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.

Becca F. · Answer

I posted about this a few years ago but I did a major remodel in the Bay Area - kitchen and 3 bathrooms down to the studs, interior paint including smoothing out textured ceilings and walls). The cost to put in new electrical wiring (to replace knob and tube), new electrical panel, and bring everything up to current electrical code was about $100k. A couple of people said I was overcharged on electrical work when I made that post. The rest of the contractor costs were $153k. Total remodel costs with materials I bought, exterior paint, new garage doors = $300k. It was my first remodel for a rental (no high end appliances, no custom cabinets). I'm very happy with the results after having tenants living there for 4 years.

I paid for everything through the GC and all communication was done with the GC. Is that electrician marking up the cost who is doing the electrical work (so more than a GC mark up?) and not the GC marking it up?

Bruce Woodruff · Answer

The Electrical Contr will mark up materials and labor specific to his work as he sees fit. The GC expects this and is only interested in the Final/Total Price from his electrician. Then the GC will mark up the Electrician's Total price (and still sometimes get a lower price than the Electrician would have given the customer directly). But he is more interested in what @Alan F. mentioned....loyalty and team player mentality. These are invaluable and why. as I said, I used a team of Subs that I would use exclusively (without getting any competitive bids from one project to the other). I would even often figure out my proposal/bid price to the customer without consulting with Subs as to their price for the particular project. If my Plumber charged me $35,000 to do a complete re-pipe on the last 6 jobs, then I'm using that number for this job too. One Plumbing Contr. loved me to do his bids for him because I was more aggressive with pricing than he was, so he usually made more money when I bid his number for him.

Sometimes, to get a job that is really desirable, a GC might go to his Subs and ask (tell) them that they need to reduce their prices by 10%. They normally will, knowing that they are getting 5-6 jobs a year from the GC. (Subs buy all of their 'toys' like RVs and boats from the GCs loyalty to them :-) The loyalty runs both ways...it has to to make this work!

Alan F. · Answer

Yes we do, that's why we are allegiant to our GC. That's also why we make sure all communication goes through the GC, not poach the customer from the GC, oh and show up for emergencies. Translate spanish for GC, sign for deliveries when GC isn’t on site etc.

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.

Eric James · Answer

This isn't relevant to a number of types of contractors. For example, the cost of comtracts for electricians and plumbers are relatively low. Their "markups" are much higher than 20-25%.

Bruce Woodruff · Answer

I was talking specifically about General Contractors. Yes, Subs will/can mark up quite high, especially materials

Garrett Crosby · Answer

Bruce, exactly — it's counterintuitive until you've been burned once by the alternative. I think every investor learns this lesson eventually, the only question is whether they learn it from a mentor or from a blown budget and a half-finished house. Appreciate you putting numbers and language to something a lot of us feel but don't always articulate well.

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'...... :-)

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

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