I am a small remodeler who is just getting started. The last couple of jobs ive done were at an hourly rate. My am unsure what a reasonable material markup would be. I charged for the time to pick up the materials (local yard, not much drive time). Like everyone I want to maximize my profits but i also want to offer a good job at a fair price.
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j,
We charge 20% mark up on T&M jobs with a $20 minimum per pick up. Hope this helps. DanT
I don't do any T&M stuff, but I am interested to know something- if you are charging for the time to pick up the materials (and presumably charging for the fuel etc ) then what is the logical basis for charging a mark-up on the materials?
John
I charge for the time. Not the truck use, fuel etc. So that is what my reasoning is.
I am also one that believes in profit from anything I touch and can reap a profit from. If the market will bare it then I will charge it. Others don't feel this is fair. But I think that is why I am in business, to make money. DanT
dan.. you're right on ..
if the owner wants to do it .. they can..
they hire me because they want me to do it..and they want me to stay in business to take care of them on the next job.... which means we have to make a profit
if you can't make a profit.. it gets harder and harder to do the job right.. quality has to slip... quality costs money... you can give the materials away if you raise your labor rates to make up the difference.. but you can make your labor rates more reasonable if you carry some of your overhead on Materials & Subs
on T&M we add 25% and so state in the Proposal .. and seperately state it on the invoice.. the typical allowed markups for insurance work here is 15% OH + 10% P ( 25% )
on lump sum jobs we markup materials and subs a lot more than that..
one of the reasons i don't like T&M .. you can't make enough money
Mike Smith Rhode Island : Design / Build / Repair / Restore
quote -- "I don't do any T&M stuff, but I am interested to know something- if you are charging for the time to pick up the materials (and presumably charging for the fuel etc ) then what is the logical basis for charging a mark-up on the materials?" --Ya know, there are a million major & minor expenses that I have trouble charging T&M customers for. Time spent doing bookwork, office supplies, saw blades, utility knife blades, tool repair etc. etc...So - you can be sure that when I do T&M (which I try not to do) I will definitely charge them a 20% markup on material. It's one of the few expenses customers actually expect.My goal is to charge the maximum price the market will bear. It's the American way, logical or not!
"Ya know, there are a million major & minor expenses that I have trouble charging T&M customers for. Time spent doing bookwork, office supplies, saw blades, utility knife blades, tool repair etc. etc..."You have those no mater if you used $5 or $5,000 worth of materials.You should not try to get those out of material markups, but rather built into your hourly rate.
"You should not try to get those out of material markups, but rather built into your hourly rate."
Why? What difference does it make where you charge the money or make the money as long as the time, O & P are covered for a given job? Why is it important to charge or bill a specific way?
As long as the job is profitable, the company is profitable, you know your numbers and what it takes to continue to make what you wish to make then why does it matter where you make it? DanT
There has been a lot of discussion (mostly on another board) about building all overhead recovery and profit into the labor rate only, and not in subs or materials. That way, your O&P stream is based more on the capacity of your company, not on whether you provide subs and materials.
I do a wide range of work. Some jobs have a lot of subs and materials to mark up, others have a lot less. I charge more by capacity (i.e. how long a job will tie me up) than by sub/material content.
You are right and I understand the theory. However it doesn't make it a one size fits all deal and that is what I was trying to get across I guess.
We do small jobs and light remodels. Because we change jobs from 1 to 5 times a week per truck if all I counted on was labor then my labor rate would be so high I couldn't get anyone to call me. We have an unusual amount of travel time and go get time compared to construction done in its purest form.
Because of that we have unbillable hours each week that we can't bill for so if you calculate that into our rate it would drive the rate well past competative. (we are currently one of the most expensive in the area for what we do) So pulling profit from subs (rarely) and material (always) is something we need to do.
I liked your examples above in response to john. You hit the nail right on the head. DanT
Are you pricing work to clients by the hour? If so, then I agree that a labor-only overhead recovery will not work, because no one will pay $90 per hour or whatever that will result in. I can't remember for sure, but I thought you were fixed price.
davidmeiland - "Are you pricing work to clients by the hour? If so, then I agree that a labor-only overhead recovery will not work, because no one will pay $90 per hour or whatever that will result in. I can't remember for sure, but I thought you were fixed price."
Are you saying that if you really do need to generate $90 per hour to cover your wages and overhead are you saying you should sell the job at $60 per hour becuase that more patable even though your then losing $30 per that you need for overhead recovery? Your better off staying home and not working if that's the case,... and that God it isn't. We're getting that $90 per hour (for high skilled labor) that you say no one will pay. If no one would pay us what we need to run our business we would close up shop and look for another career. That just hasn't happened.
Think about it for a second too. Your saying homeowners will pay $90 for a plumber but not a carpenter?
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right.... of course i can charge $90 / hour.. ( not )....
that is so patently false, it's laughable...
don't you do specialty contracting ? then you can get specialty rates..
but you can't tell me you are going to come into most areas ( including my afluent community ) and quote a labor rate for carpenters of $90 /hour
if, on the other hand , you are quoting fixed price work , BASED on charging the job $90/hr..
then yes.. you can get it..
but you will not get it as a GC in the residential remodeling business in T&M work
suppose you decide that your production hours for your carpenters are 1600 hours of billable time.. then each man will generate $144,000 .... come again ?
Mike Smith Rhode Island : Design / Build / Repair / Restore
Mike Simth - "right.... of course i can charge $90 / hour.. ( not )....
that is so patently false, it's laughable..."
