Changes in how jobs are completed — with lead carpenters, with subcontractors, and with lumberyards installing product — mean it's worth re-examining markups, at least for experienced contractors.

At conventions, contractors always tell me that learning to mark up at least 50% has saved their business lives. (Most add that they're now at 67%. More than a few contractors have said in this hot market they've raised markups to 75% or 80%.)

Still, when I introduce the 50%/67% markup concept at seminars, I always ask, “How many of you mark up at least 50%?” The number of contractors who raise their hand is never more than 10%. The smaller contractor still needs to understand why he needs 50%, why he should work toward 67%, and why he must never lower markups unless he has a total understanding of his costs.

Overhead And Job Costs Overhead is at least 25% to 30% of the total. Markup must be high enough to pay bills, as well as direct job costs. Those costs include labor, benefits, materials, sales tax and delivery, subcontractors, plans, permits, and cleanup.

Most contractors, particularly those under $800,000 volume, don't understand true job costs: They're doing six tasks themselves and aren't charging the company for that work. They don't realize the sales function accounts for 6% to 8%, production management for 4% to 6%, and office management, 6% to 7%. Plus, there's the cost of their vehicle, field and office equipment, rent, educational seminars, accounting fees, and advertising. Tack on training, legal fees, and general insurance.

Tweaking Markup

Changes in labor have taken place in the past 10 to 20 years that affect overhead, and therefore, markup. Here are a few.

  • The lead carpenter concept has had an impact on the cost of field carpenters and has changed production managers' jobs. Lead carpenters don't need help for most projects. Studies show one man is 80% to 100% effective; the second man is 23% effective; and the third man, -5%.
  • While the lead carpenter has to be paid well, the total is usually less than if he has help on the job, so it saves money. On larger projects, the lead carpenter concept probably will open doors to greater use of subcontractors.
  • More remodeling firms have started using outside companies to do more of the job. Companies might decide to pay the difference between using their own people or subs to do these jobs. This difference could be taken off the markup.
  • Some large lumberyards have started concentrating on the top 15 home builders. These builders have 28% of the new home construction market and plan to capture 40%, because they own all the land. These lumberyards won't talk to small builders or remodelers. They're handling subcontractor sales of product and of installation. I'd recommend that remodelers develop relationships with lumberyards below the top 10 that are working with smaller contractors. Try to get them to handle part of your subcontracted work. Then, build from there.

    • No Looking Back The remodeling industry is doing fine, at its upper levels, from a markup standpoint. If lack of quality help persists, these companies will be forced to team with middle-market and upper middle-market lumberyards, home centers, and distributors to help them handle the work. The result might cut their markups and margins — but not by much.

    Smaller remodelers must be trained to use at least a 50% markup — a little less if they're subbing large parts of their projects.

    Small and medium-sized contractors need to mark up properly to stay in business. The minimum markup of 50% results in 33% gross profit. Your overhead is almost never less than 25% to 30%, so why would you lower your prices?

    — Walt Stoeppelwerth is a publisher of management and estimating information for professional remodelers. (800) 638-8292; [email protected]; www.hometechonline.com.