When it comes down to it, the real point of being in business is to charge enough money for every job so that the company is making a profit on every project. That means contractors need to know what their overhead is on a monthly, quarterly, and annual basis, as well as knowing — almost down to the penny — what the costs are for each project.
Small- to medium-sized contractors usually have an overhead of 25% to 30%, meaning their markup goal needs to be a minimum of 50% in order to produce a 33% gross profit.
Larger companies have higher overhead — usually 30% to 35%. A markup of 67% brings in a 40% gross profit for them.
Historically, to arrive at a project price, remodelers would estimate the five items of job cost — labor (including fringe benefits), materials (including sales tax and delivery), subcontractors, plans and permits, and cleanup — and then add 50% to 67% to that number. Everything was marked up the same.
Changing Times But now there are reasons to re-examine what gets marked up in an estimate and by how much. For one, the increased use of subs means that their estimates are getting more detailed. Instead of providing just a lump sum price, they are breaking down their estimates to list each product and installation. This also means that they can't include their sales costs in their proposals.
At the same time, it's becoming more common for customers to balk at the high markups that accompany high-priced products.
The way that many contractors handle this problem is to reduce the cost given to the customer if they ask for individual costs of specific items and add the difference in the price elsewhere in the estimate. Alternatively, contractors can present a lump sum so that the customer does not recognize that the labor figure overall still is high enough for the cost of the total price of the project.
Another common solution is to pull out the very expensive products before adding the markup to these items. Examples of items that are usually separated from the main part of the estimate include products such as $3,000 refrigerators and ovens, expensive floor tile, and high-priced countertops for the kitchen.
Many contractors are already doing this. I heard recently about kitchen cabinets for a couple of million-dollar-plus houses that start with a more than $100,000 cost to the contractor. Adding a 50% or 67% markup on this type of contract will probably not be possible.