ECN Forum Forums General Topics of the Trade Business Related Discussion What's a Fair Markup?

For me 30% is normal for most material I deal with and seems to be fair. I never ever "give away" material at cost. I do not supply decorative type fixtures or ceiling fans etc. I do try to upsell things like dimmers, decorator devices, and better quality bath fans. For a one man operation every penny counts. 30% on a $50.00 fan is $15.00. Not bad. On a $135.00 fan it's $40.50. Thats more like it! The customer gets a better product, I make more money, everybody wins.

A great book on this point is "Mark Up and Proffit" by Stone. I can't say I understand it all what he writes yet. Basicly his point is you should not pick a number out of the sky like 30%. He has some formulas that you worked backwards. If you sell this much, your OH is this, materials cost, owners pay, owners proffit, company proffit than your mark up HAS to be this or you will not make your goals.

What is interesting is he pays the OH and proffit on the material sales not the labor.

It really seems like most EC don't look at materials as a money maker. A lot seem to concentrate on the labor only. I don't know if that is because in the years past materials were pretty cheap. If you look at what you spent on material in the last year think of how much more you would have if you marked it up xx more. I also read EC saying we charge xx mark up to cover the trouble of getting it. How many things in this world can you buy for a little bit over cost? Just to pay them a little for the trouble of going to the warehouse to get your what ever.

I seen other programs where it was just the other way. All the OH and proffit was based on labor only with nothing figgured in for labor. The minimum labor rates tended to be higher.

It brings up a question. Would it be better to charge a customer a high MU say 3.0 with $40/hr labor. Or high labor rate say $100 per hour with almost no MU.

I am guesing the best way would be to figure half your OH and proffit on labor and the other on half on materials MU. It would make the labor rate maybe $65-70 /hr. Then the MU would be 1.5?

Another question would be at what point do you need to care what the other guy is charging MU, labor rate, etc.? I like to know too but I think you have to be carefull not to follow the other guys off a cliff.

Not to offend anyone just some ideas for disscusion.

Tom

Tom,

You hit the nail on the head, "Mark-Up and Profit" By Stone, is not only the safe way to run a business but the only way, however many feel, that if they use these methods of mark-up, they will not get any work, because they are to high on the bid, however, these methods of pricing, assure a profit on every job, The bargin hunter, or price shopper may not like your prices, but the serious buyer with a need to have work done will.
And yes, the auto repair industry uses the split method of mark-up 50% or more Labor mark-up and 50% or more Material mark-up, and they turn a nice profit.

I wanted to add more about this subject of markup.

You can never add enough to cover the warranty work replacing an outlet, switch, light or ceiling fan. Also, thanks to the proliferation of hardware stores, nothing will stick out on an invoice (and tick off your customers) more than markup, IMO. I'd rather charge $5/hour more and pass materials on at cost. I'll make more on that $5/hour, which WILL cover the cost of warranty work.

If you're on time, clean, reliable, perfectionist, etc. your customers will go that extra $5...and feel good about the material cost.

Dave

Dave, I don't actually put the price I pay for material on an invoice, just as the supplier does not list the price that they pay for that material.(They don't give it to you at cost) The markup is there in part to cover the time you spend getting that material. If a customer calls five contractors and asks how much per hour to wire six receptacles they will remember who was $5.00 an hour more expensive than the other guys. Markup is an integral part of your overall dollar intake. Why give it up?

Dave made an interesting comment about being required to pay sales tax on any mark up he would put on material. Is that common around the country? I have never heard of that one. It is not required in my state. However, it is required by one municipality in my area.

Charging sales tax is a good question for the accountant to explain. Short answer, no. Long answer:

IL IRS
"Are construction contractors required to collect sales tax? (top)
When construction contractors incorporate tangible personal property into real estate under a construction contract, they are not authorized to collect tax from their customers. In this situation, the contractor is considered to be the end user of the tangible personal property and incurs a Use Tax liability, on the cost price of the property incorporated into real estate, which he either pays to his suppliers or self-assesses and remits to the Department. If a construction contractor, however, sells tangible personal property to customers over-the-counter, he is making retail sales, and is required to collect sales tax just like any other retailer. Please refer to the Illinois Administrative Code; Sections 130.1940 & 130.2075."

I guess is the IRS just does not trust us to collect and pay it. Less trouble for me.

Tom

I used to share Dave's opinion, but I've learned to overcome it. I was affraid to charge more for an item than my customer could buy it at Home Depot. Sometimes even losing money on an item because I had to pay more than they could find it otherwise. Now I understand that to stay in business and cover all my expenses, I have to mark up materials. Much of our work is flat rate, so we don't even break out materials, but for our internal figures, the materials are marked up.

For items like dimmers and switches look at it this way. Lets say you're on a job and you need a device box. The closest place is a hardware store and they charge $1.80 for it, but you know you can get it at your supply house(15 miles away) for $.70. Do you complain or gladly pay and be thankfull you don't have to drive 15 miles and waste an hour. If you have any common sense, your overjoyed that the hardware store had that item on the shelf for 2 years waiting for you to buy it. Now consider that 4 way ivory decora switch you have on the truck, the one you bought last year, just in case. Now should you charge the $6 or $7 you have invested in it or should you charge $9 or on an item like this, maybe even $12. In this case the 4 way switch is to the homeowner like the device box was to you. They need it and you have it. Now if you don't have the switch and you charge them $75 an hour to drive and get it, then maybe you shouldn't mark it up.

[This message has been edited by Electric Eagle (edited 11-17-2004).]

Active1, Yes with regard to the sales tax quote from your tax code. Works the same way in my state. As long as I am not selling across the counter I pay the tax to the supplier and I am done. There is no more tax paid. With one exception. If I pull a permit in Colorado Springs I get a letter from Colorado Springs when the permit is closed out. I have to pay tax on any material I brought to the job. Even if I bought the material in Denver, paid state and local tax on the material and took it to the Springs myself. What a HASSLE! Even in that case I do not pay tax on my mark up. (Should have made that clear earlier.) I find it odd that anyone would have to pay tax on their mark up.
Hey, I agree on the material mark up. I mark up everything. I provide engineering on most of my jobs and I mark up my engineering fees. I feel I need to see a return on every dollar that is spent in my business or as Les pointed out I am just working for wages.
I know I can buy oil at a discount auto supply place. Change the oil in my truck myself and save money. I don't, I take it to Jiffy Lube and let them do it. Sure I pay twice as much for the oil but I expect that. It is just part of the package.

EDIT: I don't want to come across that I am saying it is "wrong" not to mark up material. I just feel that electrical contractors as a whole could make more money if they would all get together and agree on rates and mark up. ( I know, a nutso thought.) I do know that it is difficult if not impossible to compete in the residential service market with guy's who post adds in the local paper that go something like - "Moon lighting Master, Licensed, Insured, Cheapest Rates in town" (Direct quote from my local paper.)

[This message has been edited by kentvw (edited 11-18-2004).]

The sales tax thing works a little different here in the Mountain State. If I'm doing new construction or installing new circuits or equipment (not upgrading old equipment) I pay the sales tax at the wholesale level. I recover this as an additional 6% in my markup.

If I'm doing repairs or replacing old equipment, I don't pay sales tax at the wholesale level, but I'm required to charge my customer sales tax on everything, including labor.

It is a pain in the backside but this came about because of abuse of the previous system.

Tom