How Does Everybody Handle The Mark Up Issue?

ottagosoon

The question is not whether you should mark up your estimates. I’m going on the theory that we all agree on marking up our estimates.
I want to know in the example below, how to include your mark up on extras or change orders?
Example:
You sign a contract for an addition. In that estimate you gave them allowance on various items. Let’s say one of those items is laminate flooring and the allowance was 2.50 per square foot. They make a selection and the square foot price is 5.00 per sf. Well with sales tax and the number of square feet there is an extra cost of 1,325.00. Now your company is working on a markup of 30%. Add that to the extra and we have 1,723.00.
Now while making their selection, the supplier told them or maybe it was priced, they know the difference in the price between the allowance and the selected flooring. They did a little math and see your charging 3.44 per square foot and they saw or heard it was 2.50 sf extra.

Should you have included in your contract a markup previsions tell them about your 30% markup on all items?
Should you not include markup on the extras causing your total job mark up to go down?
Should you go to your supplier before hand and scratch out all the pricing?
I find it hard to tell customers I markup the job price up. That’s not because I feel I cheating them. It’s just that they the customer cannot conceive that it’s not profit. Yea it might be job profit. But that’s not where the bills stop. Profit is what is left after everything is paid for ,net profit. We are the only industry that the customer can tear apart the cost and compare it to what they can get it for and that carpenters and mechanics only cost a company 20.00 hour. They have no business scents. Of course they go dumb and blind when they’re in a restaurant eating a 25 dollar t bone steak and drinking a 4 dollar beer.
What to do?

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neolitic

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bwalley

What I do on allowances is give the client a fair and realistic allowance, if they go over slightly, I don't charge them, if they go under slightly, they don't get a credit, I don't nickel and dime my clients.

If the amount of mark up on the overage is going to be an issue, it might be easier to just not charge the mark up and give it to the client at your cost.

You are still making money and they will think you are a great guy for not nickel and diming them, and it should bring extra work down the road and referrals as well.

Unfortunately there are some contractors who lowball to get the job and then use every opportunity they can to charge the client extra, these types usually only work for a client once.

Many times what I do is just charge them list price on items, and my mark up is covered by the discount I get, tile is different though because we don't get much of a break on it.

I do not hammer my clients on change orders, they get a break on the price because I am already working there and I just want the job to progress smoothly, I want them to be happy so they call me back and refer me to their friends.

modterry

Mark Up: We have allowances in our contracts and we call for 10% mark up and it includes the actual cost of the materials, ordering ,shipping , pick up ( which I include the labor to go get ) , labor etc. You are right - if you normally have a larger margin = say 30% then, Customer may say this is too high. It is a touchy subject - On one hand they know you need a margin to survive but, they also are looking for a bargain. Some of the suppliers I send the customer to , only quote to our company and not directly to the customer.

We do the same process with Change Orders also, this seems to be very acceptable to the customer.

Terry

Grumpy

If I am going to be ina situation where my customers are getting prices on materials I am either going to walk away or, since I know in major remodeling this often happens I just don't deal with it, I am going to include a markup variable in my contract.

bwalley

The issue comes up often in tile selection or other minor details like that, where you bid the job and since you don't know exactly what tile or other flooring they are using you will give them an allowance.

If you really have to mark it up, use a smaller percentage in the contract, otherwise you will risk getting into an argument with a client over a few dollars.

If you are willing to give up a remodel over a small amount of mark up on tile that is fine.

To me I would rather leave a few dollars on the table and work for them later.

Mike(VA)

For me its quite simple. I have my standard markup in place, but on the allowance items only, I have a higher markup. My clients don't see it but I know that allowance items, dealing with them, and making all the changes necessary cause me to devote sometimes a lot more of my time to them. Whether the amount of allowance items goes up or goes down, my calculated markup on the original allowance items stays the same. Win, lose, or draw, its a lot simpler for me this way.

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I EXPECT THAT SOMEDAY I WILL SEE THE FRUITS OF MY LABOR. IS IT SOMEDAY YET?
Clifton, Great Falls, McLean, Fairfax Station, Manassas, Virginia Renovation Contractor

ottagosoon

I certainly agree with that. If the client chooses a lessor item, then you give back the difference in the allowance and keep the markup.