And that comment is so uneducated and uniformed it's damaging. Damaging in that carpentry contractors in these forums are going to listen to you and believe you because it further reinforces their own self defeating beliefs that carpentry contracting just ain't worth that much.
"don't you do specialty contracting ? then you can get specialty rates.."
Yes we do, we are sort of elite and we often are working for more than that $90 per hour but that really has nothing to do with it. Here's a local handyman service that is doing extremely well and they're charging $110 for the first hour
$85 each additional hour and $60 for an estimate. They couldn't ever approach what we do in terms of specialty but they can charge $110/$85 for handyman work and get it? Those rates they publish on their site must be patently false huh?
"but you can't tell me you are going to come into most areas ( including my afluent community ) and quote a labor rate for carpenters of $90 /hour"
Yes I can. If we were called on to go to your area we would still charge $90 but we would also probably add a per diem and charge for the travel. Our costs wouldn't be any cheaper just because we working in Rhode Island instead of Westchester our costs would in fact be a little higher working so remotely.
Then again if I was a Rhode Island based contractor or we were to open up a RI based shop our overhead and labor costs would probably not be as high as they are here in Westchester so we wouldn't be charging the $90 per hour that we charge here. I would be charging the rate that I needed to cover my costs based on the location of my business.
if, on the other hand , you are quoting fixed price work , BASED on charging the job $90/hr..
then yes.. you can get it..
Actually that is most of what we do and have done but lately we've been doing a lot of change order work and fast track work on a T&M basis. And in our fixed priced contracts it says that additional work done on a T&M basis "will be billed according to the attached rate schedule" so our clients know what our billing rates are.
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"Are you saying that if you really do need to generate $90 per hour to cover your wages and overhead are you saying you should sell the job at $60 per hour becuase that more patable even though your then losing $30 per that you need for overhead recovery? Your better off staying home and not working if that's the case,... and that God it isn't. We're getting that $90 per hour (for high skilled labor) that you say no one will pay. If no one would pay us what we need to run our business we would close up shop and look for another career."
No. I am saying that if you need to generate $90 per hour from a general contracting business, you had better charge fixed prices, and conceal the whopping hourly rate, like John says. The general public is conditioned to think $35-60 per hour, as far as what I've read from guys in various locales that post here about pricing.
I guess you don't know me well enough to know that I pull out my soapbox and rave at length about the benefits of fixed price whenever T&M comes up. Maybe you have me on 'Ignore' status?!
davidmeiland -"No. I am saying that if you need to generate $90 per hour from a general contracting business, you had better charge fixed prices, and conceal the whopping hourly rate, like John says. The general public is conditioned to think $35-60 per hour, as far as what I've read from guys in various locales that post here about pricing."
First of all I want to say I think it's really stupid to talk about the actual dollar rates that contractors charge because it varies so much by region. For instance you say the "general public is conditioned to think $35-60 per hour". Well $35 per hour went out around here as a genuinne contractors billing rate about 15 years ago and I haven't head $60 in while either. (so your pooh-poohing $90 per hour as unrealistic was way off base)
Secondly you should never charge based on what your so-called competition is charging. You should charge based on what you need to cover and pay for your overhead costs, wages, and a decent net profit.
If the general public is supposedly conditioned "conditioned to think $35-60 per hour" that's the fault of contractors who believe in that and who allow them to accept that. I get e-mails from time to time with neophyte contractors writing to me telling me they can't charge what my PILAO Worksheet tells them they should be charging because that's not "the going rate around here" and they will never get that. I then respond to them if they really do genuinely fell that way then they will just have to work for less $$ because there is no way around those numbers. The math doesn't lie.
The problem really lies in the value message those contractors are sending out (and somewhat in the service they provide too). You certainly can't charge 85-95 around here and be hokey about your service. Customers can get hokey unprofessional service for 50-75. But providing the value message that supports the rates of 85-95 is often where most contractors fail.
" guess you don't know me well enough to know that I pull out my soapbox and rave at length about the benefits of fixed price whenever T&M comes up. Maybe you have me on 'Ignore' status?!"
Hardly David. I actually consider you an ally in that crusade (and on this forum your actually labeled as a friend). I hate the idea of T&M and in our first thirteen years we did only two projects as T&M. But in our fourteenth year like I said earlier we've broken down and been doing some work T&M and I don't think the higher labor rate you get from using a capacity based markup (PROOF) is such a hard sell as you and some others are making it out to be. Especially in this kind of a sellers market.
T&M is a tougher sell than a lump sum. 1000% agreement on that. But my point is if you get backed into a project that calls for T&M you can't then lower you rate to make it more palatable. Hey, if you have a choice I say sure do it Lump Sum but if there is no way around it and you have to do it T&M you have to use a rate that will work financially, not the one that you think the public will accept.
