I was speaking recently with a contractor who was explaining his pricing structure to me. He charged a fixed hourly rate for labor, added a 10% markup to subcontractor costs, and added 15% to material costs. He confirmed that his supplier gave him the locally standard 10% + 5% discount. So he was getting the “10 and 5” discount, and then for his customer, he was applying a 15% “markup” to the discounted price, which in his mind brought the material price back to the retail price. Let’s leave aside the question of whether or not it’s reasonable—because of the cost of selection, delivery, storage, security, and warranty—to expect customers to pay more than retail on materials (they probably should). The contractor’s assumption—that adding 15% to a cost that has been discounted 10% + 5% brings it back up to retail—is both commonplace and incorrect. Let’s see how the numbers work out.

We make two assumptions:

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