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Contractor Markups: How Much is too Much?

A reader sent in this question regarding contractor markups on a kitchen remodel:

“A contractor submitted a bid for cabinetry (at full cost) plus electric, plumbing, etc., plus charges for supervision, overhead, and profit. The last three categories added up to 35 percent. With the cabinetry at full cost, the contractor must have expected a net (over invoices to him) over 50 to 60 percent.

Should one expect the contractor to pass the contractor discounts on to the customer, if he is charging for profit separately? I am told that in commercial construction the markup on a job is at the 10 to 12 percent level, not the 50 percent we were quoted. We did not accept the bid.”

My perspective: Home remodeling is a messy, confusing endeavor, much more so than is new commercial construction. The remodeling company employees have to work around a family and pets, act as therapists sometimes and deal with the existing home, which may be substandard, in addition to getting the materials and installing them properly. The most troublesome contracting companies are those that do not charge enough and who struggle running from one job to the next to keep the paltry funds flowing.

There’s a common joke in the remodeling industry: Q: What would you do if you won the lottery? A: I’d keep running my remodeling business until I used up the money. In my opinion, you don’t want to work with an underfunded company whose employees are underpaid, whose employees don’t have benefits or training or pension plans, a company that can’t afford to pause and improve its systems. I think the primary focus on saving money is misplaced when deciding on a contractor. Save that focus for Costco and choose your contractor according to reliability, quality and trustworthiness.

What do you think?

18 Comments on Contractor Markups: How Much is too Much?

  1. mylaladreamhome // May 15, 2007 at 11:52 pm // Reply

    20 percent to 30 percent maybe, 50 to 60 percent seems like overkill for a job well done…plenty of businesses outside of the remodel world based on this kind of precentage in sales work this way and still do great work, and treat and pay their employees well…am I missing something?

  2. Dale R Evans // May 16, 2007 at 12:20 am // Reply

    I have worked in the contractor’s side of remodeling for many years and have yet to find a supplier that will give a contractor a larger discount than a homeowner.Suppliers explain they would lose an enormous amount of business if they did so. Kathy Price-Robinson’s comment is well taken. Home remodeling is dominated by small underfunded construction companies because successful companies quickly learn it is much easier to make a profit a a developer or in commercial construction.

  3. Charles from San Diego // May 16, 2007 at 9:50 am // Reply

    Of course it is true that home remodeling is messier in many ways than new large-scale construction. However many contractors do charge unreasonable markups to ignorant clients. Some examples I have been quoted personally:
    $10,000 for sewer replacement that turned out not to be necessary at all.
    A range of $50,000 to $150,000 for the exact same remodeling job, where each bidder got to see the same plans before bidding.
    It is ridiculous to say “employees have to work around a family and pets, act as therapists sometimes, deal with the existing home that may be substandard, in addition to getting the materials and installing them properly.”
    Just as often, the homeowner has to act as therapist for the employees and deal substandard materials delivered, or installed incorrectly. From my personal experience:
    A painter who disappeared from the job halfway; it turned out he got arrested in Mexico for driving into the country with an illegal gun.
    Seven windows scheduled to be delivered by Jeld-wen. Five arrive; two were mistakenly delivered elsewhere and installed by the contractor there, who did not verify they were the right size. Of our five, one was built wrong and one arrived with smashed glass. The company schedules two replacements. Only one arrives; it is built identically to the one that was built wrong. Months later now, the warranty on the windows s void because the contractor has taken over 21 days to stain the windows after installation.

  4. Kenneth Jaggers // May 16, 2007 at 9:52 am // Reply

    My wife and I are approaching the end of our second year on a house remodeling project — which was to take six months per our first contractor.
    Experience has taught us that there are no ethics in the contracting business, even from quite prestigious organizations.
    Even though we agreed to pay a quite significant hourly rate, we’ve been confronted with fraudulent hours, double billing for services, inflated material prices, shoddy or incompetent workmanship, failure to show for work per agreed upon times, etc.
    The project is taking four times as long to complete and is costing three times the original estimate.
    My suggestion on a remodel — “Don’t!!!!!”

  5. Mike Stafford // May 16, 2007 at 11:58 am // Reply

    I agree, 20 – 30% is reasonable, 50-60 is gouging.
    My experience matches those above . . . contractors failing to show up to do jobs . . . contractors refusing to complete jobs they contracted for unless we paid extra because they found the job “more difficult than anticipated” . . . contractors who’s work fails inspection for not meeting the building codes, etc, etc. And these are all licensed contractors, both large and small, where we did not take the lowest bid because we felt it was unreasonable.
    It is to the point we do virtually everything ourselves . . . our expereince shows that contractors do not hold to the terms of contracts and that once they get to where the job is at the maximum level of inconvenience for the customer, they throw something in to force the customer to pay more or they don’t show back up.
    It’s a little better here in Oregon (the contractors just don’t bother to show up for bid appointments which makes the decision easier about using them) but the problem is endemic . . . we dealt with this in LA and the SF Bay Area before moving here . . . the same all over.