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well, jerrald .. you and i agree that we should charge whatever our numbers tell us.. and.. we always have..
you used the plumber analogy.. not a good or valid comparison..
you and i both know that a journeyman carpenter is a high value skill.. but there is no certification for that in our areas..
the entry to the trade has no threshold..
a plumber or electrician are both licensed by the state.. their threshold is quite high
as for marking up "materials & subs " in a T&M contract..
of course you should do it.. any contribution to overhead reduces the contribution you need to make from any other sector..
since we have decades of acceptance by the public of marking up subs & materials, not to do so forces you to raise your "published rates" for labor.. just one more objection to overcome in the sale..
i will not reveal on an internet forum what my markups are.. but they do follow enlightened suggestions by most industry guruhs
when we are forced by circumstances to do T&M.. i have zero problem and zero resistance from my customers about marking up subs & materials by 25 %
this means that i can contract for a lower labor rate in the T&M contract and STILL make the same net overhead & profit i need
it also means that i have LESS problems when i present my bill.. a lot less
when you can charge $50/ hr/man , you have much fewer complaints about ' slow production" or "inefficient operations" than you do when you present a bill for $90/hr/man..
to me.. remodeling & additions are, by their nature, prototypical & inefficient...
shifting some of these operations to efficient specialty subs saves my customers money.. buying and supplying the correct materials for the end -use saves my customers money in terms of decreased maintenance
as a result.. and since i still have to make the same amount of money .. no matter how i charge for it.. i like to lay it out in a nice logical accounting..
Labor + [ ( Materials + Subcontracts ) x markup ] = amount of invoice
i get a lot less hassle.... and of course.... i own the liability for subcontracts and the materials... so risk = reward..
if the owner wants to hire his own subs... and buy his own materials .. what does he need me for ?Mike Smith Rhode Island : Design / Build / Repair / Restore
MikeSmith- you used the plumber analogy.. not a good or valid comparison..
you and i both know that a journeyman carpenter is a high value skill.. but there is no certification for that in our areas..
Your saying the the licensing certification that plumbers go through accounts for the cost difference which just isn't true. Having worked as a business consultant with a few plumbers now I've seen their books and the cost of certification is negligible when amortized. It might add Value which is something you can charge for but it doesn't add Cost which is something you have to charge for.
The reason plumbing contractors are getting their rate and carpentry contractors are not is perhaps three-fold.
A large percentage of plumbing contractors have historical been using Capacity (PROOF) Based Markup for longer than carpentry contractors or GCs have. Probably because they are in a service based business where they are not necessarily providing the materials.
Due to licensing and certification there is a higher bar for entry into the plumbing trade as a business owner so they are often more business savvy than a lot of the neophyte carpentry and GC contractors out there so they know what they have to charge based on their real numbers rather than on what they think or hear "the going rate" is.
They do a better job of selling the value proposition that the neophyte carpentry and GC contractors.
"as for marking up "materials & subs " in a T&M contract..
of course you should do it.. any contribution to overhead reduces the contribution you need to make from any other sector.."
But the problem with that thinking (which is the thinking behind the Estimated Total Volume Based Markup method) is that you can't really accurately predict how much materials and subs you will sell in a year where you can make reasonable predictions regarding you labor costs so basing any of your Overhead Recovery on something as uncertain as the sales of materials & subs introduces variability and risk. So why do it? Markup up materials and subs for Net Profit, not the recovery of the overhead segment of your Gross Profit. It's too risky and limiting.
since we have decades of acceptance by the public of marking up subs & materials, not to do so forces you to raise your "published rates" for labor.. just one more objection to overcome in the sale..
While the public accepts a markup what they don't accept is the extraordinary markups on materials and subs that the Estimated Total Volume Based Markup method calls for. If they see a door at Home Depot or find a price for it online at $1200 they will accept you marking it up 10 or 15% for Profit but they start to balk at 20% and find the more typical Estimated Total Volume Based Markups ranging from 1.5 (50%) to 2.0 outright objectionable. They say they aren't going to pay $2000 (1.5/50%) for that door they know costs only 1200 bucks. They might then say okay we'll just buy the door and then we'll pay you to install install it and then if you take that job you've lost the portion that portion of your overhead recovery that material contribute to for that job.
So your choices as contractor are then to turn down the job or move to a method that realistically prices the materials (in the eyes of the consumer) such as the Capacity (PROOF) base markup method.
Any time ####Estimated Total Volume Based Markup contractor does a job or any work for that matter that doesn't call for materials or subcontracting they are losing money on that project.
i will not reveal on an internet forum what my markups are.. but they do follow enlightened suggestions by most industry guruhs
Good idea I think the actual numbers are misleading and some lazy beginner rather than taking the time to do the research and math to figure out their rate will just take a short cut use your numbers. A contractor in Texas using the ranges I been throwing around just wont get a lick of work whereas a NY contractor who uses the rate he's heard a carpenter in Texas uses will be out of business, broke, in a month. Contractors should copy the method, not the numbers!
when we are forced by circumstances to do T&M.. i have zero problem and zero resistance from my customers about marking up subs & materials by 25 %
I would bet those same customers of your would accept a much higher (and more representative) billing rate for your labor and lower markup on materials too. The lower markup on materials certainly gives them a lot more freedom of choice in the actually materials they choose because they aren't as quickly moved out the range they can afford as they would be with the higher materials markup. And most customers today want more choices not fewer.
it also means that i have LESS problems when i present my bill.. a lot less
Why would presenting a bill of $69.67 per hour and materials plus 25% be any easier than a bill of $85 per hour and materials plus 10%? (I came up with the $69.67 by reverse engineering the $85 per hour to cost and then readjusting the markup figures in an Estimated Total Volume Based Markup formula so that they would work with a 25% markup on materials)
when you can charge $50/ hr/man , you have much fewer complaints about ' slow production" or "inefficient operations" than you do when you present a bill for $90/hr/man..
