeak.
I can't begin to count the number of yard signs that say "Peace is Patriotic," often right next to one that says "Bring our troops home," but I have yet to see one that says, "Encouraging our troops is patriotic."SamT
Anyone who doesn't take truth seriously in small matters cannot be trusted in large ones either. [Einstein] Tks, BossHogg.
"Encouraging our troops is patriotic."<<<
Encourage them as to what? That we're winning? That they want us there?
That bush will send them gear to keep them safer and if they come home wounded they'll be treated with the respect and care they deserve?
Encouraging and with lies or campaigning for them to come home.
And that Peace is Patriotic is stupid too...All that does is make some sign maker a few bucks.And I'm yet to understand what "support the troops" actually means if you've been against this war from the beginning. THAT is really generalizing. To me when I say support the troops. It means keep them safe and I wish we never gone into Iraq in the first place...unless there REALLY was WMD.
You know, not to generalize, but the 29% of people who still support President Bush are the ones who love to pronounce themselves more patriotic than the rest of us. But just saying you're patriotic is like saying you have a big one. If you have to say it, chances are it's not true.
http://WWW.CLIFFORDRENOVATIONS.COM
Encouraging them to stay there and do the best they can .
Letting them know that we respect what they are doing for us.
Encouraging them to believe that we DON'T think they are dying for no reason.SamT
There are three kinds of people: Predaters, Prey, and Paladins. For the life of me, I can't see why Prey feels safe disarming and neutering Paladins.
Encouraging them to stay there and do the best they can .Letting them know that we respect what they are doing for us.Encouraging them to believe that we DON'T think they are dying for no reason.<<<<Well I don't think they have much of a choice once they're there and doing the best they can I'd think is a given because that means staying alive.And letting them know what they're doing for us? Or letting them know we honor their incredably good intentions? (which is waht pizzes me off most about Bush!!)
>>>Encouraging them to believe that we DON'T think they are dying for no reason.<<<
You mean lie to them if you think some of us...maybe most of us at this point think its ridiculus that we went in there for the reasons we did?
Sorry...I'm not in the habit of lying.I support their incredable intentions and bravery and want them all home in one piece and those that need medical help should be put up in five star hotel hospitals!!It just blows me away that even that...all they get is crap ... what an outfit of loosers this Bush administration is.
They're a disgrace to these people,soldiers in Iraq and the this country!!
You know, not to generalize, but the 29% of people who still support President Bush are the ones who love to pronounce themselves more patriotic than the rest of us. But just saying you're patriotic is like saying you have a big one. If you have to say it, chances are it's not true.
http://WWW.CLIFFORDRENOVATIONS.COM
Let's talk about this some more, the next time I'm in the Tavern.SamT
Anyone who doesn't take truth seriously in small matters cannot be trusted in large ones either. [Einstein] Tks, BossHogg.
LOL... and I thought I went off topic arthurhttp://www.thesmallbuildingcompany.com
So off topic I didn't even realize I was writing in this thread anymore till you just posted that...lol..I just opened the email and there was Sam's comment so I ran with it...sorry.
and now back to our regular programming..
You know, not to generalize, but the 29% of people who still support President Bush are the ones who love to pronounce themselves more patriotic than the rest of us. But just saying you're patriotic is like saying you have a big one. If you have to say it, chances are it's not true.
http://WWW.CLIFFORDRENOVATIONS.COM
Oh, there realy were WMDs there. Sadaam used them at one time. Of course, it was when he was still on our side, so I guess those don't count.
SamT
There are three kinds of people: Predaters, Prey, and Paladins. For the life of me, I can't see why Prey feels safer from predators by disarming and emasculating Paladins.
Edited 4/3/2007 11:16 am by SamT
hi arthur,i like your approach and i strive towards working exclusively T & M. The dilemma seems to me that customers still want to know what the project is going to cost and if they can afford their design. How do you handle this, given you are not working for a fixed price? Is there a general estimate given based on square footage? Do you do a series of takeoffs just for estimating purposes? Or do you shy away from this all together? Thanks,Nick
I read your post on your approach and it is what I have been working towards. I figure my hourly rate to include profit and overhead. I think however that the only thing that sometimes has me sweating it out is when I carry the cost of the materials before I receive the next payment, I am carrying risk (like not getting paid maybe?). That has always had me wonder if I should mark up a bit just for carrying that risk. It's competitive enough around here so I'm always hesitant to go too high."it aint the work I mind,
It's the feeling of falling further behind."Bozini Latini
hvtrimguy "...I think however that the only thing that sometimes has me sweating it out is when I carry the cost of the materials before I receive the next payment, I am carrying risk (like not getting paid maybe?). That has always had me wonder if I should mark up a bit just for carrying that risk. It's competitive enough around here so I'm always hesitant to go too high."