The only problem with that is If you give back something the smart buyer will want the markup also.

This way seems to be better way of getting some if not more of your markup on the add allowances.

It's that gray area that you don't want to spend time educating or arguing your clients on markup and business practice, but you can't give to much away.
My practice has been just not apply the markup to that change order.
At this time I do not include any mention of markup in my contract.

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Kgmz

Where did you guys learn how to put a allowance schedule in your contracts?

Have any of you read AIA general conditions, Allowances.


For one you only have allowances on items that should have them, like flooring, appliances, light fixtures, plumbing fixtures, etc.

Then the allowance covers the net cost of the items, not profit, labor, etc. These other items, profit, labor, etc. should be covered in the general contract sum. Also if they buy something cheaper than the allowance then they get some money back, which should not affect you since the profit is not in the allowances.


Example: Allowance for kitchen appliances, slide in range, diswasher, microwave hood. They decide they want the higher end stainless appliances. you only make a change order for the difference in price because nothing really changed like the wiring, etc. But lets suppose they want to change the configuration, to counter top burners, wall oven with microwave and convection and large stainless hood. Now the change order will have labor included and a small markup if the price change is considerable. Because the cabinets will have to be changed, the wiring, etc. more things affected by the changes.



I see so many contractors that get burned by this, having a lot of the profit in the allowances. For example customer says they have to really cut back, and goes with low end flooring, appliances, lighting, cabinets, etc. You really lose if a lot of your profit is in the allowances, but if it done right and elsewhere it doesn't make a difference to you and you still win.


This is how you still make the same money, and allow your customer some decisions on how they spend their money.


Edit: After reading this after posting. I know a lot of people are not going to agree with giving any money back if they use cheaper items than the allowance as I described above, because they say I have a contract that says X amount of dollars. But by law you have to if you include a allowance schedule in your contract, and if you have your profit elsewhere it doesn't hurt you. And lastly you will get a reputation of being a fair and honest contractor that is willing to work with their clients even if money gets a little tight.

Mike(VA)

I don't have a problem whatsoever with giving money back if they choose less costly items. First, I list out every allowance item under the Scope of Work section in which a choice is to be made by the client. I attach a value, my 'allowance' of the cost of each item. If they find a lesser priced item, or a higher priced item, then the difference is made up at contract end.

However, I usually spend a fair amount of time dealing with these items to see what else is needed, picking up or returning them, consulting with a client as to why the item they selected won't work and what a different option would be, and so on. That is time and effort, maybe expertice, that needs to be paid for, hence the mark up.

For example, if the total of all allowance items is $50,000, and my standard markup for OH&P is 1.45 on everything else, then the markup for the $50k might be 1.6. If they purchase and pay for those items themselves, that markup is still there, (they don't see it), and it doesn't change. My total contract amount includes the total allowance amount so the contract amount would be reduced, or increased, by the difference. Original markup amount doesn't change. Simpler for me to keep track and less explaining to the client.

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I EXPECT THAT SOMEDAY I WILL SEE THE FRUITS OF MY LABOR. IS IT SOMEDAY YET?
Clifton, Great Falls, McLean, Fairfax Station, Manassas, Virginia Renovation Contractor

Mike Finley

Why do an allowance in the first place? For example for lets say hardwood flooring. If you have a relationship with a vendor you can send your client to that vendor to select their hardwood with your schedule for the take off for what they need, they can select it, you pay for it, your vendor sells it them based on your pricing, you make your mark up still and the material just gets added to the next payment.

ottagosoon

One small rule in the Remodeling business is to figure out just what percent of markup you need to put on your work to stay in business. There are some experts that say you should have at least 50% markup on all cost to get 33% net job profit. That job profit of course pays your overhead (phone fuel insurance business growth). But the amount of markup is another argument.
First we all should know you estimate the job with, labor, subcontract cost and material cost. Then add your markup. Allowance items are pulled from your estimate and given to the client. They should not include you percentage markup on allowance items. Sometime sale tax, fright and other associate cost are included and should be mention with your allowance contract list.
If the customer swings the other way and buys all high end items, it does make a difference and you’ll loose. With a contract with allowances for all those items in it, flooring, appliances, lighting, cabinets, etc, the difference could be in the thousands of dollars. That would mean that a large amount of mark up is missed. Example: Allowance difference 5,000.00 dollars 30% markup 1,500.00 dollars missed. If it happens enough that would lower your standard job markup times the number of job you do that year.
Yes you should get paid for it and you should not give it away. That time and effort could have been spent landing another job. If your mark up is for 20% the added deference should be marked up at 20%. If you don’t Example: Flooring allowance cost 2000.00 x 20%= 400.00 markup. Add for upgraded selection 1500.00 with no markup = your new markup of 11.4%. That’s right your markup on the flooring went from 20% down to 11.4%. Now if you had all these items in it, flooring, appliances, lighting, cabinets, etc, you could see the same happen to your job markup percentage that happened to the flooring example.