Like I said I don't now anyone around here who bills at $50/ hr/man so comparing that figure against 85-90 is pointless.
Labor + [ ( Materials + Subcontracts ) x markup ] = amount of invoice
That's no certainly no different that what we do on T&M. What's your point?
i get a lot less hassle.... and of course.... i own the liability for subcontracts and the materials... so risk = reward..
if the owner wants to hire his own subs... and buy his own materials .. what does he need me for ?
He hires us to supervise those subs and he pays us our hourly rate for that supervision. If it takes us an hour @ $85.00 per hour to contract and supervise a sub for a day worth of work that client pays us $85.00 for our time plus the cost of the sub contract plus 10%. If it takes 8 hrs of supervision for that subs work we would charge $680.00 plus the cost of the sub contract plus 10%.
When you markup subs 25% it that intended to cover their supervision? As you can see from my example we figure that as a direct job cost and not a markup percentage because certain sub work requires more or less supervision than other sub work.
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. Well $35 per hour went out around here as a genuinne contractors billing rate about 15 years ago and I haven't head $60 in while either. (so your pooh-poohing $90 per hour as unrealistic was way off base)
While I agree with many of the points you have made I would point out that in my area many, not a few, but many contractors are still working for $25 an hour. Numerous businesses including the largest steel welding and fab shop in the area work in the $35-45 range.
We charge $50 unless the job gets to be 5k or above and then we back off a bit. Frankly I don't know of anyone in my area in any business charging $90 an hour. My CPA gets $60. So I do believe that David has at least a point of it depends on where you are. You can provide excellent service (I think we do) and good salemanship (working hard at it) but you can still only up sell so far in comparison to your enviroment.
Some costs that might be relavent. We can still buy the occasional house here for 15-20k. A really nice house 4k sf or so built in the last 10 years is 500k. You can rent the nicest house available to rent for $1200 a month and a very livable one for $600. Just some comparisons. DanT
DanT - "We charge $50 unless the job gets to be 5k or above and then we back off a bit. Frankly I don't know of anyone in my area in any business charging $90 an hour. My CPA gets $60. So I do believe that David has at least a point of it depends on where you are."
I know David knows that, he a smart guy, but he didn't say that. He just categorically said "no one will pay $90 per hour" without saying something qualifying like "no one will pay $90 per hour where DanT is" which is probably true. So I called him on that. Like I say over and over talking about the actual $$ figures is confusing, misleading, and dangerous. Talk about the method, not the numbers.
And speaking of methods where you wrote responding to something David meland wrote earlier: "You are right and I understand the theory[Capacity Based Markup]. However it doesn't make it a one size fits all deal and that is what I was trying to get across I guess." and to BillHartmann where you wrote "there are many ways to sking the cat."
I think it take issue with that. The point I've been trying to make for quite a while now is that a Capacity Based Markup Methodology returns consistent results in recovering your overhead costs regardless of fluctuations in your material and subcontracting volumes. Basically it works under any and all circumstances.
The Estimated Total Volume Based Markup Methodology only recovers your overhead costs reliably and consistently under certain circumstances.
You wouldn't buy a saw that only cuts in the warm weather. So why use a management tool that only works under certain curcumstances when there is one that works under any? Use that knife that consitently skins the cat, not the knife that only sometimes works. That's the issue and that's the debate and probably why these Capacity/PROOF advocates just wont shut up.
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I didn't specifically say that prices had a relationship to locale, but it sure is true. If I'm not mistaken, you're in Westchester, where there is a huge amount of dough. Didn't you once comment that Martha Stewart moved back into her place in your 'hood after she got out of the hopper? Folks like that have the money to pay a carpenter $90 per hour if they want to, and so do some of the folks here. I would judge from your job photos that you are mostly serving a luxury market (a great strategy IMO) but a lot of our Breaktime posters are in more middle class economies and there is no way the average person will pay $90 when they make $46,000 per year at their full time job. Then there are the abysmally low wages we've heard about in Texas, for which there is no explanation. From reading DanT I believe he makes most or all of his sales to middle class households. I am trying to imagine someone selling my mother a bathroom remodel 20 years ago, when she worked as a secretary and my dad as a teacher, with an 8-year-old Dodge station wagon out front. So much easier if you pull up and there's a Mercedes sedan and a Lexus SUV. Your price will not be the issue.
davidmeiland - "I didn't specifically say that prices had a relationship to locale, but it sure is true. If I'm not mistaken, you're in Westchester, where there is a huge amount of dough. Didn't you once comment that Martha Stewart moved back into her place in your 'hood after she got out of the hopper?"
Yeah that's true she's a mile nd a half up the road from me at the top of the hill. I'm down in the valley next to the train tracks and interstate. I have a client now who is virtually just across the street from her up their and the symbolism of traveling up to the top of the hill to go to work is never lost on me.
Folks like that have the money to pay a carpenter $90 per hour if they want to, and so do some of the folks here.
Yes they certainly can and they'll even pay more than that for the right services but the "poor" people down in the valley like me pay the same rates as they do for most of the same services. Yeah you can very easily find contractors out there that will work for a lot less than that but you know the old adage; You Get What You Pay For.
I would judge from your job photos that you are mostly serving a luxury market (a great strategy IMO) but a lot of our Breaktime posters are in more middle class economies and there is no way the average person will pay $90 when they make $46,000 per year at their full time job.
