As you navigate the bidding process, it never hurts to research what other people in your community have paid for the same project. Of course, most homeowners want to know if they are being charged a reasonable price on their remodeling estimate.
When it comes time to seal the deal, many homeowners find markup to be a major point of contention. Sure, you could probably go to your local home improvement store and purchase the products for less. After all, DIY projects are huge these days! But, why do contractors markup their prices? Where does that money go?
What is the Difference Between Markup and Profit?
To begin, we need to clarify that markup and profit are not the same thing. Oxford Languages defines markup as “the amount added to the cost price of goods to cover overhead and profit.” They also define profit as “a financial gain, especially the difference between the amount earned and the amount spent in buying, operating, or producing something.”
Simply, markup does not serve solely to line the pockets of wealthy CEOs, as many would believe. It is required for a business to continue to exist and serve your needs, as well as those of others in your community.
Why is Markup Necessary?
As an unbiased source, Construction Programs & Results, Inc. is well qualified to address the purpose of markup. They do a great job of explaining this topic in their article, How Much Should a Contractor Charge?
Here is an excerpt from their article:
If your contractor has a 1.50 markup (which is reasonable for a remodeling contractor), that means that if the estimated cost for a job is $10,000, they’ll multiply the $10,000 x 1.50 and arrive at a $15,000 sales price.
Now many people who know little about business and even less about the costs of running a business will say, “Oh, look at that crook. He is making $5,000 profit on my job.” Nope, not true.
Your contractor gets $5,000 to pay their overhead expenses (which includes salary) and make a reasonable profit. I just heard those same people say, “But wait, contractors don’t have any overhead!”
Guess again. They have overhead. Advertising, sales commission, job supervision (which isn’t usually a job cost), office expenses (even if they work out of their home), insurance, accounting and legal fees, licenses, taxes, employee expenses, and their own salary are just a few of their overhead expenses. The typical remodeling contractor will have overhead expenses ranging from 25% to 54% of their revenue – that means every $15,000 job could have overhead expenses of $3,750 to $8,100.
Somewhere along the line, people started believing that a 10% overhead and 10% profit is the industry standard for construction jobs. Or that a 20% markup is all a contractor needs. Armed with that knowledge, owners try to get their contractor to reduce the price of the job they want done.
If you think it through, it’s not a smart move. Would you ask your surgeon to reduce his price before doing open heart surgery? Would you ask your auto repair shop to reduce their price before rebuilding the engine on your car? Do you really want them to go cheap? For most homeowners, your home is your largest single investment. Why do you want to use a cut rate contractor to improve or repair your major investment?
What Happens When a Business Doesn’t Charge Enough Markup?
If a business is not profitable, it will not last very long. What’s left after the cost of services, labor, material, and overhead is used to upkeep and grow the business. Though business may be booming one month, it may not be so hot the next. Profit will carry a business during these down times. Low markup is the top contributor to failed remodeling companies.
Take It Easy on the Contractor With a Fair Remodeling Estimate
If you’re main goal is to find the best price, chances are the company you choose will not be in business for long. They could even go out of business in the midst of your project! You want to work with a remodeling company whose prices are fair, not cheap, especially if you expect to receive quality work and products.
Cut and dry, markup is not profit. It’s the necessary amount for your contractor to cover expenses, finish your project, and ensure his business will continue to thrive for years to come, much like your hairstylist, mechanic, or favorite restaurant.
If you just can’t afford it at the moment, we suggest reading our article on Budget Friendly Bathroom Remodeling for some great tips on doing it yourself.