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Kgmz

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MCerminaro

this is pretty interesting. I will give allowances for said items, its simple If they go over that said allowance they pay me that overage. No mark up. My price includes installation of x number of yards of flooring so weather its $10bucks a square or $100 bucks a square, I still get the same labor rate for the install.

Most homeowners are smart nowadays. You can send them to one of your vendors and your vendor may try and keep their attention in one area, but its my experience that people like to shop around.

As a general rule my allowances on an addition are stipulated in my contract based on the critieria of are previous meetings. When we discuss window, door, flooring, etc options. I price my bid accordingly with that in mind. My allowances are based on that criteria. Then if they still go over, they pay additional cost at no mark up. If the products come in lower, there is no credit.

I have built my business on not ripping off my customers, peopel know when they are getting screwed, at least in my neck of the woods they do!

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ottagosoon

Charging a markup is not ripping off, screwing or cheating customers or clients. It's called good business sense. Whether everything you do gets marked up or some items don't get marked up.
Just like every other business we build a product at a cost then mark it up to pay your overhead and a profit for the company. The only difference is that our product is not built in the factory, it's build in someone home.
I would say you could not find an item in walmart that is not marked up. Even the items marked 50% off. They made their money on the ones sold at full price before the sale to balance out the sale items. Giving them the markup they need to begin with.
Some of us are doing the same thing. Putting enough mark up in the base bid to cover the non marked up overages on the allowances.

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Winchester

Having a set mark-up is good business sense? What if you end up with clients for the next 6 months who are on a real tight budget and use all cheap materials? Your 33% net profit would be a hell of a lot smaller than some other guy who just got 6 months of work with all high-end materials.

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MCerminaro

I agree, we do build a product and mark it up for profit. When I bid a job, the price of the contract is based on what they actually want. Not builder grade low end materials. I then give allowances based on that. If they still decide to upgrade from there, say for example carpet. My price included $30/yard carpet and they picked $35/yard. They only get hit with the additional $5/yard. I do not in turn mark that 5 bucks up. I've already made my prfit in the original price.

I know contractors that will bid a job with bare bones in the price, get the job because the price is great, then as the job progresses the price goes up and up. That is shifty, my initial price rarely goes up, unless there are add on items. Everything is set up front. What windows are included, carpet, etc. I would never price a job and give an allowance for a Capital window, when the customer cleary wanted a triple pane Pella from the gate. Its just good business practice.

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Brock

agreed. my standard allowance for a refrigeratore for example is 350.bathtub is 120. I keep everything to near flea market prices. the customer will find the cheap stuff. you cant believe how resourcefull they are when pushed.

ottagosoon

If you need to clear or make a job net profit of 33% on each job, and you’re doing that, then it doesn’t matter how big the job is, how long it is or the dollar amount. You made your net job profit. Granit if you do a 10,000.00 job and it has a net profit of 3,334.00 dollars. Then did a 20,000 dollar job and it had a net profit of 6,667.00 dollars. One number is bigger but you have made a 33% net job profit on each job. I would think if both of those jobs lasted 6 months and the only difference was high end allowances, I still made my labor rate, paid my subs, paid the materials and made the estimate profit for the jobs. We all wish our clients had an open check book.
And it’s like this guy said here:
I would hope when doing a site visit for an estimate; I would get some kind of feedback that will tell me this home owner wants builder grade items and OH my this client wants high end items. This way I would not have a large difference between allowances for the same type jobs. And I could give them the allowance over run of 5 dollars extra at cost and still maintain my net profit for the job.

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Mellison

Marking up is a touchy subject. I mark up everything I touch.

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