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 Markup, Overhead & Profit
Dave Benjamin says
Mark Up Materials & Labor Only
I’ve been doing residential remodeling for over 45 years. Only over the past 10+ years I’ve been trying to use a system where I mark up labor and materials only and have customers pay all my subs direct at my contractor’s costs. Also passed along all my contractor discounts on cabinets, flooring, windows ect. where the customer pays direct. Plus if they have a subcontractor they used in the past, I’m ok with that as well.
PROBLEM: If you screw up on labor and/or materials you’re doing the job for nothing. Cost plus using a 10% mark up on projects work the best. The % moves up and down depending on project cost. The larger the project, I’ll lower the %. I think I need to stick with 10%-15% regardless since I’ve become more of a construction manager instead of the head carpenter on the job. I subcontract all trades with guys I’ve been working with for years.
TBear says
Why I Mark Up Labor & Materials by 50%
I have been a GC for 36 years doing residential remodeling, jobs ranging from $1,000 to $600,000. Every single job (over 1,000 of them) has been marked up 50%. I am still wearing jeans, driving a 4-year-old truck, and making house payments. In other words, I’m making a living, not getting rich.
If a homeowner does the GC job themselves, they save my “cut” but in the end the job takes longer, involves more drama, isn’t built as well (yes, experience really does matter), and sometimes costs more than I was going to charge. That’s just the truth. But if they find out that I’m marking up the job 50% they are outraged. They aren’t bad people. I like my clients, but they just don’t understand that everything in life that is hard and complicated is invariably going to take longer than you think and cost more than you think.
Also, the major labor and materials are only 66% of the job, another 14-17% is all the little stuff (I.e who’s paying the carpenter to set up, measure, go to Home Depot, clean up, pack up his tools, coordinate subs, talk with the homeowner, accept deliveries, drive to/from the job, re-organize the trash in the dumpster, meet with inspectors, clean up after subs, etc… there are a thousand little things that SOMEBODY has to do, and that somebody ain’t working for free). So take 66%, add in the money that subs get for any little extras, add in 14-17% for a thousand other little expenses, and the GC (who is taking all the risk on a bid job) gets the leftovers. I run multiple jobs very efficiently and at the end of the year I walk away with 19%. At 50% markup, I net 19%. If a homeowner doesn’t think I’m worth 19% then I’ll work for someone else.
NC says
Is Contractor’s Supervision Time Billable?
What do you include in your fees to client? Is your time as a GC, site supervision, project management billed as line items? Or do you take all material and subcontractor labour costs and add 50% to capture all your time and expenses?
buildingadvisor says
There is no standard formula on cost-plus work to determine what are direct costs subject to markup, and what costs are covered by overhead. Each contractor has to come up with a system that works for himself and his client — this includes everything from supervisory labor to things like insurance, tools, porta-potty, truck expenses, and so on.
The general rule is that costs attributable to a single job are billable as line items, while costs necessary to run the company regardless of specific jobs are covered by overhead. Whatever approach you choose should be spelled out clearly in the contract.
Probably the trickiest is billing for the GC’s supervisory and administrative time. Some split the difference by charging for admin time at a set rate, but without charging overhead. This may be limited in the contract to X hours per week. Time spent on the job site or swinging a hammer, if you do that, is usually billed as job site labor.
You can read more about cost-plus contracts at this link. You can see that I’m not a big fan of cost-plus work from the client’s perspective, but for many jobs it’s most sensible approach.
Suzanne says
Thank you for this thorough answer. BTW, the GC described in the post above did not come to the job site or provide any services. I called the GC and told him I was going to pay the $230 directly to the sub, and he seemed annoyed but said okay.
My policy is for full replacement and this was an upgrade of the insulation “like in kind and quality” from R19 to R30. I think a 50% markup for a restoration company is fair in most situations, given their much higher costs of doing business. I appreciated their quick response, special expertise, and their patented mold remediation technology and processes.
However, I think this crosses the line because ServiceMaster is already marking up the total job, which the insurance company is paying for, and was not involved in any other way. If ServiceMaster was providing materials or supervising even a little bit, I would feel the markup was fair. The action I will take is to say this to my insurance adjuster: “Mike, Because you have recommended that I have ServiceMaster do other work for me outside the claim, I think you should know before making the same recommendation to your other customers that ServiceMaster is marking the work up by almost 50%. Your company and ServiceMaster are in a position of trust, and we are in an extremely vulnerable position.”
Suzanne says
What’s Fair Markup in Insurance Repair?
My house flooded, and we contracted with the local branch of a national restoration company for the rebuild/restoration to be general contractor. My insurance company is paying 100 percent of the costs to install new insulation directly to this company. A subcontractor is supplying all of the materials and labor. This GC called a few days before the job and asked if we would like to upgrade to insulation with a higher R-value for $340. We said okay. On the day of the job, the subcontractor called to ask if we wanted to “pay the installers the $230 when the job is finished,” or if he should add it to the GC’s invoice. I was shocked that the GC was marking up materials supplied by the subcontractor by almost 50 percent! Still, I realize that the GC deserves to mark it up; after all, he arranged it and is the point person. But 50 percent is ridiculous! How much would be reasonable?
buildingadvisor says
Markup is a touchy subject for all businesses. The average markup on furniture, for example, is 100%, not something the furniture salesmen wants you to know.
Markups in fire and flood restoration work are generally a lot higher than for new construction or remodeling. According to industry statistics, insurance repair contractors have average gross margins of 35 to 50%. That translates to a markup of direct costs (materials, labor, subcontractors) of 50% to 100%.
Arguably, restoration companies have higher overhead due to their specialized skills and equipment, fast response time, and special services they provide such as mold mitigation. I suspect the high margins are also related to the cozy relationship between insurance adjusters and fire restoration contractors. I also think there are fewer qualified contractors and, therefore, less competition.
On the other hand, a homeowners main concern after a fire is that they get their home fully repaired without any significant out-of-pocket expense. If they get good workmanship and materials, and the work is done on schedule, they are usually happy.
A critical factor is whether the owners have a “Replacement Cost” insurance policy (RCV), which should cover the full replacement cost of a loss. To save money on insurance, some people opt for an Actual Cash Value (ACV) policy which reduces the replacement cost by the amount of depreciation – often an unpleasant shock to the homeowner who has to come up with tens of thousands of dollars after a loss.
So, bottom, line: It may seem like a high markup that you paid, but it is in line with industry standards. Best of luck with your home repair and renovations!
Chad Sichello says
The average product mark-up at Home Depot is and contractor suppliers is 200%. Meaning, if you bought it for $75, they bought it for $25, and their supplier made it for $12.5 with their own 100% markup. Add to that, that Home Depot doesn’t even pay their supplier for any of the products until they are sold in the store to you, the end customer, as they operate as a consignment store, then you start to realize why there are billionaires in the world. If your contractor is only charging you a 50% markup, count yourself lucky, you’ve got an honest man working for you.
buildingadvisor says
I’m not a lumber dealer, but have always been told that markup on lumber are by the dealer is pretty low — ranging a 10-20%, depending on who you believe. It’s certainly higher on tools and specialty items, but nowhere near the numbers you are citing.