Some time ago, a contractor who'd attended a seminar I gave came up to me the following year and said that while he thought I was nuts when I suggested a minimum 50% markup, he wasn't making any money. So he'd tried it. And it worked. This contractor also said that after implementing the 50% markup for four to six months, he'd found he was closing on two of every three jobs, so he started marking up his work to 55%. His closing rate went down somewhat after that, but three months later he was back to closing on two of every three presentations, so he moved to a 60% markup and then to 67%.
Gaining Confidence
As a contractor sells more and gains confidence, raising the bar is easy. The No. 1 problem in the remodeling industry is that relatively few feel confident enough to charge customers what their work is worth; that is, what they need to make to stay in business and generate a good profit.
Some of this has to do with the failure of the most successful remodeling contractors, and of the manufacturers, distributors, and lumberyards that service the industry, to find a way to train the vast majority of companies in how to mark up their jobs enough to make a profit. Of the 172,000 U.S. contractors operating businesses with a payroll, no more than 15,000 to 20,000 mark up their jobs the minimum 50% needed to achieve a 33% gross profit.
Numbers and Marketing
To get the kind of gross profit you want -- and need -- to make money and expand your business, you first have to determine direct costs, then overhead. With those numbers in hand, the minimum markup for a small to medium-sized contractor is 50%. As a company grows, that markup should go to 67% or more. In the specialty market, where most jobs are priced under $25,000, a 75% to 100% markup is necessary and appropriate. For jobs under $3,500 -- considering sales cost and setup time -- a minimum 100% markup is necessary. And in handyman, where the average job is around $500, trip charges and a labor markup of 125%, or higher, are critical to making a profit.
Professionalism in all aspects of marketing and sales presentation are the other key ingredient when it comes to increasing markups, and margins. To get that markup, you have to convince potential clients that your company offers the best ability to meet their needs at a fair -- not cheap -- price. Many remodelers use a presentation book to explain their company. This includes company background, staff, vendors, insurances, a sample proposal, a change order form, and a list of past customers. What will also help you get that markup higher is a book with photographs of different types of projects you've completed.
The Value of Being Aggressive
In the past 20 years, there's been a major increase in the high-end remodeling market in many parts of the country. Some remodeling companies have been almost overwhelmed with work. Most were already using the 67% markup. Some have raised their price to 75% to 85% and get it with no problem. This might not continue forever, but it shows the value of being aggressive.
The remodeling, specialty, and handyman markets are growing rapidly as American homeowners continue to view their homes as solid, live-in investments. Most homeowners don't have the time or skills to do small or large jobs, and many are willing to pay for top service. Large and small remodeling companies alike will be in demand from now on. When it comes to markup, the owners of these companies shouldn't be selling themselves short.
