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Question DetailsAsked on 3/24/2018

Does a general contractor usually charge a mark up on subs and materials and also charge separately for profit?

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Yes - the markup is for the cossts of planning and arranging the subcontractor's work and managing the subcontractor, the profit is how he makes money on the jobs he does - generally applying profit to all outlays he makes in the course of his work.


Different contractors figure their overhead and profit differently, but there are three common ways it is done:


1) Apply a markup (at least 10% generally, more commonly 10-25%, up to 100% on some high-end and specialty jobs requiring a lot of selection and procurement and materials transport/temporary storage effort) to all subcontracts (and sometimes also to materials purchased), then add to that labor (and sometimes materials purchased gets lumped in her instead) with an operating overhead on top of that to cover business operating costs - then those are totalled and a profit percentage of commonly 10-15% (but sometimes as high as 50% for high-end companies much in demand) is put on top of that total. Because the overhead is being put only on labor in this case (so the labor rate is carrying pretty much the full burden of operating the company), that overhead percentage will commonly be 50-100% of the labor (or labor + materials). This method is commonly used by contractors doing the same type of work all the same, with a fairly constant percentage of project costs being in subcontracts, materials,, and labor from job to job.


2) Add up subcontracts, material, and labor and apply an overall overhead cost to that total ofhis "out of pocket" cost to cover costs of doing business (insurance, employee benefits and unenmployment and disability and such, building, fuel/utilities, vehicles, tools, taxes, advertising, management, office staff, etc) - figuring an operating overhead percentage based on the total of outlays. Then putting a commonly 10-20% profit on top of that. In this case, since overhead percentage is charged on top of subcontracts and materials too, not just on labor as in 1), the overhead markup percentage would be less - commonly around 25-50%. This method is probably most commonly used by contractors who have a wide variability in the percetnage of a job going to subcontracts, materials, and his labor - because while his specific job percentage in each of those categories may not be readily estimated on a job by job basis he may know fairly well how much tot total of all of them will be in a year, so easy to figure an overall overhead percentage based on that to cover his operating costs. Damaged building remodeling/reconstruction and fire and smoke damage contractors, interior design-install firms, and kitchen and bath remodel firms sometimes uses this model because one job may be very labor heavy, and the next light on labor but have a lot of very pricey (and time-consuming to obtain and ship) hardware and fixtures.


3) Third method - figuring it per the procedures of the primary government agency the contractor does a lot of work for, each of which has different methods for allocating overheads. For instance, commonly "direct" labor overhead costs like benefits and government employment taces and unemployment insurance and such are applied to the labor cost only (so maybe around 20-30%), then a general overhead is applied to the total out of all costs. Sometimes the overhead is applicable to subcontracts too, sometimes only a 10-20% subcontract administration fee is allowed. Companies doing federal government work generally run their entire operation per federal procurement rules to keep the bookkeeping breakdown on overheads and such straight for when the feds audit their contract costs.


4) Profits vary pretty widely - 10-15% is common for larger companies, more like 20-25% on more difficult or remote site jobs to provide a contingency as well. Some high-end small specialty contractors go way higher basically because the market can bear it - I remember working alongside an interior finishes contractor (fancy plaster, painting, faux finishes and such) who did not charge any "labor" on himself, only on his helpers - but charged a 100% "profit" (which included his personal income as well as profit. He could just as well have rolled his personal compensation into overhead and redued his profit. Also, with owner-operated companies, whether that owner's labor is charged directly to the jobs for supervision or direct work, or rolled into the overhead cost, can make a fair sized difference in overhead percentage for a small company.


So - rather than fixate on percentages (though excessive profit on subcontractors or materials is a flag, especially if the exact materials and subs are not spelled out in the contract), the bottom line (for jobs which can be fixed-price bid) is the safer for the customer, because then you are comparing apples to apples.


Here are a couple of links to similar previous questions with answers which might help too.


http://answers.angieslist.com/Do-gene...


http://answers.angieslist.com/Should-...



Answered 7 months ago by LCD




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