What is a remodel contractor’s markup?
When planning a home remodel, one of the most common concerns among homeowners is making sure they pay a reasonable cost. Most people aren’t looking for the cheapest possible remodel, but everyone is looking to be charged a fair price. But how do you even know what’s fair? Many homeowners concerned about fair pricing want to know what a remodel contractor’s markup is.
As a company that focuses largely on high-end residential remodeling, we get asked about this quite often at Lamont Bros. We are happy to answer this question because we want our clients to feel confident in the price they pay for a remodel.
In this article, we will discuss what factors affect a remodel contractor’s markup, and how that can affect your remodel. Specifically, we’ll discuss:
- What influences a contractor’s markup
- What a fair markup should be
- How to avoid contractors with unfair pricing
Why does markup matter?
If you’re like most homeowners, then you probably care about paying a fair price for your remodel. The concern that we need to address, then, is price-gouging. You don’t want to work with a remodeler who charges an exorbitant price on something that costs them very little.
Therefore, the first question we need to ask is, “What constitutes a fair remodel price?” Three factors affect how we answer this question.
The cost of the project
Nobody would argue that the price a homeowner pays for a remodel, called contract price, should cover the contractor’s costs. In order to complete a remodel, the contractor must first pay money for materials, labor, and (sometimes) permits.
These items make up the direct cost, which is the principal amount of the project without markup. In other words, the price markup is generally calculated as a percentage of the project’s direct cost.
When calculating markup, the contract price minus the direct cost equals the gross profit. So, the percentage of the contract price that is gross profit is the gross profit margin.
The contractor’s overhead expenses
The general principle among honest contractors when it comes to pricing is this: Charge enough to cover the cost of a project, plus enough to stay in business. Overhead business expenses are the ongoing costs associated with running a business. These costs may look a little different for every single company.
For example, a self-employed general contractor who works out of his truck has very limited overhead. This overhead might consist of tool expenses, vehicle maintenance, and business insurance. On the other hand, a design-build firm like Lamont Bros. likely has more expenses. For example, our company has several dozen employees, an office, multiple company vehicles, and a showroom.
Overhead expenses are important because they come out of a project’s gross profit. Therefore, contractors with greater overhead expenses typically must charge a higher markup in order to stay in business. However, hiring a contractor with a higher markup may often be worth the extra cost if that contractor adds significant value to the project.
The value a contractor brings to the project
When trying to decide on a fair contractor’s markup, you should also consider what additional value the contractor is bringing to your remodel.
If a general contractor does all of his material purchases at The Home Depot, that’s something you could do yourself with very little effort. Therefore, it doesn’t add much value, and thus, his markup shouldn’t be substantial.
However, if you work with a company that orders all of your materials from various suppliers worldwide, then delivers and installs those materials into your home, the markup will likely be higher. This is due to the fact that the company has special relationships with manufacturers, allowing you as their client access to products that may be difficult to buy directly as a consumer.
A contractor may also offer additional expertise or resources that increase their markup, as well. For example, at Lamont Bros., we have an in-house design staff with both structural and interior design expertise that provides remodel design services to our clients. We also have a showroom that is resourced to provide additional value to our clients. This does raise our overall markup, but it also gives our clients access to benefits that increase the value of their remodel projects.
So, what is a reasonable remodel contractor’s markup?
In remodel construction, the average gross profit margin is between 34% and 42%. Now, keep in mind, the gross profit margin is not what the contractor actually takes home. Since business overhead expenses are not included in the direct cost, they must be subtracted from the gross profit.
At the end of the day, the net profit, or “true profit” after deducting overhead expenses, averages between 5-9% of the total revenue. This is enough for the company to remain financially stable and, in a good economy, even grow their business a bit.
Signs that a contractor has unfair markup prices
Even though most construction contractors are honest people trying to make a living, there are always a few bad eggs. To make sure you’re not getting cheated out of your hard-earned money, here are a few things to watch out for when hiring a contractor.
They offer you enormous discounts
While discounts might initially seem like a good thing, with contractors, it’s often the opposite. See, most contractors operate on a pretty tight margin; if they’re really only going to make a 7% profit, they shouldn’t be able to afford to offer a discount.
In other words, when a contractor offers you a discount, what they’re really saying is that their original price was too high. You’ll likely be better off with a contractor who quotes you a fixed, reasonable price upfront instead of quoting a ridiculously high price at first, then dropping it down a bit to make you feel like you’re getting a good deal.
This is a standard practice with many aspects of residential construction, especially hardscapes, windows, siding and roofing.
They operate on a cost-plus contract
A cost-plus contract is a construction contract in which the homeowner agrees to pay for the accrued costs of the project, plus a percentage of that cost on top.
Contracts like this have several disadvantages. For one, you’re essentially handing your contractor a blank check. Cost-plus construction contracts are notorious for quickly becoming more expensive than anticipated, leaving the homeowner no choice but to pay more to finish their project. According to industry expert Michael stone, cost plus contracts end up in legal battle far more frequently than any other type of contract.
Cost-plus contracts also make it easier for a contractor to take advantage of a client. A dishonest contractor could report a higher than accurate direct cost, and the homeowner might never know the difference. All the contractor needs to do is find some way to justify that a purchase receipt contributed to the project, regardless of whether or not it actually did.
They expect you to provide value you should be paying them for
When a contractor expects the homeowner to purchase materials, help with the labor, or provide tools, that could be an issue. It isn’t always a problem, but if your contractor expects you to be heavily involved in the project, one of the questions you need to ask yourself is whether or not the contractor is actually adding value to the job.
If you’re paying a contractor’s markup for the value they bring to the business relationship, make sure they are actually providing that value.
Is a design-build firm right for you?
As a company that specializes in full-service design and construction remodeling, Lamont Bros. guides homeowners through the steps of home renovation from start to finish. If you would like to learn more about what kind of projects can benefit from our process, read our article “When to hire a design-build firm (and when not to).”
Ready to start designing your next remodel? Click the button below to schedule a free call with one of our design consultants. We’ll walk you through the design-build process and what you can expect during a home remodel.