In the hustle of everyday business, sometimes the basics of operations fall by the wayside. A telltale sign this is happening is when net profit starts to dip, and it may take months to recover what's already been lost. To refresh on the basics, consultant Michael Stone of Markup and Profit focuses on how to calculate markup for remodeling contractors and how it differs from the way it is calculated for new-home construction firms.
When you're remodeling someone's home, take the amount of time invested with a new home buyer and multiply it by four or five. Your client will be making major decisions when they incorporate a new design into a current living space, and those aren't easy decisions to make.
Remodeling requires also more of the construction company owner's time than new home construction. You can count on more delays and surprises on the job. Because the job itself is usually a smaller scope, you're more apt to have problems scheduling subcontractors, and issues with materials unavailable or late to the job site. All this is made more difficult because the owners are usually living in the home where you're working.
There are other differences in overhead. A remodeling contractor will generally need to spend more in marketing and advertising because they need to sell a higher number of jobs in a year. A remodeling salesperson should be paid a higher commission on sales than a new home salesperson, and that will also increase overhead as a percent of revenue.
Too many want to use the same markup for both types of work, and that usually leads to underpricing their remodeling work. It's a difficult adjustment for many contractors to make, but it's an important one.
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