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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?

(Photo: www.istockphoto.com)


8 Comments on Ask Kathy: How Much Contractor Markup Is too Much?

  1. I wonder if this person likes to provide her services free of charge? I am an office manager of a construction company where I have worked since 1995…our overhead averages 28%. The industry averages 25 to 28%.

  2. i weighed in on this last time you asked it. i like the system where the contractor flat fees HIS/HER work (coordination of subs, oversight, sourcing and ordering materials, etc.), and does a straight pass-through on subs and materials. this removes the sneaking suspicion of all clients that the contractor is not looking for the best prices, nor ordering the subs to be cost and time efficient. it also fairly compensates the contractor (change orders are extra, of course).
    a good contractor, like all professionals, is worth money, but not worth a percentage, because that does not truly reflect the value of his/her work, which value they should be able to fairly quote at the beginning of the project. a contractor should not be dinged for finding cabinets at half price and rewarded for a sub who takes 3 times longer to do the work than someone better, so i believe that percentage deals totally reverse the proper incentive models.

  3. If you are worried about his employees being “slow and lazy”, then I believe it’s fairly common practice to have a clause in the contract whereby the contractor is financially penalized for not finishing the project on time.

  4. College Educated // April 23, 2008 at 5:44 pm // Reply

    Riley clearly hasn’t done much construction. In the contractors defense it’s a 4 year minimum to take the contractors license test. Don’t put too much weight on formal education. Most of the foremen in the field are smarter than a lot of college educated idiots that can’t figure out how to wipe their own backsides.

  5. I second that (both Carl and Kathy). 22% is good. As I understand it, standard overhead for a construction company is around 15% and average net profit is 5-8% for the entire job. Remember he can’t take any loss to hit those numbers. $5k for every $100k of helping people like you that often don’t appreciate the work that is being done for them. Many of whom that see only what they DIDN’T get, and none of what they DID. These are the homeowners that complain without compliment, and jayhawk the laborers, who then in-turn are so afraid of making a mistake they won’t make a single decision (for fear of chastisement). So then the workmanship plummets, because all they can think of is getting off your job and on to the next one. Guess who takes the fall for the poisonous environment that the homeowner created.
    If hammering them on price is how you start the job, the GC is likely begrudgingly taking the work because he needs it even though he can smell the problems coming down the road. My advice, talk to more people that have had “successful” remodels, with reputable contractors. You will see that paying when invoiced and allowing the professional to do their job will make your remodel run much smoother. So long as they came from a reputable source. You should have inspected their work and spoken with a few referrals. If you trusted their replies then you should trust your contractors numbers. I’m curious as to where this person came up with 22% being too much. Was it just their GUT feeling? Get real.
    I strongly agree with Kathy’s notion of hiring local people in your community. You should hire people you trust and like, and pay them generously, and be happy about it – you’re feeding their families. That contractor is probably just trying to stay afloat right now (hence the discount), most are out of work. Lots of people are without paychecks, that means without food on the table. Food for thought.
    Sincerely,
    Small construction Co.
    Project Manager
    J. Bockoff
    p.s. my apologies for the rant. Godd night.

  6. I agree 22% isn’t bad. It’s not great either but the minimum you’ll ever see is 20%. 10% usually goes to cost and another 10-15% for profit. But definitely shop around and if all things are even go with a contractor you feel comfortable with who communicates well and check those references.

  7. IMHO 22% is crazy! Most of these guys don’t even have a college education. Most of these head honchos show up on the site a couple hours to create more work or tell the carpenters they did the job all wrong and to do it again ($30hr). The head contractor’s absence also allows the hired hacks to cover up the bad carpentry.
    An ad agency makes 17.5%. And that is to pay the designer, ae, materials, etc. Not to mention rent.
    Get everything in writing. Get referals. Don’t pay a cent until “everything” has passed inspection! Oh and get signatures from all workers on site that they have been paid in full.

  8. 22% is a good deal!!!
    Carl

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