The median income for a family of four in Westchester County in 2003 was $90,100* which is a lot more than $46,000 (*What is Affordable Housing? westchestergov.com). And David, I'm sure you know, I'm no dummy, I am well aware the average Breaktime poster isn't living and working in a community like I am. But my point was you can't just go talking about numbers like that saying categorically "you can't get $90" or "people wont pay this or that" because of those regional differences. Forget Martha Stewart and George Soros the Average Homeowner here is very often paying that $90 or pretty close too it
I would judge from your job photos that you are mostly serving a luxury market (a great strategy IMO) From reading DanT I believe he makes most or all of his sales to middle class households. I am trying to imagine someone selling my mother a bathroom remodel 20 years ago, when she worked as a secretary and my dad as a teacher, with an 8-year-old Dodge station wagon out front. So much easier if you pull up and there's a Mercedes sedan and a Lexus SUV. Your price will not be the issue.
I can't take any credit for a strategy to get into the "Luxury Market" because I didn't have one, I wasn't that smart. I stumbled into it but once I got in there I realized it was a great market to be working so I developed a strategy to stay in it.
The difference between the High End and Luxury Market is often subtle. The High End Homeowner will pay you $90 to hang a $1200 door where the the Luxury Homeowner will pay you $90 to hang a $8000 door. Most of the differences are in the materials they choose. However there are also the occasions with the Luxury Homeowner where they will also very willing pay a premium above and beyond that $90 for a hard to find special talent or skill too.
However to tell ya the truth I think working the High End and Luxury Markets is picking the low hanging fruit. When I hear others guys running around bragging about how they're able to collect fees of $90 and higher per hour I say big deal. If you're in Westchester County NY, the San Francisco Bay Area, Naples Fla. that's nothing special, it just means your on par.
I remember a few years back reading about a guy named Terry Skilling and his Kansas City, KS based company called Rhino Builders and how impressed I was with what he was doing. Skilling and his partner built a hugely successful and profitable multi-million company providing middle market remodeling solutions. I'm more impressed with the management of middle market successes than I am with successful high end and luxury contractors.
Remember talk about the methods not the $ numbers.
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I think it take issue with that. The point I've been trying to make for quite a while now is that a Capacity Based Markup Methodology returns consistent results in recovering your overhead costs regardless of fluctuations in your material and subcontracting volumes. Basically it works under any and all circumstances.
Ok, you are saying that Capacity system works all of the time in any situation.
The Estimated Total Volume Based Markup Methodology only recovers your overhead costs reliably and consistently under certain circumstances.
And the Estimated Total Volume works only under certain circumstances. That is my point. If I am working under those correct circumstances then I have two options according to you. Frankly I believe there are a few more out there although I can't name them without research.
Look, all I am saying is that you need to know your numbers, needs and desires in order to make money. Knowing the tax structure is good too. Knowing all of those items you can pick a number of different methods to place profit or account for it all and still do well.
The bookeeping department under the tulage of Henry Ford Sr. used to weigh the reciepts from small purchases and then enter them into the books as one entry with surprising accuracy. They did this until the end of his rein in the 40"s. They also had no clear idea of how much it took to produce a car. Until Henry Ford II took over they used almost no modern accounting methods or profit assigning methods. Henry I went by the theory if you have more money at the end of the month than the beginning it was a good month.
I don't advocate that this is a good practice nor that you are wrong. I just don't believe there is only one way to get it done. But its always nice to see someone who believe strongly in their method. DanT
We do both. If we are doing handyman work then we work by the hour. Remodeling is done by quote. This week we are all working by the hour. Lot of small jobs. The week after we are doing a kitchen and a bath remodel that are both quoted work. Confusing isn't it lol. DanT
"Why? What difference does it make where you charge the money or make the money as long as the time, O & P are covered for a given job? Why is it important to charge or bill a specific way?"As I said because you might have $5 or $5,000 worth of materials. None of those expesnes that he mentioned have to do with materials. "Why? What difference does it make where you charge the money or make the money as long as the time, O & P are covered for a given job? Why is it important to charge or bill a specific way?"Well if you don't have much in the way of materials how is that overhead going to be paid on that job.BTW, there have a been a number of people that are putting all of it on labor and no mark up in materials.That has been discussed before, I think most of it was on the JLC forums.
Sorry for not responding earlier. Your post and mine seemed to hit at the same time and I left the house as soon as I posted.
I have read the stuff on JLC but as I said to David it depends on your local and situation. I agree with a lot of the basic premis of the business advice given by gurus such as Sonny and Jerrald but there are many ways to sking the cat.
I simply think it is really important to know you numbers, what you need to make and know how you are going to make it. The rest is semantics and putting on paper what you can sell. DanT
It strikes me, there is another element here.
Charging for your time and expertise is built into your hourly rate. But that rate should not be fixed. It should vary with your client's ability to pay.
The more prosperous the client, in all likelyhood, the more sophisticated his requirements as to quality, design, execution, materials, etc. If you charge him the same as all others you now have a problem: you can't charge another client who is equally appreciative and sophisticated but less prosperous,less.
For example. Say your Priest/parrish needs/wants some nice stuff done on the parrish house. They, in theory, have little money. It is a good thing to do that for them at reduced or no cost. But, if you haven't created other, more profitable accounts, you can go broke trying to do a good thing.
In my view, there is little to distinguish the quality of a Nova and a Coupe de Ville, but there is still a lot of difference in the Money.
