Why you are probably not paying your Contractor enough....

[Bruce Woodruff]

Just what y'all wanted to hear right? Lol..... But almost no investors/remodel customers and even almost no Contractors understand this important business concept - Mark-up vs Margin.

Most people (including Contractors) just figure on adding 20% to whatever costs they pay (Subs/Vendors/Materials) and they assume that it will give them sufficient O/P (Overhead and Profit). And they would be correct, except that you don't multiply by 20% to actually receive 20%.

Contractors - You need to multiply your cost by 25% to actually get 20%. Here's a good article on it: https://www.jobtread.com/blog/markup-versus-profit-margin

Investors/Homeowners - Why do you want to pay your Contr more? #1 - Fairness, #2 - Decency, #3 - Self Interest.

[Jay Hinrichs]

Quote from @Bruce Woodruff:

Quote from @Garrett Crosby:

This is something almost every investor runs into when they start getting contractor bids — the math "feels" high until you understand why it has to be. Markup vs margin is one of those concepts that's simple once explained but causes a lot of friction in investor-contractor relationships before it clicks.

There's also a related issue on the investor side that compounds this: when you squeeze a contractor to a number that doesn't actually work for them, you get quality corners cut or the project abandoned mid-job. The "savings" on the front end usually show up as a much bigger problem on the back end. The contractors who survive long-term in this business have figured out their real costs — the ones who haven't tend to be unreliable precisely because they're operating underwater.

Good contractors who do quality work and finish on time are worth paying. The deal analysis needs to account for real contractor costs from the start, not optimistic numbers that make the deal look better on paper and blow up in execution.

 Yes!! You got it! It really is in everyone's interest right? I wish more investors understood the strange sounding concept of 'paying more saves you money'...... :-)

I find you have two distinct paths for most investors to choose.. Most that are trying to buy wholesaler houses and fix up to sell or rent are very keen on cheapest price to make the numbers work based on what the proforma's are telling them.. IE if you went with top tier contractor pricing 90% or more of the proforma's wont work. This is what causes so many issues in the fix flip fix rent scenarios for investors. 

On the other side of the coin is New construction. Generally speaking your sub base is top tier as you may hire a GC for the project who will then sub out each trade.  So your success is subject to the GC's sub base and that is critical when hiring a GC. 

Top Tier GC or subs can be paid once a month and can buy their own materials etc.

investor rehab GCs generally cannot many want payment up front or at least money for materials up front and this is the risk many investors face.. Go this route to get your pricing down to the point your proforma actually works.. from what I see in the funding of Fix and flip or BRRRs all over the country Top bend subs just wont math for their projects so its a risk reward scenario as well..  

I get it on business folks not understanding how to get to net profit :)