Contractors often apply a markup to materials to cover the costs associated with purchasing, sourcing, storage, and delivery. Typical markups on materials can range from 7.5% to 20%, depending on various factors, such as the type of project and the contractor’s overhead. It’s not uncommon for projects to exceed original estimates by 5% to 20%.
Contractor and Subcontractor Markups
General contractors generally charge a fee between 10% and 25% of the total project cost, which includes administrative costs, office rent, and accounting fees. Subcontractors, who make agreements with the contractor rather than the client, may vary their markup based on their trade, with some markups reaching upwards of 25%.
For contractors handling materials, a minimum markup of 27% is standard, with a reasonable markup around 40%. Trades and remodelers often have higher markups due to indirect and overhead costs related to sales—ranging from 70% to 100%. On the other hand, general contractors typically aim for a 35% margin on projects, necessitating a 54% markup on materials, while subcontractors can aim for a 50% profit margin, requiring a 100% markup.
Contract Clauses and Contractor Fees
The contract should list the rates for the contractor and subcontractors, including the markup percentage on materials and any markups for profit. A cap, or "not to exceed" limit, may also be included in the contract to protect the client from runaway costs, especially when the project scope isn’t clearly defined.
It’s worth noting that a contractor listed a bid of $5000 for drywall materials, which should cost no more than $1200-$1500, indicating an expected markup of around 20%, with labor costs provided separately. Additionally, marking up materials and then adding approximately a 25% "Contractor Fee" against the entire project is not standard practice, as clients typically expect either one or the other.
Electrical contractors also mark up materials to recover costs. To determine the cost to mark up electrical materials, one would multiply the direct costs by the cost multiplier (e.g., $10,000 x 1.50 equals $15,000). When bidding on electrical projects, one must consider labor, the accessibility of wiring paths, and any additional costs such as structured wiring or removing old wiring.
When offering services that include stocking and delivering materials to the customer, some contractors wonder if a 35% markup on materials and a 6% markup on overhead is fair. It’s crucial to factor in the quality of service and the reputation when pricing, rather than focusing solely on price.
The cost to manufacture a product is instrumental in determining both the selling price and the profit margin. Many entrepreneurs make the mistake of designing a product fully before figuring out the manufacturing cost. More experienced companies will seek to answer major cost-related questions before investing resources in development.