Stef
I can't agree with that at all. If you want to volunteer your services as community service for your parrish, then go for it. But billable work is billable work. What do you do when poor little old lady down the street whom you did discount work for refers you to her wealthy doctor son? You come out looking very unprofessional if they start to compare notes
You costs of doing business remain the same no matter who you're working for, that means giving a discount can only come from one place.... your profit/pockets.
That's the short version. I gotta run, but there's alot more I can and probably will say on this.
Absolutely correct, and yet another reason not to charge customers by the hour. If you want to give a little old lady a break, you can easily do so with a slightly lower fixed price.
I frequently give people references to past clients. I know for a fact that they call those references sometimes and ask what I charge per hour. Not much to say on that question...
Not at all.
I am a Doctor, and I can tell you that both parties are quite happy with my suggested arrangement. The Doctor does that all the time. Gives his services away to impecunious patients, and often incurs considerable "Materials" costs. He must make it up elsewhere or he simply cannot do it. He is giving his time, and has only so much of it in a day.
He will be delighted you helped his mother, and expects to pay more than she did.
Stef
Edited 8/28/2005 11:04 am ET by fatboy1
Funny Doc, but I find few clients in my industry that would agree with you. Most of my "monied" clients are some of the most frugal and watch the money spent carefully. If they were recomended by one of my senior citizens and were told I charge $40 an hour and I billed $50 you can bet I would hear about it, and not in a posative note.
When I first started out my rates went up a couple of time in $5 an hour increments. I held old original customers at the old rate feeling a sense of loyalty to them for helping me get started. I had at least 4 occasions where someone asked me my rate, then declined to do business with me because they heard I was cheaper.
I finally figured out what was happening and raised everyones to the same level. Lost a couple of originals but everyone else was happy. Health care must be different than repair, remodeling and construction. Who would have guessed. DanT
With the intellectual requirements it takes to become a doctor, I am suprised that you fail to notice that there are differences in the practice of medicine and the construction and repair of homes, and the way both business models operate.
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
Piffin - "With the intellectual requirements it takes to become a doctor, I am suprised that you fail to notice that there are differences in the practice of medicine and the construction and repair of homes, and the way both business models operate."
Ya know I actully think there are a ton more similarities than differences between the practice of medicine and the construction and repair of homes, and the way both business models operate. Sure there are differences in that most of their work the client doesn't pay them directly it done through managed care, insurance, medicaid, etc. There is also a thing in medicene called the Emergency Medical Treatment and Active Labor Act which requires hospitals to provide you with treatment regardless of your ability to pay. There is no such law in governing the contracting industry.
But I also think that fatboy1 just doesn't get it. The practice of medicene still needs to be run like a business. All those things that he mentioned the "the rich" were willing to pay for "The more prosperous the client, in all likelyhood, the more sophisticated his requirements as to quality, design, execution, materials, etc." are things that take more time and are why the high end projects cost more. Sure the higher skill that many of those things take costs more too but most of the difference is in the volume of time therefore the higher price.
Ironic isn't it that Michael gerber writes a poplular business book like The E-Myth Revisited: Why Most Small Businesses Don't Work and What to Do About It then writes again on that same theme with a book for especially intended for physicians called the The E-Myth Physician: Why Most Medical Practices Don't Work and What to Do About It (Jan 2003) the insinuation perhaps being that there are a lot of physicians who just don't get it and they need some extra more specifically related help and examples. But not to ignore us he then went on to publish the The E-Myth Contractor : Why Most Contractors' Businesses Don't Work and What to Do About It putting us all in the same boat.
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Hey Fatboy1-You don't charge client according to their ability to pay. If you did you'd be out of work in 2 weeks. Instead you charge according to their desired result and WILLINGNESS to pay. You stated this: "The more prosperous the client, in all likelyhood, the more sophisticated his requirements as to quality, design, execution, materials, etc." If they expect more, they pay more.You should always do everything in a workmanlike manner but for the lower budget job you may butt or miter the mouldings while in high-end projects you will cope. Low-end may get 2 coats of a rich color wall paint, while high-end will get 3.I want a BMW but can only afford a Ford. Do I get to go to the dealer and get the BMW for a Ford price? I think not!Bottom Line: You give what they pay for. Otherwise they will suck you dry.FrankieThere he goes—one of God's own prototypes—a high powered mutant of some kind never even considered for mass production. Too weird to live and too rare to die.—Hunter S. Thompson
from Fear And Loathing In Las Vegas
what is the logical basis for charging a mark-up on the materials?
My logic is this: the customer generally does not have the knowledge of the material needed, or the quantities needed. If I have that knowledge, then that knowledge has value to the customer, and I should be compensated for that knowledge/value.
As far as marking up subs, what the customer is paying for is my established relationship with a good sub. That sub would not be there were it not for me, and they very likely would not be able to be scheduled when the work needed to be done. Some HO's have the ability to pick and schedule subs, but the majority do not. My experience is that the majority do not want to deal with finding subs, therefore my relationship with a sub has value to the customer, and I should be compensated for that value.
As far as billing for drive time and mileage: If I am working on a cabinet in the shop, I am not incurring mileage related costs or drive time. Why should my shop projects reflect that overhead? I feel it is more fair to bill it out as a direct job cost. Time to pick up material is time away from my family, why should I not be compensated for that?
Not picking on you at all, I'm just pointing out where I have changed my thinking in order to boost revenues. Some people would not agree and that is OK, because I can't, nor would I want to work for everybody.