Hvtrimguy I know your question was directed towards Ovolo but since this is what I was questioning in john messages above (msg#87614.17) I going to comment. YES, you should put a markup to earn a Net Profit on the Materials you provide not so much to cover the risk of not getting paid ( that is what credit checks are for) but for you risk you carry just in case the there is a problem with the materials you have provided. Your using your expertise and judgment to provide the correct materials to solve your clients problem so you deserve compensation for that judgment and expertise.
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off topic, but did you get my e-mail last week?
Neil, I did get it but I am up to a week behind schedule in responding to emails about 360 Difference developement. I'll email you later today or possibly tonight.
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When ever is convienent.
Thanks
john- "What on earth is the justification for adding markup to materials? It can only be that you are not charging for the time required to purchase the materials."
John are you saying a contractor shouldn't markup material at all. In other words not make anything on the materials he or she provides?
I'll warn you ahead of time that if that IS what you're saying, I couldn't disagree with you more.
However where you then say:
"If I was a homeowner who had a contractor proposing to make extra profit on the materials which I was paying for (that's what T&M means, right?) then I would be concerned that the more materials the contractor used the more money he was going to make. There would be no incentive for the contractor to be careful with the materials. I should think that the HO would be much happier paying a higher hourly rate without the materials being marked up" (my emphasis)
I'm in agreement with you there. Whereas contractors using a Uniform Percentage Markup Method typically markup materials anywhere from 50% to 67% (they have to to make and cover their Overhead Costs) contractors using a Capacity Based Markup generally only markup materials to earn a Net Profit on those materials since their Overhead Costs have been covered by their "Loaded" Labor Rate. Generally a Capacity Based Markup Contractor might markup materials around 11% to generate a 10% Net Profit.
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Jerrald, I will try to reply in greater depth later, but for the meantime, let me ask you a question.
If an average home owner was in the position of having to choose between two T&M contractors (A and B), and A said that he would charge the HO X$ an hour and also he would mark up all the material and all the sub contractors Y%, and B said that he would charge Z$ an hour but that he would not charge any extra for materials and subs, which should the HO choose?
Well, of course, it all depends on X and Y and Z. Which is most likely to produce a satisfactory product at the lowest price? Thing is, how is the HO to know? He's only an average HO, after all.
JohnIf my baby don't love me no more, I know her sister will.
<<<<<
If an average home owner was in the position of having to choose between two T&M contractors (A and B), and A said that he would charge the HO X$ an hour and also he would mark up all the material and all the sub contractors Y%, and B said that he would charge Z$ an hour but that he would not charge any extra for materials and subs, which should the HO choose? >>>>
he should give it to contractor "c" who will give him a fixed price for the whole job
unless someone sits down and estimates the job ... neither "a" nor "b" will have a clue as to the bottom line...
if they do have a clue.. then someone should develop a "fixed Price " contractMike Smith Rhode Island : Design / Build / Repair / Restore
i couldn't agree more. i have NEVER worked T&M. still, it was only an example
JohnIf my baby don't love me no more, I know her sister will.
Why fixed price?
Believe it or not some clients are more comfrtable with T&M, as are some contractors.
I do 90% of my work on T&M and don't mark up materials if the owner pays for them directly.
I cover all the expense and profit you and Jerald talk about in my hourly rate and a fixed fee based on my estimate.
And yes, I can estimate the costs, and do get quite accurate results from doing so.
I don't believe there is a universal "right or Wrong" way to operate your own business.
What works for the individual owner is whats important.
Then there is the now dead contractor of custom homes here who used to just tell clients that if they had to ask the cost of thier project from him they couldn't afford him. He had clients standing in line for him to have an opening in his schedule right up until he died.
dovetail97128 -"Believe it or not some clients are more comfrtable with T&M, as are some contractors."
I do believe that is true but it also very rare. I was actually shocked when around nine months ago we had a client tell us they didn't want a fixed price from us and that they wanted us to do the job T&M.
"I do 90% of my work on T&M and don't mark up materials if the owner pays for them directly."
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We don't charge a markup up on materials if the client or another third party in the project is providing them but I could envision some exceptions to that. If for instance the materials being provided have little on no intrinsic value until after we work with them then I would charge for the markup on the value of those materials.
For instance if a client was to give us the white oak we needed to fabricate a tricky railing like this one to the right I would charge for the value added our skill in crafting something like that gives to it. The material cost is trivial or incidental compared to the value added our labor adds in making that wood into a serpentine railing.
