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Question DetailsAsked on 3/30/2018

Signed contract and learned materiel cost in the contract is more than the materials that came into our home. Why?

Signed a contract with contractor. The contract has material cost. Noticed that materials brought in our home was less than cost on contract. We picked out materials and stayed in budget that was on contract. All the contractor had to do was order. Materials was delivered to our home not by contractor. I'm reading and learning about markup. Do the state of DE have an allowable or fair markup value put on these cost? I'm finding that some of these markup costs are over 100% of cost of material for our project. Is this fair for the homeowner. Is there a law when these markups become unreasonable and the value is not fair. If so what can the homeowner that has signed a contract and found that this is the case do? I understand why contractors markup but when material is being marked over 100% and 200% over cost of material cost something is wrong. There should not have been cost for picking out material. We did that and sent price and sku number from where contractor purchase from.

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IF this was a fixed-cost contract, whether materials are broken out individually or not, then you signed a contract for a fixed scope of work for a fixed cost - time to talk markups and profit would have been BEFORE signing the contract, and you are paying an agreed-upon fixed price for a given work product, and (technically - aside from agreed-to change orders) any overruns or underruns or savings on costs are in or out of the contractor's pocket. If a certain allowance for fixtures and appliances and such was included for you to pick them out after the contract was signed, then the contract total amount should be adjusted (by change order) based on whatever that actual number turned out to be versus the allowance. See below about "loaded" versus "actual" costs, if it says anything about those being loaded or burdened costs (including overhead or profit allowance)- if it says nothing about that would be actual invoiced cost after any returns and rebates and discounts.

IF this is a reimbursable-type contract - cost plus or similar, then any markup and profit (which would commonly be different between materials, subcontracts and labor) should have been spelled out in the contract - usually as a percentage of each, but sometimes (cost plus fixed fee type contract) a flat $ amount for the total contract on top of actual costs, or sometimes (cost plus limited fixed fee) a flat $ amount or percentage of job up to the original estimate amount, and less or no markup on overruns.

Typically, if you were picking out the materials without his help and he was not involved significantly in picking//picking them up, so he was just doing the ordering, something like a 10-15% markup would be usual.

I found nothing on any limits in Delaware, and I seriously doubt you would find one other for government contracts.

Some contractors apply most or all their overhead costs and G&A (general and Administrative) on the labor charges, and only make up materials and subs maybe 10-20% for some direct effort in the procurement and profit. Others spread their indirect overhead (G&A) and profit across materials and subs too, so may be 50%, 100% or such markups on those in that case.

Generally, unless a very difficult special order, anything over 100% markup would, to me, just be gouging. I have only done that in remote sites job cases where the contractor is responsible for the freight and shipping/handling insurance and such too, not adding them to the bill separately.

So - if cost-plus type contract (though does not sound like it - sounds like you had a fixed price contingency for certain fixtures and appliances and such), and there wss not a specified markup on subcontracts or materials, that can be brought up for discussion, and you could claim that he is overcharging you. In arbitration or a court fight would likely come down to how he estimated the job.

And of course what the contract says about the materials cost - if it provides an allowance for "cost of fixtures and appliances" or such, then without specifying a markup that would infer the actual cost he paid. If it saiy "loaded cost of fixtures and appliances" or such, then that "load" or "burden" would be his markup and should have been spelled out somewhere in the contract to be chargeable.

If this does not make it clear, or you find the markup is not spelled out in the contract, then sounds like you need either a contract amendment to stipulate the markups for different classes of items not billed with overhead and profit inclulded (unlikely to get contractor approval at this late date) or an attorney experienced in homeowner home construction/ improvement contract claims.

Answered 2 years ago by LCD

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