What is the Standard Contractor Profit in Rehab?

Question

How much does your contractor usually charge on top of his (or her) subs to manage a rehab job?  I am working with my first contractor, the prices he's getting from his subs are very reasonable, but he's charging 10% for overhead and 20% for profit over and above the sub costs.  Does anyone know if a 30% mark-up is standard operating procedure?

Jon Elson · Answer

The 50% down was in the terms of his contract, I haven't discussed why he needed that much up front yet; I will definitely question this once I decide that I'm going to go with this GC.

I will definitely get additional quotes, I got a few smaller quotes from a handyman and the GC is comparable on restoring the floors and painting the house, which leads me to believe that he's got decent prices... At this point I'm really questioning whether to go with a GC or sub it out myself to learn about the business and create a little more profit.

Keith Bloemendaal · Answer

@Jon Elson I would definitely get another quote. What is the 50% down for? Again I build new homes, not rehab, but I can't imagine why a contractor needs 50% up front, I would question that for sure!

Jon Elson · Answer

Thanks for your replies guys! I recently got the latest proposal. He decreased his fees to 22% of the total cost of the job. He will be finding the contractors, purchasing material, ect. The only thing I would be responsible for is 50% of the total cost of the job upfront.

I really like the GC that I've been working with to price out the job. I think he would be a great contact to use going forward. However, I'm not sure that there is enough meat on the bone to pay the extra $. I am also toying with the idea to sub out the work myself to decrease the cost and serve as a learning experience. I am rehabbing my own home to sell and pull out my equity to use on future deals, please see the numbers below:

Added value: 45K

Less Cost of rehab: 27K (I didn't want to spend much more than 18K)

Less Additional Realtor Fees: 2.7K (45,000 x 6%)

Less Staging: 2K

Less Holding Cost on Loan: 1K

Additional Equity Upon Sale: 12.3K

So, I guess the question is, is it worth it to take on the risk of the rehab for the extra 12K of profit, I think so. But, since this is my first rehab, am I better off subbing everything out myself to learn the trade and reduce cost vs. having a GC sub everything out which increases cost and alleviates headaches? Another plus to working with the GC is developing that relationship to use him down the road. What are your thoughts?

Bill Gulley · Answer

Not at all, I have used several, from large GCs to the pickup truck fix-it guy and I agree with your advice of finding a good one and being fair. Many around here, try to get in your pocket to quick for too much, but a good relationship and keeping them busy cures that. Takes time to build good relationships and that is key to getting good work and good prices. I've even given bonuses, slices of profits, partnered as well. I feed the guys, bring the beer at the end of the day, have advance loans for those in trouble or having issues or problems. I've commented on such before, so don't take my comments as if I try to mess over a GC and pinch them too hard. :)

John Ellis · Answer

Bill G have you been using the same contractor for most of your projects. It seems you have a real issue with contractors making money. Just as it is not their business to worry about your business I think a great working relationship with contractors will get your desired result. It seems you devalue there abilities and look at them as a problem rather then a solution.

John Ellis · Answer

As a contractor I work with investors to help them understand the cost. If the contractor is in charge of just doing the work then the up charge should be min. If all I had to do was show up and work then 10% is what I would charge. If I had to order and pick up most of the materials, pay for them in advanced and then get reimbursed and do the work I would charge between 15-20%. If I completely managing the job including buying materials, hiring subs, handling all deadlines, drop offs, inspections, budget, etc. Basically a project manager plus a contractor then I would charge 30% across the board. I would be happy to go into more detail if you need but I hope this helps you identify the type of relationship you have with your "contractor"

Also as a side note remember that a great contractor will make or break your flips. Having a positive relationship with them is vital to success completion of jobs. It should be a win win to many times contractors make false promises and investors want something for nothing. It is a fine line so when you find a good one reward the ones that show up, do a great job, provide great customer service and leave you knowing that the next flip you will use them again.

Keith Bloemendaal · Answer

I really depends on the project, but I'd say 20-30% is not uncommon. I try to get 15% on new construction, ie: $50k on a $350k new build. Remodel is a different animal though. Have you had more than one bid?

Bill Gulley · Answer

Depends on how that is figured, 10, 20 % of what? Charging a fee, then charging again that's over 30%, 30% is too much of the contract, IMO, depends too on the scope of work and costs involved.

Mine got costs plus 10 to 20%,

Just have to negotiate, he shouldn't be making more than you.

Many go at it looking at the value, say a 100K home improved to 140K then wanting the lion's share of the 40K (less materials). They aren't entitled to that ARV, the claim to the original 100K or all of the 40K as if they are responsible for the added value by themselves, consider ownership risks, financial risks, market risks, making the deal happen, etc. They have a "job" pay them as a job.

They may have a business to run, but that's not your business, their costs incurred by their side have nothing to do with your job, there are many ways to pay them, time, cost plus, cost plus, plus with a profit, but don't pay some flat profit if they drag their feet, profit comes from a good job, on time and on budget, they need to take risks to earn profits just like you do, there is no guarantee. Does the burger cook get a slice of the owner's profit plus fair compensation for his time and skill? No!

Just depends on many factors and your contributions too, are you just walking away handing them the deal or can you reduce their time, give direction, buy and provide materials making their job easier or more of a job?

Many think they are engineers, architects, construction managers and skilled craftsmen and think they can charge accordingly, not IMO. Need to assess what they really bring to the deal and pay fairly. Generally, the construction company thinking guy is not appropriate for small residential rehab projects, the "package, full service types". I'm sure they will come to disagree, but small jobs can usually be done more efficiently being more involved yourself. If you can't, they may be your only choice......which means you need to learn your business. :)