markup on subs

[Guest]

I'm new to the remodeling business, just starting my third year. I'm hung up on my mark-ups. From everything I've learned and have been told, it's always been "your markup on direct job costs should be 50%-80%". I markup materials, plans/permits, clean-up costs, and my labor 50%. But when It comes to my subs, it's hard for me to markup 50%. I guess I think that the price will be to high. The few jobs I have marked my subs up 50%, I haven't gotten. My overhead is fairly low, probably 15%-18%. I'm doing alright not marking my subs up 50%, sub markup is probably around 20-25% at it's best. I'm just wondering what you guys out there are doing. if you have a fixed markup for all direct job costs, or if it varies. Is it achievable to markup subs 50% or more? Thanks!

[Guest]

Re: markup on subs

It is not only possible to get a 50% mark-up on subs it is imperative that you get it. The cost of conducting business is so (and we can go on forever about how much it costs) high that you have to cushion yourself as much as you can. Another way of looking at the reason is to understand that you as owner are entitled to a reasonable wage for the work you perform for your company, and your company deserves a reasonalble return also. This is called profit and if you are going to succeed for a period of time you must have profit. Profit is not a dirty word, notice that it has more than four letters, and is the only reason to have your own business. Our company has to have a minimum 50% mark-up to take on a real attractive job, our normal mark-up, including on subs, is about 80% and has been known to climb to a 100%. After 16 years we are doing very well but still far from wealthy.

[Guest]

Re: markup on subs

Peter,

How do you define "reasonable"? I am not arquing with the need to make a reasonable profit, just wondering how you define the term.
BobL

[Guest]

Re: markup on subs

IMHO, a reasonable profit is whatever you can get and still leave the customer believing he got his money's worth.

Part of the reason to charge these markups is to have enough money in your pocket to do the job the right way.

If you charge 20% markup, your customer needs to understand that she's only getting service and quality to match the lower price. If you charge 100% markup (I've never tried), your product had better justify it.

Some do cheap, fast, low quality work at low markups and still make a living. Others take the time to do every detail perfectly, use only the best materials, offer good warranties, and answer the phone on the first ring. If they charge for the service, they make a good living too.

Most of us fall somewhere in between and we hate the first and pretend to be the second.

[Guest]

Re: markup on subs

Markup and profit are not the same thing. A 50% markup on your direct costs, generically speaking these are--materials, labor, subcontracts and equipment rental (there can be others) results in only a 33% Gross Profit Margin! Even the term Gross Profit is a misnomer. It is actually Gross Profit Margin and it doesn't necessarily mean you have earned any profit at all yet. In fact it may be hiding a loss. Out of that figure you must still pay all your operating expenses. Hopefully it leaves you with a margin of profit after having deducted those expenses, but it doesn’t guarantee you one.

Many contractors like yourself, and people just getting started in business don't understand this concept--it's one of the leading reasons why so many fail. If you want to survive you have to make a profit and even then, all the profit you make, you won't necessarily get to keep. Much of it must be reinvested back into the business to help you grow and stay ahead of the competition.

Your strategy can’t simply be to underbid the competition on every job. It must be to submit a winning bid on only those jobs you can complete successfully, with minimum risk and a reasonable profit. What’s reasonable? That question is best answered by your prospective clients, however some common sense and a little research on your part, might best help you find the client base your looking for.

Find a way to identify a niche within your market as your own, and then do everything you can create value around your production and services. Prove you can deliver "on time, every time, exactly as promised." If you must depend on subcontractors to get the job done, find those who are just as committed to providing quality production and service as you are and are willing to stand behind their work. It is going to cost you time, money, effort, resources, control and coordination to work with anyone else outside your organization, and those all amount to some very real expenses. Therefore you must earn a profit because of those alliances.

If you can create such value you will begin to attract customers who are willing to pay more in order to deal with a quality contractor like yourself. If all you are doing is chasing bids for the lowest dollar, you can’t afford to sell value, such as I am talking about. Sooner or later it catches up to you.

[Guest]

Re: markup on subs

Kurt, here's a couple of extensive discussions about both mark-up "and" profit from the Remodeling Online forum. It's a couple of evenings of reading and a good education. I think the Fine Home Building forum also has one or two you can find.

http://www.remodeling.hw.net/frmTopicFront/1,1078,'282~0~0~29~1~7559',00.html

http://www.remodeling.hw.net/frmTopicFront/1,1078,'282~0~0~29~1~9265',00.html

[Guest]

Re: markup on subs

BobL, As I am a true capitalist I define reasonable as absolutley as much as I can get. I agree with Ryan that you must still leave the client totally delighted.

