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Contractor Markup What are you

really paying?
Posted by: Jason Allan on | No Comments

Contractor markup is a given when hiring a contractor for

your project. You will have a bid or negotiated contract that will include a percentage
for the contractors overhead and profit. If you have requested a cost breakdown
from your contractor you will likely see a percentage for their markup or profit.
What you probably wont see is the markup for materials purchased and for material
and labor costs as well as the overhead and profit for any trades or subcontractors
awarded work by a general contractor for your project. You also will not see what the
contractor paid for materials hes bought in bulk and taken from his inventory to use
on your project.
Nobody expects a contractor to work for free, if they did, they wouldnt be in business
for long and wed be doing a lot more new construction and renovation work. Before
signing a contract it helps to have a clear understanding of what you are really paying
for and gives you a basis for negotiation.

Whats included in Construction Overhead?

Construction overhead costs are basically a percentage of the general contractors

operating expenses charged to your project. These (indirect) costs are not
necessarily related specifically to your project but rather their cost of doing business.
These expenses, which get markup, may include any or all of the following:
Project management
Superintendents
General foremen
Estimating
Engineering
Coordination
Expediting
Purchasing
Detailing
Legal expenses
Accounting
Data processing
Other administrative expenses
Shop drawings
Governmental approvals
Auto insurance and umbrella insurance
Pickup truck costs
Cost for the use of tools
Construction overhead costs are not to be confused with General Conditions costs
that are specific to your project and get their own contractor markup percentage.
General Conditions costs include items like dumpsters, portable toilets, small tools
and consumable items, project staff dedicated to your project (not general office staff),
equipment rental specific to your project, drinking water, cleanup, temporary utilities
and temporary protection to name a few.

These items are essential to completion of the work but not part
of the scope of work illustrated in the contract documents.
Your contractors overhead portion of the markup will be a percentage of the overall
cost of your work lets say 10% as an example. He may add another 5% as a fee for a
total markup of 15%.
Because this construction markup is based on the total cost of your scope of work, his
markup is on top of the overhead and profit already included in the cost of each of his

subcontractors and suppliers.

Subcontractor markup will vary by trade and can be upwards of 25% depending on
the trade and whether the work is union or non-union.
To summarize, the contractor marks up work performed his own employed workers
and each subcontractor (or supplier) hired by the contractor will mark up their own
work.
In aggregate, the contractor will again markup his work (employed workers) and the
total sum of the subcontractors work by adding overhead and profit to these totals.

Dont Pay for this Contractor Markup Twice

While contractor overhead and profit costs are largely unavoidable as

well as the layered markup you are paying due to subcontractor and supplier
markups, you should be able to negotiate these costs with your contractor.
Its probable your contractor will have relationships established with multiple trades
who may be willing to work with you on these percentages just to get a contract for
your work in this troubled economy.
You may also include language in your contract regarding how any changes to your
scope of work are priced including a negotiated contractor markup percentage. For
example, adding these terms to your agreement may help you to keep your costs
down:
1. Contractor will pass anycash discountsfor materials ordered for your project
back to you this is an opportunity to get some money back or allocate to a
contingency
2. Any rebates or refunds generated from returns or surplus materials should go to
you if not, this becomes additional contractor profit
3. Small tools purchased by the contractor to do your work should be turned over
to you at the end of the project (if you want them). After all, you paid for them!
4. Make sure your contractor does not charge overhead and profit onsales or use
taxthis can add up
5. Your contractor should not charge sales tax on labor
6. Ensure that the fee charged by your contractor for changed work does NOT
include overhead expenses youre already paying under the original contract.

7.
8.

9.

10.

This is especially true if the changed work is done within theoriginal contracted
timeperiod and does not extend the schedule
Make sure your contractor provides costs for any changes within a specified
period and that the cost is agreed to before the changed work begins
The costs paid to your contractor for work he does with his own employees may
be padded with added markup. This is the difference between what theyre
workers are actually paid and the billed rate they charge you. Ask for backup
on billable rates.
Include language in your contract that gives you the righttoexamine the
contractors recordsto verify the accuracy and appropriateness of the pricing
data used to estimate costs in their change proposals
Consider having your contractor work under a guaranteed maximum cost
contract where any overruns within the contracted scope of work are at the
contractors expense and not yours
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