Bryn asks: On a cost-plus bid, what be an average to high-average markup to expect from a contractor with a strong reputation for doing good work? What is the highest percentage one might expect? Are there other factors in comparing bids?
Steve Bliss, of BuildingAdvisor.com, responds: There is no industry standard for markup percentage and the numbers vary a lot depending on the type of job, region of the country, and market conditions. In general, remodeling jobs will have a higher markup than new construction. High-cost areas with complex regulations, like California or New England, will see higher markup than the Midwest. You’ll also see higher numbers when contractors are very busy.
That said, I can throw out some general numbers. For remodeling, you will often hear the phrase “10 and 10” — meaning 10% overhead and 10% profit for a total markup of 20%. You could consider this a benchmark. I’ve seen numbers as low as 10% and as high as 40% in high-end markets.
Cost-plus is used less frequently in new custom construction. I would expect to see lower numbers in the range of 10% to 20%.
As with many things in life, the devil is in the details. It is important to know at the outset what are considered “ direct” or “reimbursable” costs. These are the costs that will be marked up and billed to you. All other indirect cost will be paid for out of the markup percentage. For this to work well, the contractor should present actual invoices of these expenses when he bills you. Transparency and organization are paramount. No invoice, no payment.
As part of the bid, you should get a list of all reimbursable costs from the contractor. The list typically includes the costs of job-site employees (including taxes, benefits, and workers comp), subcontractors, materials, bits and blades and other consumables, and rentals such as staging, dumpster, and porta-potty. It may or may not include vehicle expenses, other insurance costs, and usage fees for equipment owned by the contractor. It might also include on-site supervision time from a job supervisor or the company owner.
The material costs should be the actual price paid by the contractor – not the “retail” costs on items where the contractor gets a discount – such as kitchen and bath fixtures, lighting, windows and doors, and other specialty items.
In a cost-plus contract, the contractor should provide copies of invoices with his bills. No invoice, not payment. Everything should be transparent. It can get a bit murky, however, if the contractor is billing for some of his management time and then marking this up. I would consider this double dipping as management time is typically considered overhead and paid for by the mark-up percentage. See Are Supervision Costs Billable?
Since different contractors include different items in their billable costs, it can be difficult to compare two cost-plus bids. Always get an estimate of costs for budgeting purposes, even on a cost-plus job (required if you’re borrowing money). If a contractor can’t or won’t provide this, then walk away. If possible, get a “not-to-exceed” price or a fixed-fee markup rather than a percentage of costs. With cost-plus-a-percentage, there is little incentive for a contractor to keep costs under control.
On a job with many unknowns, or with incomplete plans, cost-plus pricing may be used as an expedient way to proceed. Sometimes it’s used by contractors who are not skilled at estimating or don’t want to take the time to do a detailed estimate. If you care about costs, my advice is to take the time to complete the plans and investigate the unknowns as much as possible. Then get a fixed bid with allowances for the few remaining unknowns.
Cost-plus contracts can work well and are favored by some contractors. But they can also go badly and are the source of many construction disputes. Personally, I don’t like cost-plus contracts as all the risk of cost overruns is on the owner.
I recently got three fixed-priced bids for a small addition. The high bid was about 10,000 higher than the low bid. The middle bid contained so many “exclusions” that the final cost would have equaled or exceeded the high bid. Two contractors said they would only work cost-plus – one wanted 20% markup and one 30%. I initially accepted the lowest fixed bid, but the contractor turned out to be disorganized and repeatedly missed deadlines for completing the bid and contract. This did not bode well for the rest of the job. So I went with the highest fixed bid – the guy I liked the best and with the best referrals. Now can breathe easy and trust that things will go smoothly with few surprises. Moral of the story: The low bid isn’t always the best bid.
Read more on Cost-Plus Bids Avoiding Cost Overruns