  6. Kathy Robinson is Right – the problems in remodeling a home a never ending, and always something new.
    Get the Best Contractor -and quit quibbling about the price, and the chances are you will get a good job well done !!!
    From Richard – former contractor – former because of the low prices many contracters put out there with illegal immigrant labor, and no ethics, and more often than not – no ability to get the job done right !!

  7. Sean in Washington, DC // May 16, 2007 at 1:11 pm // Reply

    I’ve found the best solution is to either act as the general contractor and hire the subs, really do it myself (it’s not always pretty), or get a referral from a friend. The comment about contractors using illegals is fine, but I’ve just as many “legal” workers show up high, drunk or not at all. It’s an equal opportunity scumbag industry.
    Also never pay them too much upfront. My clients don’t pay me until the work is done, so I won’t pay you either. As for the contractor charging full price for cabinets, that’s easy. Just go buy them yourself through one of the many manufacturers out there.

  8. I’m lucky enough to have friends in the electrical and plumbing trades. I do the demolition, and carpentry myself, and have them come and do the electric and plumbing. I’ve never failed an inspection yet – and have save many many many thousads of dollars. Yet – this is not the route many people can take – either from lack of skills with a skill saw or lack of time.

  9. I had one contractor told me that he marked up 17 1/2% on all his subs. That was his fee for managing and oversight. If I wanted to take care of any finish work (countertops, etc) then I had the choice of him doing it or I could do it. If he did it, he would charge me for the subcontractor’s fee plus his markup. He was very upfront and it seems very reasonable. He even offered to give me the subcontractors invoices.
    We ended up not going with this contractor because he was so busy that after 6 weeks to rebid our job, he had still not completed his prices.

  10. We are in the process of doing a home remodel. We purchased most of the materials ourselves. Shopping till we dropped and getting the best buys we could find. Now our contractor has told us that he will be charging us 22% mark up on the materials that we purchased. Is this legal is this correct? He already has a cushion of $23 in case he goes over his estimate. We are ready to move out of our home this Saturday so we don’t want to cancel with this guy. Any quick advise would be appreciate he says this is very standard.

  11. I would not pay the contractor a 22% mark up for the materials you bought. The mark up is intended to compensate the contractor for his time and labor in securing the materials for the job. I think you should cancel the guy, don’t do things because you are ready to move. He is ripping you off and you are allowing it. He knows you are desperate and is taking full advantage of the situation. Trust me on this one, fire the guy and get someone else.

  12. charlene miller // September 5, 2007 at 3:57 pm // Reply

    Would you be interested in doing a story on a contractor here in southern california who is doing business without a contractor’s license and literally bilking unsuspecting customers out of thousands of dollars. The local police department doesn;t seem to think it is a case worth pursuing because it is considered a civil matter, and in the meantime this crook is continuing to gain people’s trust and money. Please let me know if you have any interest in this story. thank you for your consideration

  13. Kathy Price-Robinson // September 6, 2007 at 12:30 am // Reply

    Charlene, this is not the kind of story I would like to write. However, I did look on the website of the State Contractors License Board at http://www.cslb.gov. Here’s what the site said:
    UNLICENSED ACTIVITY
    It is illegal for an unlicensed person to perform contracting work on any project for which the combined price of labor and materials is $500 or more. CSLB works to curtail underground economy contracting activities and reduce unlicensed activity through stings, sweeps and other enforcement actions.
    In a complaint involving an unlicensed contractor, CSLB may issue a warning letter, a citation, or refer the complaint to the local district attorney for review and possible prosecution. CSLB has limited jurisdiction over unlicensed persons and cannot require an unlicensed person to make repairs to your project or pay restitution.
    To file a formal complaint, go here: http://www.cslb.ca.gov/services/forms.asp#COMPL, and scroll down to “consumer complaint form.”
    Good luck!

