Detailing Costs and Markup in Commercial Work
Commercial contracts often require documentation and place a limit on overhead, profit, and markup. This means you have to learn to appropriately modify the way you present job costs and profit in your bids and invoices. November 23, 2012
Question
I come to this forum humbly asking for some advice on how to justify the proper amount overhead that we must charge to a project. The situation is that many of the GC’s that we do work for are demanding that all sub-contractors break down all changes so they know labor and material, then they say we can add 10% or 15% to cover overhead and profit.
As all of us in the millwork industry know that a firm cannot survive on that model, we are the only trade that produces a product away from the site and then installs it (ok, maybe architectural metals). Has anyone dealt successfully with this and is willing to share how they did it?
Forum Responses
(Business and Management Forum)
From contributor F:
You need a published shop rate at time of bid, a published install rate at time of bid, both with time and half and double time. Ninety nine percent of the time you can get by with "shop fabricated cabinets" $3000 x 1.15 and field labor 16 hours at $100 x 1.15. You need to move all your overhead into shop labor when they want a more detailed breakdown. These markup systems are based on buying a product from a manufacturer and then marking up that cost and installation. The contract part is the field install of custom manufactured goods. So the sell cost of the product gets marked up to your percentage and if applicable make sure you add tax. You also bill for every movement and mile, trip charge, etc.
From contributor G:
It sounds like the GC wants to treat you as an employee. If you have other places to get work from I would tell this guy to pound sand. The price is the price. There is no need to explain to him how you came up with the pricing for your projects. All he needs to know is what it is and then choose yes or no as to hiring you. If he wants it broken down, charge him a fee to do it. It takes you time and it should be unnecessary.
From contributor F:
In commercial work it is very common to cap the contractor and subcontractor overhead and profit markup as part of the contract. One doesn't need to justify their shop or field rates or how they arrived at them. It’s the markup on top of those rates that is capped by contract. The reaction that the GC is trying to pull one over on the sub is just a lack of familiarity with the process and what overhead and profit they are looking for.
From contributor W:
As a guy who has been on both sides of the fence and now is a commercial GC, I can understand the confusion. We use ten percent to show the client that we are not gouging them by charging an inflated markup on work. We as a GC usually put a markup on the subs price and ten percent is generally an accepted rate to the client. The subs that we use also show a ten percent markup as an invoice to us. How the subs arrive at their price before the markup is entirely up to them if they choose to include overhead, travel, etc in the cost price before markup, just as long as it shows ten percent. For the most part we make the subs use this system on extras or t and m not in the original scope of work. Again it is to show the client we are not raking them over the coals.
From contributor C:
This truly is just a "proof positive that the gc and sub aren't killing the client in extra's." There is really nothing wrong with it and it's pretty damn difficult to compare our prices on the street. Just break it down like they ask and move on.
Contributor F states it all in his first post. They are not asking you to give away the ship, just tell them how you got there and if the shop rate includes your overhead, then adding the 10-15% is almost gravy, isn't it ?
From contributor A:
Let him cap your profit at ten percent. Our labor rate always includes the overhead. How could it not in a time and material basis. If you want to give him a different labor rate for installations, that is your prerogative. However, our overhead is there regardless if we work in the shop or install. One company, one labor rate.
From contributor F:
The language is in the contract between the owner and the contractor, that’s where the source of the markup is. It is usually addressed in a standard AIA contract. Nobody likes change orders - they cause losses in momentum, delays in projects, changes in sequencing of resources, and make it harder on the whole team. By definition change orders are initiated by the owner based either on something they want differently or some unforeseen circumstances. Field changes may be initiated by the GC to cover some unknown that was covered in their allowance or contingency.
Professional contractors and architects recognize that small changes have larger overhead and cost impacts relative to a large change order. That is why as a sub it is important to breakout that $500 of "overhead" into measurable billable units, ie mileage charge to HD, labor, time to get there and back, time to fabricate, time to engineer, time to load and deliver, time to install. All of a sudden when you break it down you discover that the $500 is actually $750 when you look at every step and bill for it.
GC's don't really like having to do all the documentation either but it’s driven by the customer, the owner, or tenant. I am amazed at the amount of subs that view the GC/sub relationship as adversarial. It’s important to be part of a team to succeed with GC's. GC's that are too difficult to deal with or can't manage project either need to be charged more or avoided.
From contributor S:
That information is none of their business, period. I consider my overhead and profit to be strictly confidential. They are essentially dictating what you can make off a job, and what your expenses can be. I doubt they would let you do the same to them if you turned the tables. You might as well let them give you a budget for bathroom supplies.
Try going to a restaurant and asking for a steak but telling them that they can only make a five percent profit and that you need a list of their overhead expenses so that you know that they are justified, oh and that their overhead can be no more than ten percent of the cost.
Or walk into a barber shop and tell them you will hire them for $10 per hour to cut your hair, but that they can add ten percent for their expenses. I would quote my price and state that my overhead is a private matter if asked. If that isn't good enough they either don't understand what they are purchasing, or they are trying to push you around. They are your customer, treat them as such. You are not their employee. I suppose this model is appropriate if you’re hiring generic laborers. I can think of many contractors who would take offense to this whole idea.
From the original questioner:
I think the people that have responded to me telling me that I need to tell the client it is none of their business have chosen that direction because either they do not do commercial work or have enough work that they can tell the contractor / owner to take a walk.
I am not in that position, I have 80 employees that I feel responsible for. I understand that the GC is only taking orders from the owner and that if I want to play in this arena then I better figure out how to do it better than anyone else. I like the idea of just saying shop built cabinets and then show the mark-up. I am not confident that I will be able to sell it. I also like charging for every last minute of time, purchasing, programing CNC's, drafting, PM time, and so on. Keep the ideas coming and if anyone has constructed a letter that explained this to the GC I would love to see it.
From contributor Y:
Interesting thread - I went through this recently. I am learning to do commercial estimating from the current owner. We had a good size job over the summer (120k) and while it was in progress a change order was issued and needed a quote provided. The owner was away so I submitted the price as a total. The GC called me back and needed it broken down into labor, materials and profit. I used our typical template of shop rate x hours, materials at cost, and added our % for profit -simple and honest.
That was where I made my rookie mistake, honest. We were not allowed the profit I had submitted they only wanted to give me up to ten percent. I told them the final price is what it cost don't care how you write it up, take it or find someone else. In the end I had to rewrite the quote using a higher shop rate and a profit in the materials line and only show ten percent profit. I know better now when I do change orders.
From contributor B:
These contract provisions do not control what you are able to charge. You may charge whatever figure you would like, just document how you got there in the most general of terms and then add 10-15% OH&P. If you approach this with the notion that you have to divulge material and labor mark-ups you are over-thinking it. Weighted materials plus weighted labor plus allowed OHP equals quote. The only time to get testy is if they ask you for a further breakout which would start to get into company confidential information. I've rarely seen a GC push the matter unless the CO seemed really out of line. At any rate, this is standard practice on larger projects. It’s better to understand what is being asked of you and learn to work it rather than getting confrontational with the GC.
From contributor F:
I just want to say when they push for deeper detail then we need to treat the shop just like the field does where they are allowed to charge for equipment by the hour and the operator by the hour. So for unloading materials we bill for the forklift time and we bill for the operator at some minimum. Then we bill for moving material to the saw and the forklift again, and then we bill for the saw and the operator as two separate line items and so on.
