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

Question

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.

Garrett Crosby · Answer

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.

Bruce Woodruff · Answer

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'...... :-)