  14. my brother-in-law is a high-quality home builder and remodeler in Houston, TX and coming from a business/consulting background, he charges a “flat fee” for his company’s services, with additional charges for change orders and delays on the client side. he passes through all materials and subs at cost, with invoices, so his clients COMPLETELY trust him and he has incentive to use the best materials, best subcontractors, get the best prices and be very efficient. personally, i would much rather he try to get me great prices on materials and subs without feeling conflicted, and i would rather know exactly what he is earning – and choose to pay him that amount up front. and yes, i would pay him PLENTY with that kind of system. it’s not about being cheap so much as about being smart with spending.
    being an amateur student of real estate and remodeling of the past few years, i have come to the conclusion that “percentage” based compensation is crap, and usually creates conflicts of interest. why should a buyer’s agent, a mortgage broker or a contractor get paid MORE for getting a worse deal for their client? it’s disastrous and breeds mistrust, and it’s time for people to re-think the model to better reflect the realities of the relationship and to base compensation on quality of work completed in the client’s best interest. the contractors who provide excellent services and materials in a timely way would then shoot to the top of their industry and command top dollar. there is nothing quite like having to cover the cost of a “do-over” to sharpen the attention and make sure something is done right the first time, so this model would shorten construction time, lower materials/labor costs, and increase attention to detail. those who do those jobs best will get paid the most, instead of the opposite. win/win.
    even if the total on a job were to come out exactly the same, i think most homeowners would feel a certain satisfaction in having gotten a 25% discount on their cabinets, as well as in having paid a great contractor a good fee for a job well done, rather than feeling that they grossly overpaid for materials, and the contractor probably cut some corners because he needed the markup and savings to make rent. respect works both ways and people are usually glad to be in a position to choose to pay more for better work (or the opposite) when given the opportunity, so the pricing system should be based on the contractor’s actual quality of work done in the best interest of the client.
    in a relationship built largely on trust, it helps to have a transparent system that encourages trust. commissions and markups are antithetical to this.

  15. Jennifer Marosy // November 8, 2007 at 6:52 pm // Reply

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  16. After reading several of the posts, I just had to make one myself. I am a remodeling contractor. I have only been in business for a couple years and I have not had a single unhappy customer yet. I have also got probably 95% of my bids, BUT these were smaller jobs, that bordered on handyman work. It is easier to up with good solid figure when you have a smaller job, but larger remodeling jobs that include several different trades, that is a whole new ball game. There are so many variables that could go wrong for a remodeling contractor during a job, that he could go belly up on a job in one day if things did not work out. Not only that, the time that is spent calling subs, coordinating times to show up for bids, get job phases finished, just plain dealing with busy people is enough to ask for a 50% markup. I find scheduling and managing to be one of the most difficult parts of large remodeling projects. Secondly, the complexity of remodeling is like very few other trades out there. There are many days I am jealous of electrician, plumbers and other tradesmen because the have a really good idea what they need and will do everyday. Not so for the remodeler, he has several reigns in one hand and all he can do is hang on some days. My question to those people out there that are worried about markups. Have you ever checked the markup of products at Home Depot? I have heard 100, 200, 300%!! We all accept that as a norm because we don’t worry what Home Depot marks up, as long as we are told it is bottom dollar. I can assure that on many products, Home Depot is still not bottom dollar. One last thing! When you are shopping for a lamp at the store, do you expect to find a package deal consisting of: the wire to supply power to the outlet, the outlet box, the sheetrock knife to cut the hole in the sheetrock, the vacuum to clean up the mess and the electrician to wire up that outlet! I don’t think so, but that is what a good remodeler does for you. Not only for the lamp, but everything else that has to do with a residence and he is expected to be “the professional”. People just need to do their best to find someone they trust and then pay the PRICE! Believe me, they are getting a good deal! I don’t think there is such a thing as a rich remodeler!!!!
    Tim

  17. For all of you who think 50% markup is outrageous, please read the Michale Stone article at:
    http://www.theconstructionmarketplace.com/marketing.asp
    I think you’ll find that the markup REQUIRED TO STAY IN BUSINESS as a contractor is shocking. That’s why 96% of contractors go out of business, because they DON”T CHARGE ENOUGH for their services. Remember, it’s a business, not a charity event.

  18. I am a contractor who got out of residential contracting because of the headaches. Contractors charge extra because statistically 1 out of 10 residential customers do not pay the bill. That was 3 years ago when I did residential. Today, I have heard it is much worse. As a contractor sometimes you get jammed out of $300 sometimes $3000 sometimes $30,000 or more. Add that to the bonding and 3 different types of required insurances to be a legal contractor… lets just say it adds up. The fact is that if a customer does not want to pay the bill there is nothing that a contractor can do. If you lien the building the owner goes to the Registrar Of Contractors (ROC), which opens up litigation and puts a suspension on your license (which means you can not work) for months at a time. If you sue, the same thing happens. That is why most contractors get 50% up front, that way they are getting screwed out of there profit and at least they have there materials and labor paid for. The ROC is a corrupt and inept organization that should be terminated. Justin Allen President Desert Coatings

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