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Dumb Idea #4372: Pass on my contractor discount to my customer

16K views 13 replies 6 participants last post by  KAP 
#1 ·
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 :eek:) 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?
 
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#4 ·
Read some of the past posts on markup and overhead. They will shed a lot of light in the subject.
Oh I completely understand markup and overhead. In addition to using markup in the past, and establishing it based off of my expenses and projected sales, I've read a few books on the subject now. My favorite book was "Markup and Profit" by Michael Stone. He advocates marking everything up equally, but I think he might be wrong in the instance of marking up special order products. Basically whether I install a $1000 vanity, or a $200 vanity, the work I actually perform is pretty much the same.

There are two ways of looking at it in my eyes:

1. Why should I make more for installing a more expensive product? I'm not performing any greater service by doing so.

2. Why should I make less for installing a less expensive product, especially considering that they are generally less durable, more prone to problems down the line and are, if anything, more work to install?

I guess am just trying to simplify the whole process and make my business less dependent on upselling someone else's product, while having the added selling point of "We don't punish our clients for wanting nice products installed, and thus our pricing is more fairly based on what we actually do rather than what we sell." That's my thinking anyway.
 
#3 ·
All my work is cost plus. I charge the client exactly what the materials cost. My cost.

I mark up the total cost of the job. That's materials, labour, and sub-contractors.

Sure, if they pic expensive tiles I make more money. But the selling point is they are getting them at cost.

My markup is there as a "general" markup. Not specifically on the tile.
 
#7 · (Edited)
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.

Ethos, you are assuming that they would still want to pay a 142% difference from the cheaper tile to the better next (i.e. - $100 to $240). IMHO, if they are that concerned about a $500 difference including your mark-up for both levels of tile (i.e. $150 to $650), on a project that is most likely in the $10's of thousands, I would think they would not be willing to pay more than twice the amount even with the discount. They are going to decide what level of tile they want unless you sell them on the pro's of the better quality tile (i.e. - more durable, less likely to chip, more consistent sizing, etc.).

Based on the way you do it, I think you would be better off just telling them you will be able to get them 10% off their best price they can get as part of a trade discount.

Tile is one of the things we don't decide on when writing the deal. Flooring, paint and wallpaper are the same. We only add labor in the agreement as part of the overall price, and the reason is, there are SO MANY choices and levels of quality with these products. We recommend brands, etc., but what we do tell them is to choose what they want, but don't buy it as we will get them a discount on it from our suppliers. Saves them money on material that they would have otherwise spent money on, and we get a mark-up in the process...

What happens when they go for the cheap tile anyway, even after you give up your mark-up? You get to spend more making it look right, and your problems remain the same that you listed, but now, with no buffer (i.e. - mark-up)...

Besides, some people see value in making crap look good... :laughing:
 
#10 · (Edited)
Ethos, you are assuming that they would still want to pay a 142% difference from the cheaper tile to the better next (i.e. - $100 to $240).
What happens when they go for the cheap tile anyway, even after you give up your mark-up? You get to spend more making it look right, and your problems remain the same that you listed, but now, with no buffer (i.e. - mark-up)...

Besides, some people see value in making crap look good... :laughing:
But you're assuming that I haven't adjusted my markup on the services I'm providing to reflect this change. If I mark up my special order merchandise, I get hosed if they go cheap, or I make it rain if they go expensive. By simply adjusting my labor / general material markup to be high enough to meet my overhead and profit based off of that, I make the same no matter what they choose and don't have to play games, or try to upsell them. If they go cheap, great, my overhead and profit are accounted for. If they go expensive, all the better as my O&P are still accounted for and my finished product looks great.

To me, it just makes no sense to charge more for installing a more expensive product. This method seems more consistent. Why hinge my operating capital on what kind of product people order instead of the actual services I provide?

I guess you've never had to replace something you f-ed up? With no mark up then your replacing it for 100% of the cost plus free labor.
No, I haven't actually. 10 years in remodeling, and I've managed to not have anything major go wrong. A few hundred dollars worth of "whoops" over that time period, from a leaky tub drain that stained about a square foot of a ceiling, to damaging the other side of a wall during demo, but generally I manage to keep myself out of trouble.

Again, however, I plan to retain business capital that would cover this, from the markup that would be applied on the other things in my business. I think people are just assuming that I'm lowering my markup overall. I'm really just shifting it to an area of a business where I actually do something. If I sell someone on a more expensive cabinet, I'm not really providing much of a service other than possibly pressuring them into something they might not want or need. I'd rather leave that decision up to the homeowner without me trying to sell them on stuff they might not want or need.

Asking a salesman who get's a 10% commission on everything they sell is of most likely going to do his best to sell top of the line, regardless of whether it's right for the home or the customer. And yeah, I know there are honest salesmen out there, but I've also run into a lot of wham-bam in and out types that close and move on without a thought other than caveat emptor. I just don't like that conflict of interest.
 
#9 ·
Ok, using tile as the example. I don't include that in a quote. The cost of the tile depends totally on what the HO chooses.

I send them to my supplier to choose a tile. Nothing from HD. I will not install cheap tiles. I tell them this up front. It is my job to advise my client and I tell them the dangers of choosing cheap tiles.

So, the client goes to my supplier. They choose the tiles. I get 30% off retail. That's what I charge to the job. They get to see the invoice from the tile supplier.

Then I install the tile. Then I total the material costs and the labour to install and add my overhead and profit margins.

That's the way I work. The client really doesn't have a say in it. If it's unacceptable to them they hire someone else.
 
#11 ·
Our general rule is general conditions and fees on everything. Hire us to build you a new house it is actual material costs+fully burdened labor+actual sub contractor costs+14% general conditions+13%fees=total project cost. Contingency amounts are not marked up and are a line item added to the total. Same model is true if you ask us to install a new toilet paper holder. Across the board fair model.
If you are installing a $3000.00 vanity you are carrying more risk then installing a $200.00 one. Should a tool fall and damage the finish or it is dinged on the way into the room you are responsible which in turn raises your risk level. Trade off on something like tile is...... We can install the higher quality faster then the cheap tile so you will see a labor savings that offsets the material cost to some degree.
 
#14 · (Edited)
I guess what it boils down to is anytime there is an exchange of product, and/or services it should come at a cost to the customer that is greater than the cost to your business. How much that is (the value you place on it for your time and business) or how you make that work is totally up to you, but the time tested ones are usually the most efficient... IMHO... KISS...

That doesn't mean there isn't room for another paradigm...

Best of luck... 8^)
 
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