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#195889 - 08/27/10 03:03 PM Cost Markup Problem
LateGreatJC Offline
New Member

Registered: 08/27/10
Posts: 6
Loc: Missouri, USA
I'd like an opinion on the following scenario. Say you're doing cookie cutter houses for a builder. Labor cost is $1400, material is $1000 - total cost is $2400. Mark up cost 125% for sell price of $3000, for GP of $600 (20%)per house. The buyer of one house works at an electrical supply house and wants to supply the material, thinking to save some money. Using the same method as above, the sell price would be $1750 ($1400 cost X 125% MU). This leaves a 20% GP of $350. Same 20% GP, but I just lost $250! What I did was take the $1000 material cost from the standard $3000 sell price for the new sell price of $2000. Still made my $600, but buyer unhappy. Was I wrong figuring this way?

Business, Office, Estimating, Legal:
#195891 - 08/27/10 07:07 PM Re: Cost Markup Problem [Re: LateGreatJC]
HotLine1 Offline


Registered: 04/03/02
Posts: 6785
Loc: Brick, NJ USA

Welcome to ECN Forums!!

Back to the math....your $600 is 25%
If your required Gp on the resi is $600 on the $3k billing, and the HO or whoever wants to be the supply house...I would take $1k from the$3k, and give him a bill for $2000. That math leaves you with the $600 clear.

#195897 - 08/27/10 11:03 PM Re: Cost Markup Problem [Re: HotLine1]
gfretwell Offline


Registered: 07/20/04
Posts: 9012
Loc: Estero,Fl,usa
I think in this case there was too much information. Why would you say you marked up anything? The labor is $2000 and the parts are $1000. If he can beat your price on the parts, go for it.
Greg Fretwell

#195899 - 08/27/10 11:15 PM Re: Cost Markup Problem [Re: gfretwell]
EV607797 Offline

Registered: 10/25/06
Posts: 756
Loc: Fredericksburg, VA, USA
I must agree with Greg. Nobody needs to know your cost, just your price. While it is risky to shift the parts cost to the labor category (then it becomes a case of "I can find cheaper labor"), hiding your cards on the materials is the key.

Frankly, to net $600 on a house with all of the potential variables scares me. Just one or two mistakes could eat that up in no time. Volume, and plenty of it would be the only way to make a real profit in the grand scheme of things.

"But the guy at Home Depot said it would work."

#195907 - 08/28/10 12:07 PM Re: Cost Markup Problem [Re: EV607797]
renosteinke Offline
Cat Servant

Registered: 01/22/05
Posts: 5299
Loc: Blue Collar Country
What you have is just another twist on a common tactic: the customer, accustomed to hearing stories about the $400 aspirin at the local hospital, assumes that you're hiding all manner of mark-up in the materials price. So, they get the idea that they can save if they supply the material.

I can't really blame them for trying; after all, all manner of 'consumer experts' suggest this bit of silliness.

I almost think that every contractor should have, printed up and waiting in the truck, a sheet explaining his policies regarding parts and materials. Here are some points that such a flyer needs to address:

First off, YOU are responsible for the job, and any call-backs. You're naturally leery of getting into a dispute later as to whether the call-back was your fault, or the fault of the material. It simply won't do for the customer to supply a replacement part for you to install, for free, later on. You're assuming an additional risk.

Next, there is the responsibility for ALL the materials being present at the right time, and being stored securely. It's no help if you wind up making a return visit, or an additional trip to the supply house, because the customer failed to supply something.

You supply the list? Right - and just how many times have you had to deviate from your first parts list? The customer isn't likely to understand this. Everyone loses when the job grinds to a halt because you need an additional locknut.

Guy works at a parts house? I hate to say this, but there is always the possibility that whatever he wants to supply is stolen, damaged, or returned. Remember: you supply the parts, you control the quality. If you want to use the lever-action Wagos, and the customer wants to foist off on you the cheapest wire nuts, there's going to be an impact on both your efficiency, and another argument brewing.

You should explain that some stuff the customer is probably better off supplying - light fixtures come to mind - because of the very large element of personal taste.

If the guy is 'in the business,' he ought to be aware of the associated costs of maintaining and inventory and handling the parts. If he supplies the stuff, you are still stuck with those costs. That $1 device probably has a real cost to you of $2 - or more. By inserting himself into the issue, the customer is complicating things even more.

Finally, stress that you have your standards, your own 'recipe' for business. Maybe you like to use Brand X and the guy happens to have a box of Brand Y - where does that leave you?

In other words, it's not just about the money, and YOU are not a commosity.

As for the other side of the coin ....
I did a fair amount of work 'following behind' tract contractors, where the new homeowner wanted something different from the 'standard.' While this might seem inefficient, the tract guy was able to operate smoothely - and I had the time to fuss over the details to get it 'just so' for the customer. Overall, I think this was both quicker, and cheaper, than it would have been had I interrupted the work flow of the job site.

#195908 - 08/28/10 08:08 PM Re: Cost Markup Problem [Re: renosteinke]
Obsaleet Offline

Registered: 04/05/03
Posts: 361
Loc: Pa
We reserve the right to add additional cost to any and all customer supplied material. All warranties are null and void upon the use of customer supplied materials. Etc.
I also spell it out up front if they buy the wrong parts they pay for me to get the right stuff, and there is the aditional cost for me to make the parts list. They usually change there thinking pretty quickly, or I don t get the job. In that case here is (supply competitors name here)maybe they can help. Either way its all good.

Edited by Obsaleet (08/28/10 08:09 PM)
Choose your customers, don't let them choose you.

#196016 - 09/04/10 11:49 AM Re: Cost Markup Problem [Re: Obsaleet]
LateGreatJC Offline
New Member

Registered: 08/27/10
Posts: 6
Loc: Missouri, USA
Actually, the numbers for the houses were changed to protect the innocent and to simplify discussion. I think the guy expected me to deduct my parts cost AND markup (which would have saved him a bunch of money) because he knew that a sell price is derived by applying a markup percent to the job costs - so using the afore mentioned numbers, the sell price would be $1750. Which brought me to a mind numbing period of deep thinking. The excepted method of obtaining a sell price is to markup up the job costs, which includes any material cost. If I did 4 of those houses, I would say "I made $600 on that one, $600 on that one, $350 on that one and $600 on the last one". Something's not right. I made $250 less on the job with no material cost, even though I had the same resource cost (sent out the same guys, the same number of days, same number of hours, same overhead). The way it looks to me, the material should have no bearing on the sell price (other than allowing for its cost (including handling & storage)) by applying a markup to it. My success depends on making $X per manhour - regardless of the material, if any.

#196047 - 09/06/10 09:11 PM Re: Cost Markup Problem [Re: LateGreatJC]
Obsaleet Offline

Registered: 04/05/03
Posts: 361
Loc: Pa
Yes, u are right. But the material can affect the manhours. You and your crew also have systems they use( and are used to) now this guy goes to the box store and gets 18cu boxes and you are used to using 23cu boxes. now the guys need to stop and figure box fill. Just one example. Now you have to add in time for this? Even just the use of a diffrent drill can effect your output!
Choose your customers, don't let them choose you.


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