Well with that said I guess I would ask, you do put some kind of markup on materials for a Net Profit when you are the one supplying the materials?
"I don't believe there is a universal "right or Wrong" way to operate your own business."
I'm not an absolutist so I think that is true but some methodologies are better or 'more right' than others which is one of the reasons I argue the case for contractors to use a a Capacity Based Markup over a the Uniform Percentage Markup Method. It's more robust and accurate. It's good to see your thinking that way in putting your overhead recovery into your hourly rate.
"What works for the individual owner is whats important."
The problem with that is that there are a lot of times where the individual owner thinks they have a good system and that it isworking and they are not seeing the real underlying causes of some of the problems their business's are really facing.
In my business consulting gigs I often meet contractors who think they have a production attitude problem in that sometimes their crews work hard and produce and their jobs are profitable and sometimes their crews get lazy and don't produce and they don't make any money when in reality the problem is not in their crews productivity at all but instead in how they figured the job. As I mentioned above using a Uniform Percentage Markup Method will make you more likely to lose money on a job with a low ratio of materials and subcontracting to your own internal labor and either make excessive profits on jobs with a high ratio of materials and subcontracting to your own internal labor (not that likely to happen) or not get the job because they're overpriced (a lot more likely). They have instead got the wrong price and labor budget on the job becuase of the method they are using.
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john - "If an average home owner was in the position of having to choose between two T&M contractors (A and B), and A said that he would charge the HO X$ an hour and also he would mark up all the material and all the sub contractors Y%, and B said that he would charge Z$ an hour but that he would not charge any extra for materials and subs, which should the HO choose?"
John that's is a real good question but looking at it from a contractors view point if I was contractor B and I wasn't marking up materials and subcontractors I just wouldn't even be looking at the job. What the point of me going through the trouble to arrange for them and assume the risk of their performance if it not earning me anything commensurate with that risk?
A contractor still needs to generate and earn a Net Profit on the sales of Materials and Subcontracting they arrange.
To answer the question given the scenario you've just described the homeowner should absolutely choose contractor B. The homeowner could expand the project to include more expensive materials and more subcontracting and get all that at cost! What a great deal! But contractor B would have to be insane to deliver more and more value and services at cost without be able to earn a Net Profit on them.
But I can describe a better (and more realistic) scenario.
Lets say you have two almost identical contractors A and B except that they use different markup methodologies. A uses the Uniform Percentage Markup Method to price his jobs. The formula he uses look like:
(Labor Cost + Material Cost + SubContracting Costs) x Markup of 1.5 = Selling Price
Then you have Contractor B who uses a Capacity Based Markup to price his jobs.
(Estimated # of Billable Hrs x Loaded Labor Rate*) + (Material Costs x 1.1) + (SubContractor Costs x 1.1) = Selling Price
(* the markup that was applied to Contractor B's labor cost to come up with a 'Loaded Labor Rate' includes a percentage to generate a Net Profit on that Labor).
To do a T&M job Contractor A is going to take lets say a burdened labor cost of $35 and multiply it by his 1.5 markup to come up with a Billing Rate for his Labor of $52.50. Contractor B using a Capacity Based Markup is going to come up with a higher billing rate since his markup multiplier is greater since it's intended to cover all his overhead costs instead of just a portion of them. He takes the burdened labor cost of $35 and multiplies it by 1.9 to come up with a Loaded Labor Rate of $66.50.
So the question is now who is the homeowner going to hire? The contractor (A) who is going to charge them $52.50 per hour plus 50% on top of any Materials and Subcontracting costs or will they hire Contractor B who is going to charge them $66.50 per hour plus 11% on top of any Materials and Subcontracting costs?
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Well, we have an apples and oranges situation here, probably caused by my not doing T&M work.
This is where we diverge-
What the point of me going through the trouble to arrange for them and assume the risk of their performance if it not earning me anything commensurate with that risk?
In my scenario the customer would be buying the materials (I realise I should have stated that) and would therefore be assuming the risk. As a contractor working that way I would see no point in putting the money for the materials and subs through my books, I would have the customer pay direct .
If, as in your scenario, I was doing T&M and if I was assuming the risk of the materials' performance then I would certainly need tobe compensated for that.
Where your system falls down is that you are adding a standard markup to the materials in order to cover the risk, but the risk is variable. An insurance company that worked that way would go out of business
Much better to let the customer take the risk, and make a healthy profit on the time.
JohnIf my baby don't love me no more, I know her sister will.
