Markup by a Different
To the Editor:
While I agree with Mr. Deal's perspective that consistency and
honesty are the only fair way to work, I think he's pretty hard
on the percentage bidders
("How to Charge for
Overhead," 9/02). Percentage bidding is brutally consistent
as well as fair. The customer who asks for a more expensive
product should pay a higher amount for overhead, though an
equal percentage. Mercedes dealers are not expected to operate
on a smaller markup than Volkswagen dealers.
By Mr. Deal's own math, his labor charges are 160% over his
costs. If Home Depot charged their cost for materials but
billed the customers at 160% of their stocking labor costs,
people would be outraged. Mr. Deal is recouping the exact same
costs we all are attempting to, just lumping it all into the
Overhead is a fact of life, and it is a percentage of the
company's overall operations, not a portion thereof. Even Mr.
Deal admits this in his closing paragraph when he reverts to
referring to his own salary and profits as percentages of his
company's annual gross, not his labor rate.
Percentage bidding permits me to completely open up my books
to my customers. I have nothing to hide. I might not be so open
if I charged "no markup" for materials and subs while trying to
explain my 160% markup on labor.
Paul Fenner, President
Fenner Construction, Inc.
Les Deal responds: Your statement that I
am "recouping the exact same costs we all are attempting to,
just lumping it all into the labor column" is in fact exactly
right. I don't agree, however, that my labor charges are 160%
over my costs. Using historical data as the starting point, I
have added my actual overhead costs for the year onto my labor
figure. Time on the job is what I bill for, and putting
overhead there assures me that I will cover my overhead
When you say that percentage bidding is consistent, I partly
agree: Always using the same percentage markup is consistent.
But what constantly changes is the cost of subs and materials.
So the amount of markup dollars you earn varies constantly over
time. The percentage system charges some customers too much of
your overhead costs and some too little. My method is more
consistent, because it attaches overhead cost to time on the
job. Each customer pays his or her fair share, according to how
long we stay on the job.
Like you, I have nothing to hide, and customers respond well
to this method because it allows them to upgrade to more
expensive material and fixture selections without facing an
Management Fee Works
To the Editor:
I've been using a job pricing structure similar to Les Deal's
for the past 14 years and have discovered a few glitches along
the way. The system works well for labor-driven operations but
won't work smoothly for construction businesses or sometimes
for specific projects that rely heavily on subcontracted labor
because overhead and profit won't be funded adequately.
Take a small bath remodel. The demolition and carpentry labor
account for a small percentage of the overall project cost. The
plumber, electrician, plasterer, tile, custom glass installer,
and painter account for the bulk of the project cost. On such a
project, my estimating, selling, and management time is
tremendous in relation to the labor. And I haven't found that a
carpenter's time can be justified on such a trade-heavy
In an effort to be equitable, I budget a management fee into
proposals. Jobs with heavy in-house labor have a lower
management fee, while trade-heavy jobs have high management
fees. I charge a flat fee based on past job performance
As Les mentioned, clients are receptive to an alternative
system provided we show them the underlying pricing structure.
And I find the system to be a good marketing and sales
Regarding the matter of directly passing through material
costs to clients, there is a downside when a product fails. Who
is responsible for the cost to repair or remove and replace the
item? Typically, a portion of material markup buys the client
"insurance" that if a problem occurs, the contractor will make
things right. Without a markup to offset the risk, the cost to
cure comes out of the contractor's profit. I give my clients
the option of either accepting materials at a direct
pass-through without markup with the understanding that they
carry the risk if a product fails, or paying a markup of 15% to
35% on materials for which I will assume the risk. I will
always be there to assist clients in the event of a material
problem, but when they choose the direct pass-though option, I
will charge to expedite the repair or replacement process. In
either case, it is important to be concise with clients to
avoid misunderstandings about their choices and
East Greenwich, R.I.
Les Deal responds: You are correct that
this method in its pure form works best for labor-laden
Like you, I spend a lot of personal hours in sales and
management on bathroom remodels. In those cases, I figure my
own time into the price, expressed as an hourly rate, not as a
Replacing failed and defective products and materials hasn't
been an issue for me. First, I use high-quality products.
Second, if a product fails more than once, we drop it. But if I
did find it necessary to provide "insurance" against product
failure, I would still try to add it in as a factor of time,
based on actual historical replacement costs.
Thieving Hammer Swingers
To the Editor:
Obviously, Les Deal is cut from a much more morally upstanding
and intelligent mold than the rest of us thieving and ignorant
hammer swingers. While I felt sufficiently berated, I am hoping
in future articles you can find authors of even greater
character and moral stature to guide the poor unenlightened
Progressive Construction, Inc.
Access to Prices
To the Editor:
Thank you for your article, "How to Charge for Overhead." Les
Deal is right: The battle has changed. The Big Box is the
reason. "They have access to prices."
A Revolutionary Idea
To the Editor:
I have never responded to an article before, but the article
"How to Charge for Overhead" in the September 2002 issue "hits
the nail right on the head," so to speak. If there has ever
been an idea that could revolutionize this industry, this is
it. I have been in business for going on 11 years now and
trying to make the percentage system work for the entire time.
My conclusion: It doesn't! And the reasons could not have been
We need more articles like this so that this method starts to
"sink in" and the old "percentage method" quickly fades away. I
truly believe that this overhead recovery method is a huge step
in guiding this industry toward professionalism and fair,
consistent profitability, as well as increasing owner enjoyment
and reducing burnout. Thank you.
Stephen L. Nash, Jr.
Upscale Remodeling Corp.