When I offer up a rough estimate of a job, It will usually look something like this:
Preliminary scope of work
Labor and General Materials: $10,000
Allowances: $3000
Allowances in this case being realistic amounts to offer a good selection of special order products such as appliances, cabinetry, tile, light fixtures, plumbing fixtures, etc that the client will make the decision on later.
One area where contractors tend to make money is on said special order merchandise. We all know the value of good relationships with sales reps and and setting up accounts to receive discounts not available to the public. For instance, I get tile at 60% of list at my main supplier and my cabinets at 40%. I assume that most contractors will either sell their special order merchandise at list to the client, or perhaps offer a small discount to keep the customer from shopping on their own too much while pocketing the rest. Then I thought about it: when I mark up those goods, I'm punishing the customer for ordering more expensive product. I'm actually encouraging them to go cheap, and thus make my jobs look cheap.
Example:
100 sq ft of tile
Across the board markup for this example: 50%
Customer is realistic and isn't looking for the cheapest option, but has a budget to stick to.
If the customer wants to order some nice $4 per sq ft porcelain tile, customer pays $650 of which I would make $200, but if they cheap out and buy junk $1 per sq ft ceramic tile, they pay $150 and I make $50. In the end, my job doesn't look as nice because the material is mediocre, and also with cheap tile, often times it varies a lot in size (I've seen nearly 1/8" differences before ) which makes it more work to make it look nice. So basically my job photos don't look as impressive in my porfolio, and when their friends and family (my potential referral business) stop by, they aren't very impressed. Also cheap tile is less durable and more prone to failures like chipping and cracking, which could lead to callbacks and frustration.
BUT lets say I offered them my 40% discount (60% of list is what they'd pay) and didn't mark it up. Now they pay only $240 for the nice porcelain. My job looks nicer in the end, and it's easier to keep my grout lines uniform because the tile itself is uniform. Their friends and family are impressed by the new job, and they ask for my number! :clap:
The thing is that to me, it makes no sense to mark up special materials like this. When it comes down to it, it really doesn't matter what you mark up and what you don't as long as it accounts for your overhead and profit. Some businesses only mark up labor. Some mark up everything, labor, materials, subs, etc. Some have a single markup across the board, and others mark up labor differently from materials, etc.
Sure I have to mark up my labor / general materials more to account for this difference in this model, but at least it doesn't punish the customer for selecting a nicer product. I risk losing a little bit of money if they go with high-end stuff, but I feel like I gain more with a nicer finished product.
Any thoughts on why this would be a bad idea? Is there something I'm missing?
Preliminary scope of work
Labor and General Materials: $10,000
Allowances: $3000
Allowances in this case being realistic amounts to offer a good selection of special order products such as appliances, cabinetry, tile, light fixtures, plumbing fixtures, etc that the client will make the decision on later.
One area where contractors tend to make money is on said special order merchandise. We all know the value of good relationships with sales reps and and setting up accounts to receive discounts not available to the public. For instance, I get tile at 60% of list at my main supplier and my cabinets at 40%. I assume that most contractors will either sell their special order merchandise at list to the client, or perhaps offer a small discount to keep the customer from shopping on their own too much while pocketing the rest. Then I thought about it: when I mark up those goods, I'm punishing the customer for ordering more expensive product. I'm actually encouraging them to go cheap, and thus make my jobs look cheap.
Example:
100 sq ft of tile
Across the board markup for this example: 50%
Customer is realistic and isn't looking for the cheapest option, but has a budget to stick to.
If the customer wants to order some nice $4 per sq ft porcelain tile, customer pays $650 of which I would make $200, but if they cheap out and buy junk $1 per sq ft ceramic tile, they pay $150 and I make $50. In the end, my job doesn't look as nice because the material is mediocre, and also with cheap tile, often times it varies a lot in size (I've seen nearly 1/8" differences before ) which makes it more work to make it look nice. So basically my job photos don't look as impressive in my porfolio, and when their friends and family (my potential referral business) stop by, they aren't very impressed. Also cheap tile is less durable and more prone to failures like chipping and cracking, which could lead to callbacks and frustration.
BUT lets say I offered them my 40% discount (60% of list is what they'd pay) and didn't mark it up. Now they pay only $240 for the nice porcelain. My job looks nicer in the end, and it's easier to keep my grout lines uniform because the tile itself is uniform. Their friends and family are impressed by the new job, and they ask for my number! :clap:
The thing is that to me, it makes no sense to mark up special materials like this. When it comes down to it, it really doesn't matter what you mark up and what you don't as long as it accounts for your overhead and profit. Some businesses only mark up labor. Some mark up everything, labor, materials, subs, etc. Some have a single markup across the board, and others mark up labor differently from materials, etc.
Sure I have to mark up my labor / general materials more to account for this difference in this model, but at least it doesn't punish the customer for selecting a nicer product. I risk losing a little bit of money if they go with high-end stuff, but I feel like I gain more with a nicer finished product.
Any thoughts on why this would be a bad idea? Is there something I'm missing?