A good starting point, IMHO, is to pay yourself a reasonable wage/salary and for your company to make a net profit of about 10% of your gross sales amount. By net profit I am looking at a dollar figure after all expenses are paid but before income tax is paid. You may not have to pay taxes on this if you reinvest in your company but you still need that 10%. Our small company, with sales just under one million, will make a net profit this year of about 11 1/2%. Our budget was for 13% but we had one job that becamne the job from hell and it pulled our numbers down. Dddue to the fact that we have had other successful years we are able to complete the job from hell as it should be done even though we will not make a cent on it. It will be done in 2 days, thank goodness.

DonQ makes a good point about knowing your numbers. I don't care how much you charge or how hard you work. If you don't know how much it costs to operate your business and how much it costs to produce your work (labor, materials and subs) you won't ever be able to make a profit and if you can't make a profit you wont ever grow and probably won't survive.

Sorry about this lone post but I get carried away sometimes.

[Guest]

Re: markup on subs

Kurt, the main thing to keep in mind is that "profit", regardless of what net percentage you shoot for, has absolutely noting to do with the quality or service of the work you perform. Strong statement? Let me explain.

Estimate a job at 40 hours. Assume it includes good workmanship and service. Now estimate the same job office Exceptional workmanship and exceptional service might require 48 hours. The percentage of net profit figured on each of the above would be the same. All you have done is to add 205 more in labor to provide the better workmanship and service.

Installing 4-5/8" crown molding or 6" still requires workmanship The degree of workmanship you intend to provide is what determines the man hours needed to complete the job - nothing to do with profit.

Profit is what you are entitled to for several reasons:

1. To accept the liabilities of being a business person (self-employed), and specifically in our industry.
2. To provide a reasonable return on your dollar investment in your company.
3. To reimburse you for the degree of expertise you utilize in performing your tasks. That is also a return on your "expertise" investment.
4. To pay for "future capital expenditures" - a reserve.
5. To put monies into bad debt and guarantee additional reserves.

My take is this. I don't replace rotted door jambs, not do I remodel bath rooms, nor do I provide skid resistant exterior tread surfaces. I solve problems, and to the degree with which I draw upon my extertie, background, research and innovation is what determines the net profit margin I seek.

Here's an example. A condo association had 36 stairways with concrete treads that have never been painted or stained. Three people slipped and fell on these treads during the rain. The Associaiton does not want to paint the treads with granuels because they and I know that then will then be committed to painting them every 4-5 years forever. An undesired added maintenance expense. I did some research and determined a viable, economic "solution" was to use Abatron 2-part gray epoxy with wither silica sand or Sharks' Skin granuels. I will use a metal template with a 4" x 34" slot cut out of it and place it on each tread which is 38" by 11" and apply a 4" wide strip of Abatron 8006-3 2-part epoxy. It will only have to be recoated about every 10-13 years, and recoating a 4" x 34" strip is substanitally less then having to repaint with granuels every 4-5 years.

My price included a net profit of 40% and I got the job. So, the quality of the work I intend to do could have been estimated at 10%, 20% or 5%. It was not based on anything other than an acceptable "solution" which was based upon my own innovative approach to the "problem.". Furthermore, the reason I sugggested using gray colored epoxy instead of clear ws due to the fact that by test sample (Abatron send me a sample kit), showed that when wet, the non-section of each tread tended to blend in with the 4" strip due to the fact that wet concrete gets darker. I suggested that we wanted to make those strips obvious so visitors would realize they existed even when wet.

Think of youself as a problem solver. As such, your net profit can and should be maleable depending on the situation at hand. I just got another job for another condo association for some stairway painting only. I based my estimate on only 5% net, and did so because I've done previous work for them at 20% to 30% net profit and will be doing more projects for this particular association - and I want to keep having them deal with me only for all of their needs. In other words - I'm locking out the competition.

Get a book entitled "The Profit Zone" and you'll understand better what I'm talking about.

[Guest]

Re: markup on subs

Peter,

Thanks
BobL

[Guest]

Re: markup on subs

Thanks! To everyone that posted in this thread. You all gave me some useful insight on bettering my business.

Thanks again, Kurt