This phrase has helped me : "You must charge for the value you deliver, not just the costs you incur" ( From "The Experience Economy" as recommended by Sonny)
Bowz
The main reason for a markup on materials, is because you are using your own money to purchase materials for a customer whom you hardly know. If you are not being paid for a period of time; whether long or short; "money costs money". I am not a bank, to finance your renovation with my personal credit.
nuff said
locolobo; Edmonton, AB
20% is a damn good interest rate. Sounds like a good business to be in. Banks would love to make that kind of interest
JohnIf my baby don't love me no more, I know her sister will.
#1... I am not licensed as a bank.. I am licensed as a carpenter
#2... Banks have long relationships with their customers. They know their customer's financial record for umpteen years, and make their loans based on these criteria.
Plus the fact that taking these types of risks is their business. My business is in carpentry. My bank manager doesn't build decks, and I don't lend money. I have been stung too often by "being a nice guy" and not sticking to this rule.
locolobo; Edmonton, AB
I think the others are basically saying that it you can get away with adding a percentage then do so, and I can understand that. But with what you said, surely if you need to buy extra, then isn't the customer paying for it anyway? If you need to buy 11 cases then they pay for 11 cases, and your time to pick it up. So why the extra percentage?
John
It's not "getting away" with anything John. Think about it. Say the job is a replacement window. On the ride from the supplier to my customer's house, my strap breaks, the window slides, and breaks in the bed of my truck.
Directly, I will pay for another window. Indirectly this customer, and all my past customers will pay for a little bit of this window through my past, and present material mark-ups.
Same window. Manufacturer's defect causes the panes to fog after 6 months. Phone rings... I gotta kick in a new window. Window manufacturer looks at the window and agrees to replace it with an equal window. But I still have to go take the failed one out and install the replacement. In the course of doing this I may lose a whole day or more with telephone conversations to the manufacturer, calls to the homeowner, the removal of the old window, the installation of the new one, re-trimming, fixing siding, painting.....
Should either of these two scenarios come out of my family's bank account? When the clerk in the grocery store drops a jar of spaghetti sauce in aisle 3, does she pay for it?
Get it?
I have thought about it. In this case, the case I am discussing, the contractor is charging for the time required to pick up the materials. It follows from that he would also charge for the time required to deal with any faulty materials.
John
If my baby don't love me no more, I know her sister will.
Edited 8/28/2005 2:49 am ET by john
Yeah, that'll fly like a lead balloon. When you work T&M the customer expects to pay for your time to do the job ONCE. They do not expect to pay for you to do any follow-up work, any corrective work, any re-work, etc. But, a fact of building is that things sometimes get done wrong and need to be done again. No one wants to pay for that second time, but all contractors know that it will happen and needs to be charged for. How would you handle that in a T&M situation? Just 'eat' the time you spend doing warranty work or corrective work? Nah... you'd quit doing T&M work and start doing fixed price, where you can build in a couple of percent for re-work and a couple of percent for warranty.
People also don't want to pay T&M for time that they do not perceive as 100% productive. Here's an example:
(Phone rings in contractor's office)
Owner: "Ya' know, Bill has been working on the siding, and the past few days he really got a lot done but today it seems like he's not moving very fast. Do I have to pay for all of the time today? It really only looks like he got 4 hours of work done, not 8."
Contractor: "Oh, I didn't realize that you wanted to buy only our most productive hours. I thought you wanted 40 hours per week, and I've been selling you 40 per week at $50 per hour. Realistically, we only have about 20 highly productive hours per week to sell. We have to work all 40 to get those 20 hours, but the good news is that I can sell just those 20 to you, for $100 per.
Owner: "I hear my mother calling. Gotta go..."
Owners also beech about time they spend talking to you, expecially when they initiate the conversation and ask a lot of questions about how you are doing things, because they do not understand how things are built. They invariably ask at some point if it's fair to charge for that. Some of them decide that calling you at night at home is the way to avoid getting you on the clock.
Owners think that (a) a 20% markup on materials is more than fair, but they know nothing about owning and running a construction business. They also think that (b) that 20% markup should more than cover any time or material needed to correct defects. Fact: it does not.
Experts in residential construction consistently recommend a 50% markup on all costs, meaning a 33% gross profit margin. That means that if I spend $1000 on labor and materials to work on your house, I charge you $1500. There are lots of guys out there who say they can work for $40 per hour with a 20% markup on materials only. Virtually all of them will either quit business or raise their prices substantially after they realize it doesn't work. The other few will exist in a perpetual state of red ink, late payments, undeclared income, tax evasion, and all that good stuff.
Fixed price work eliminates a huge number of headaches. There are no discussions about whether work was done quickly, or done right the first time. There are no discussions about whether that entire case of Sikaflex was used on this job, or whether lumber was loaded on a truck after lunch and taken somewhere else. There are no discussions about whether a 20% markup on materials is fair, or whether a 50% markup on all costs is fair. With a well-defined and specified project, the only discussion is about whether the job is DONE.
Firstly, I never work T&M. When I stated out I did, then the second job, and every job since then has been fixed price. How else would I hide my whopping labour rate from my customers?
Never the less, this discussion is about T&M, and my response was to question the LOGIC of marking up materials. Bill Hartmann's point about the difficulty of recovering costs when the costs of materials might vary wildly is a good one, and I haven't heard a decent rebuff to it yet.