If as in your scenario "the customer would be buying the materials" and they were to see Contractor A charging $52.50 per hour and contractor B charging $66.50 they are more than likely going to go with Contractor A and I know this is true because we see this happens to us all the time. Being a 'B type' contractor (capacity based markup) when cost is the only or primary consideration we lose pretty fair amount of jobs to the 'A types'. In the grand scheme of things tough I see nothing wrong with that. We can either lower our price and take the labor only jobs at a loss or stick to our good business thinking and only work the jobs that allow us to cover our overhead and turn a Net Profit.
Those Contractor A types don't stick around too long in the labor only market. Pretty soon they get the message and start using a loaded labor rate or quality suffers and they eventually tank and are out of the business.
"If, as in your scenario, I was doing T&M and if I was assuming the risk of the materials' performance then I would certainly need tobe compensated for that."
Good I'm glad to see we're in agreement on that.
"Where your system falls down is that you are adding a standard markup to the materials in order to cover the risk, but the risk is variable. An insurance company that worked that way would go out of business"
Well first of all the risk I am talking about in this context is really what I would better describe as 'entrepreneurial risk' and not really construction risk. If there was a Summa Theologica of my thinking on estimating and pricing you would see that I say to assign and treat construction risk on a line item basis in that some tasks (and materials) are riskier to perform than others . That kind of risk variability can only be dealt with on an individual line by line basis.
And as for the generalized risks we face in construction and remodeling that is what insurance if for.
This 'entrepreneurial risk' and its subsequent reward, which is Net Profit, is the reward for venturing out on your own into business. It's the reward for creating and running a business.
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Name an industry where goods are sold without markup. Heck, the kids on the corner selling koolaid make us all look sick with the markup they are able to get!
Beer was created so carpenters wouldn't rule the world.
Ya know redoak I think my recommendation might actually be to avoid the book Markup & Profit altogether. I think it puts out the wrong or at least misleading information on markup.
I think it's a decent book for the most part except for what is has to say about developing a Markup. The Uniform Percentage Markup Method which based on you producing an accurate estimates of just what you're going to sell in the way of dollar volume for coming year of your own Labor (not so hard to predict) as well as Materials and Sub Contracting (those last two being much more difficult to predict). The Uniform Percentage Markup Method, also sometime called Total Volume Based or an Across-the-Board Markup is a weak method and can in some cases be actually tragically flawed (see The Potential Problem Using a Traditional Volume Based Markup for an example of just such a case). And even then ignoring the extreme cases the method will leave you over priced on projects that have a high ratio of materials and subcontracting to your own labor and you'll probably price yourself out of a job and on the jobs that have little or no materials and subcontracting you be under priced and doing the job at next to nothing or for a loss.
I would instead recommend if you don't already have it picking up David Gerstels Running a Successful Construction Company and then read what he has to say on using a Capacity Based Markup in Chapter 5, pgs 167 through 168 . The Capacity Based Markup method is far more robust ('robust' meaning it doesn't fail to produce the intended results under certain conditions, it always works).
Then for a little bit more thoroughly detailed guide explaining just how to come up with the right billing rate then read Ellen Rohr's How Much Should I Charge?: Pricing Basics for Making Money Doing What You LoveView Image. And to top it off you can then download the freeware Excel Workbook I've designed to help finally get that rate you need to charge: The Capacity Based Markup Worksheet.
Given that you're a "specialty contractor (painting and drywall)" I think it's especially important for you to work with a Capacity Based Markup method since you may at time perform work for a GC, Project Manager, and/or Designer where you don't provide any of the materials and you don't want to end up being left short when it comes to recovering your overhead costs under those circumstances.
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Jerrald,I appreciate the post and the book recommendations. I'll follow through and check them, out.Not familiar with either uniform percentage markup method or the capacity based makup method. I think I need input on coming up with the right billing rate. My rates over the years have been relatively competitive with most paint contractors in my area (Seattle), but I am also an accomplished visual artist who has an eye for detail, can do highly detailed work (if the client is willing and interested in paying for that), have the verbal skills to effectively communicate with the HO, etc. I do not really know what these skills are worth? On the whole, I see very few paint contractors who are as conscientious as I am and can deliver the level of perfection I can. This should clearly be worth more to those looking for that level of finish, but how much more?I have been making a decent living to date (I'm in my mid-50's now), but I think I can and should be doing much better. Unfortunately, I have paid little attention to the business side of my career. Paint contracting was originally a way for me to get time in the studio, but over the years, having a family and a kid (and the uncertainty of making a living as an artist; some years selling work, some years not), I've ended up devoting much of my time to painting houses.