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Ask Kathy: How Much Contractor Markup Is too Much?

ContractorQuestion: My contractor just handed my contract to me, and I’m in shock! He wants 22% of the cost of materials, 22% over the cost of labor, 22% for subcontractors and 22% for labor management crew. I think this is way too much. First, the subcontractors are making a profit, and now the builder wants 22% on top of that for the same job. I feel if he can’t do the job and he has to subcontract out, then it should be no more than 5% for babysitting. That also goes for paying his employees’ wages. I have no control over the employees he hires. What if they are slow and lazy at my expense at $30 per hour plus 22%? No way! What should a contractor charge?

Answer: Oh my, where to start! First of all, I can understand your frustration. Every dollar the contractor charges for markup is another dollar you don’t have to upgrade your project. So if you don’t like the markup, don’t hire the contractor. It’s so simple. There’s no need to get upset, just find someone else whose numbers are more to your liking.

That being said, what’s the obsession with contractor markups? What kind of markups do you think Wal-Mart or Home Depot make on that stuff they import from China? I’m sure it’s a lot. And contractors are people from your own community, hiring your neighbors, purchasing from local lumberyards. By the way, subcontractors are not hired because the contractor’s employees cannot do the job. Subs are usually hired because they are state-of-the-art experts in what they do. Professional plasterers or masons or plumbers are often elegant artisans in their respective crafts, and that’s who you want doing the work.

I think the confusion over markups is based on misunderstanding how a good contracting business works. There is an office and office staff to maintain, and bookkeeping, and employee benefits, training, insurance, licenses, certifications. And there should be money for callbacks when things go wrong. You can find a guy with a pickup truck and a dog in the back who won’t charge any markup. He’s scrambling from one job to the next barely making wages. And if something goes wrong later on with your job, he won’t have time to take care of it.

Also, you don’t want your contractor undercharging and then going out of business. The most important issues to consider when hiring a contractor are the company’s reputation, staying power and quality of work. Focusing too much on saving money on the markup just brings grief. If you think “babysitting” subcontractors is what a contractor does, you might consider acting as your own contractor and hiring those subs. Then you could save the 22%.

Am I being too harsh? From the disasters I’ve seen when markups are challenged, and sub-standard contractors are hired, I get a little riled up about this topic. Any answers for this person that are more sympathetic than mine?


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