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Contractor Markup on Materials. Costs and Estimations

Costs and Estimations of Contractor Markup on Materials

By | 2020-03-26T18:47:28+00:00 March 26th, 2020|Hard Money Blogs|0 Comments

Whether you’re paying contractors for a job or a contractor looking to perform a potential job – Knowing your contractor markup on materials used is an essential cost.

Ideally calculated and agreed on before the job goes ahead, some contractors arrive at their markup through estimation.

Yet, by merely guessing your material markup, you run the risk of losing money on a project. Also, you put yourself and indeed any other future business at risk by taking such a carefree approach here.

Here we look at the concept of markup on materials and why it’s necessary. We also consider what factors a contractor usually uses before arriving at that final figure.

Contractor Markup on Materials – What Does It Mean to Markup Materials?

Placing a markup on the material is a simple yet essential process. It requires contractors to cover both their overheads and profits on each specific job they perform, working out the total hard cost here.

Yet, even though markup is considered to be a straightforward mathematical formula that all contractors should apply, many have no idea of how to arrive at such a figure.

Contractor Markup on Materials

How Do Contractors Markup Their Materials?

For most contractors, arriving at their markup figure for materials involves using a tried and tested process. This usually means identifying those areas that are direct or indirect expenses, that is overheads, and separating them into job accounts.

This allows contractors to both track and predict their business’s performance. Furthermore, they can then examine how they estimate jobs and move towards a correctly calculated figure as a result.

The list of expenses most commonly referred to here will dictate how much contractor’s markup their materials when pricing each job:

  • On-site staff salary and benefits
  • Accounting
  • Design rates
  • Project management
  • Engineering consultation
  • Legal consultation
  • Estimating
  • Data processing
  • Marketing expenditure
  • Advertising expenditure
  • Permit fees
  • License fees
  • Insurance fees
  • Tool costs
  • Pick-up truck costs

Why Do Contractors Markup Their Materials?

Contractors understandably have to add a markup to the materials they purchase on behalf of their clients. The reason they do this is to cover their time including sourcing, purchasing, storing and then delivering such materials.

For many people requiring the use of contractors on their building projects, it’s not practical to merely buy materials directly. Though it can indeed save you money, the responsibility of doing this is vast.

If you decide to bypass this process and buy the materials yourself, you would need to source them and have responsibility for them when they arrive at their destination. This is as well as taking all the decisions on where they would be stored safely and securely.

If you have a large scale project this will become increasingly time-consuming and indeed complex. In turn, the contractors may then charge you here.

In some cases, if you do take the decision to source your own materials, some contractors may look to simply make up the markup lost on their side by just increasing costs elsewhere to reflect this.

What You Need to Be Aware of With Contractor Markup on Materials

The problem arises with contractor markup on materials when most customers realize there’s no set industry standard on the actual figure here! Neither is there really any obligation to disclose that exact markup.

Therefore, this figure can vary greatly and in some cases be grossly abused. However, it’s always worth remembering that you can as a customer challenge your contractor’s invoices.

Yet, one of the best ways of ensuring transparency is to establish a clear path at the very beginning of the project. For many, this means having a contract in place before any work takes place.

A reputable contractor should be more than happy to work on an open-book basis. This means all costs and fees are made clear from the very beginning and written down. They should also be more than willing to explain their costs to you.

The Average Markup on Materials Contractor Work By

Though such rates will vary greatly from country to country, state to state and indeed contractor to contractor, there are some typical figures for material markup.

This final figure will depend on the turnover of the contractor in question, the type, value, and nature of the actual construction project itself is also a factor.

However, as a general guide, typical markup on materials will tend to fall between 7.5% and 10%.

However, there are also many contractors that charge between 10% and 20%.

Therefore, it’s crucial you discuss this figure before agreeing to anything.

How to Ensure Protection When It Comes to Paying Contractor Markup on Materials

Through such markup costs are largely unavoidable, there are areas where you can act when faced with such costs. This is besides ensuring you’ve negotiated correctly with your current contractors.

As a result, you could also look at keeping your costs down by:

  • Considering having your contractor work on a guaranteed maximum cost contract. This will mean that any over-run within the scope of work that has been contracted will be at the contractor’s expense – not yours.
  • Ensuring that you get back up on the billable rates your contractor is paying to their employees.
  • Making sure any changes during a specific period are agreed beforehand regarding costs.
  • Requesting that any refunds or rates specifically generated from surplus materials or refunds come straight to you. If they don’t, they will become additional profit for the contractor.
  • Insist that any small tools purchased to do the work are returned to you when the contract ends.
  • Making sure any cash discounts for your project’s materials are passed back to you. This will ensure you get money back or allow you to allocate it to a contingency fund.
  • Making sure that you stipulate in your contract that you can verify the pricing data used by your contractor regarding their estimated costs.

Final Thoughts on Contractor Markup on Materials

Ultimately, the markup a contractor places on materials for all their projects is essential and a way for companies to stay in business, while hopefully making a profit of some sort.

Therefore, to be able to pay their overheads and of course make a profit, it should be expected that you’ll encounter a markup when hiring a contractor for your next project.

But, if your contractor is a good one, they should have no problems dealing with any questions you may have on the figure of this markup before you commit to anything further.

About the Author:

Yanni Raz is The Founder and CEO of HML Investments, with over 15 years in the real estate and hard money lending industry, Yanni is an expert in real estate investing, trust deed investments and more.

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