We realize that the contracting industry can be confusing. You call around to get contractors to show up, only to have multiple different proposal amounts for the same project. How much should a contractor charge? Homeowners frequently confuse Markup with Profit, and we want to set the record straight. Markup isn’t profit. Markup is a general term that applies to the overhead and profit that any business needs to realize if the company wants to stay in business. It is the amount a business charges above its direct cost, also known as cost-plus pricing.
Suppose your concrete contractor has a 1.50 markup (which is reasonable for a concrete contractor). If the estimated cost for a job is $10,000, they’ll multiply the $10,000 x 1.50 and arrive at a $15,000 sales price. Many people who know little about business and even less about the costs of running a business will say, “Oh, look at that crook. He is making $5,000 profit on my job.” Nope, not true. Your contractor gets $5,000 to pay their overhead expenses and make a reasonable profit. Now I know what you’re thinking “Contractors don’t have any overhead expenses!” Guess again.
Contractors, like most businesses, have overhead expenses like advertising, job supervision, office expense, insurance, accounting, legal fees, licenses, taxes, and employee expenses, and their salaries are just a few of their overhead costs. The typical concrete contractor will have overhead expenses ranging from 25% to 54% of their revenue – that means every $15,000 job could have overhead expenses of $3,750 to $8,100.
At some point in history, people started believing that a 20% markup is all a contractor needs. With that knowledge, owners try to get their contractors to reduce the price of the job they want. If you think it through, it’s not a smart move. Would you ask your surgeon to reduce his price before open heart surgery? Would you ask your auto repair shop to lower their price before rebuilding the engine on your car? Would you want them to go cheap? For most homeowners, your home is your most significant single investment. So why do you want to use a cut-rate Craigslist contractor to improve or repair your considerable investment? We are trying to show you that all contractors operating within the laws set by the state of Arizona have these expenses. So, when getting prices for your next project, ask yourself, “what am I not getting by using the cheap guy from Craigslist?” If his expenses are the same or close to everyone else’s, yet his price is thousands of dollars lower, he must cut costs somewhere. Often, it’s at the owner’s expense with inferior materials or improper building practices.
On the flip side, you have “contractors” that aren’t following the laws; they carry no licenses, insurance, or bonds. They pay their employees a meager wage under the table to avoid labor burdens like workman’s comp, health insurance, and retirement. These fly-by-night “contractors” are the real crooks in this scenario, and I’ll explain why with an example. Let’s use a small project, a 500-square-foot pad; for this, we would charge around $4,500.00. After all expenses, this project would net roughly a 500-dollar profit for the business. Still, the no-name unlicensed contractor can do it for $3000.00. How? Look at the no-name unlicensed contractor’s costs; this 500-square foot pad is poured at 4″ thick, making it right at 6.11 Cubic yards. He orders 7 Cubic yards of concrete at $190 a Cubic yard, that’s $1,330.00 for the material cost of this slab. Let’s say he has one worker for whom he pays $20.00/hour, and it’s an 8-hour job that’s 160 dollars for labor (this would be for minimal subgrade prep and no reinforcing steel). So far, we are at $1,490.00 in cost. Assuming he had all the forms and supplies before this job, $1,490.00 is all this project will cost him apart from small ticket items like fuel, leaving him a profit of roughly $1,510.00 +/- because he operates outside of the laws. He won’t have to pay taxes or any other expenses associated with doing business legally. That’s over a 50% profit margin or a markup of 2 compared to the law-abiding contractors’ markup of 1.5.
Every business must make a profit, or it will go away. It must price the work or services to include the cost of its goods or services, cover its overhead expenses, and make a reasonable profit. It needs a reasonable profit to build and maintain the business, keeping it viable during challenging economic times. Profit ensures a business’s longevity – if it doesn’t make a profit, it might not be in business in six months. Suppose it can’t cover overhead expenses and make a reasonable profit. In that case, it might not even be in business long enough to finish your project, much less service any potential warranty work a couple of years down the road.
We can tell you that, in our experience, too many contractors make little to no profit. That’s why so many construction-related businesses fail. According to the Small Business Association, construction-related enterprises have some of the highest failure rates in the nation. The National Association of Home Builders published a report a few years ago stating that their best remodeling contractors averaged under 4% net profit.
So, suppose you’re focused on finding the cheapest contractor to do your job. In that case, you have a high chance of selecting a contractor who will likely go out of business. There’s an old saying, “A fool and his money are soon parted.” Any homeowner who selects a contractor based solely on their price has only themselves to blame when things go sideways. Markup isn’t profit; it is the money needed to make sure the contractor can complete your job, pay his bills, and if he’s doing things right, make a profit on the job as well, just like your doctor, your mechanic, your grocer, and every other business. Most good contractors believe in transparency, and we aren’t crooks. We are just trying to run a business and support our families. I’ll leave you with what my old boss once told me, “Quality work ain’t cheap, and cheap work ain’t quality.”