My thought is that if the customers pays for the materials (that's what T&M means, right?) then the materials are the customer's. It follows that if the materials are faulty then that's the customer's problem. OTOH if the contractor marks up those materials then the contractor is in effect selling them to the customer and has therefore to take responsibility for them.
If the contractor is going to take responsibility for the materials then charging a fixed percentage markup is crazy, because the risk is so variable. The markup would need to vary depending on the likelihood of faults and the difficulty and time involved in replacing them.
There would have to be some very compelling reason for me to take a T&M job, whether as a contractor or even as a customer, and even then I probably wouldn't
JohnIf my baby don't love me no more, I know her sister will.
From: john -"
Never the less, this discussion is about T&M, and my response was to question the LOGIC of marking up materials. Bill Hartmann's point about the difficulty of recovering costs when the costs of materials might vary wildly is a good one, and I haven't heard a decent rebuff to it yet."
That's becuase Bill Hartmann is 1000% coorect in the points he making on this markup issue. In further support of what he saying you might want to read Markup: Comparing the Traditional Volume Based Markup
vs. the PROOF/Indexed/Labor Allocated method.
I also have never heard a decent rebuff to it yet either.
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That's a great post with some great logic DP. I like that analogy. I'm gonna have borrow it from you in the future.
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Going a bit further with brian's analogy, if said window takes five hours to install ( retro, not new) and a cheap vinyl window generates a markup of $75 while a Marvin quality unit generates a markup of, say $150, should there be a need for replacement on the contractor's dime, the Marvin is going to cost him more in materials while both are going to be about the same range of labour cost to replace again, notwithstanding the fact that the Marvin is less likely to genmerate complaints.
Welcome to the Taunton University of Knowledge FHB Campus at Breaktime. where ... Excellence is its own reward!
But the Marvin while costing more does have a lower chance of causing the contractor problems than the non-branded cheap vinyl window so I'm not sure where your going on this one.
Edited 8/28/2005 6:05 pm ET by JerraldHayes
" If you need to buy 11 cases then they pay for 11 cases, and your time to pick it up. So why the extra percentage?"
Who pays for the wear and tear on the truck? Fuel? Truck insurance? All things have to be considered when you talk T&M. If they are not then you will lose money.
As one of the posters above mentioned there are a host of things you struggle to charge for because the client wouldn't accept them. Mark up on material is a given so you use it. DanT
1. Try to start charging by the job rather than T&M. With T&M it is harder to get burned but also harder to profit from experience, education and any good fortune you come across during a project. You may/ will get burned when you under budget your funds or time but you will figure it out - quickly.
2. We charge 30% mark-up on all materials. It covers fixed and incidental costs which are a part of any business.
3. We used to have a line item in our contracts for OH and P, as Mike mentioned he does. Clients however, always felt that was a point to negotiate. Wrong! When I refused to negotiate the %, they would move on but comment that since they gave-in on that point I should cave on the next. HA! Clients can be so entertaining. OH & P is now built in to each line item or section of the Agreement.
4. You must commit to memory certain responses for when Clients challenge your billing. Get comfortable enough with these responses so you: a) do not sound like you are apologizing, b) respond succinctly and precisely, c) do not explain your billing methodology, d) do not lead them to believe they are your partner, and e) do not start thinking that since you agree on the projected result, you are all on the same team or have the same interests.
5. Stop confusing "What the market can bear." with "What you can get away with." They are VERY different. The former is ONE of the factors involved in determining price while the latter is ONE of the signs of a person who has a poor understanding of business.
Frankie
There he goes—one of God's own prototypes—a high powered mutant of some kind never even considered for mass production. Too weird to live and too rare to die.
—Hunter S. Thompson
from Fear And Loathing In Las Vegas
jpeaton it's entirely conceivable that if your charge the correct hourly rate for recovering your Overhead and earning a Net Profit on that labor you could successfully survive without charging any markup at all on you materials or sub-contacted labor. However it could and should also be logically argued that and goods or services that pass through you to get to your clients you should really be making Net Profit on so IF (and that's a big if) you are charging a valid and correct hourly rate you markup on materials (and/or subcontracted services) should be in the range of 8% to 16% (shoot for 12% and it work out in the wash to 10%).
So how did you go about figuring your hourly rate?
Taking into account that you're a "small remodeler who is just getting started" I restate a few things that I've posted here many time before.
I highly recommend you pickup and read Ellen Rohr's book How Much Should I Charge?: Pricing Basics for Making Money Doing What You Love and read through it. It's a quick and even enjoyable read as she does a great job and simplifying explaining what you need to understand and know. After you've read her book....
Download the freeware Excel spreadsheet I developed that I've been calling the PILAO Worksheet and fill it out with your real costs of doing business so that you get a realistic billing rate that works. If you need help with it feel free to give me a call at the phone number on the website and I'll give you a quick hand with it.
You may also want to read the JLC article Irv Chasen of PROOF Management Consultants wrote entitled Allocating Overhead to Labor Makes Financial Sense. You may have read here where people refer to the PROOF markup method, well that's where that label came from. He didn't invent the method but he certainly made it very well known amongst contractors which why so many contractors refer to it as the PROOF method.
David Gerstel in Chapter 5 of his book The Builders Guide to Running a Successful Construction Company on pgs 167 through 168 describes the method as "Capacity based markup".
The markup methods that Ellen Rohr, Irv Chassen, David Gerstel, and I are all taking about are the same method just with different names
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