GC margins?

Question

Sorry this is a repost.

We bid a renovation project to 3 GCs.  I have only received 1  response so far. But the GC accidentally sent me a breakdown of his subs  cost associated with the project with his mark up 45%  plus a 5% kick  back fee to the interior designers that referred him.  So I am looking  at a 50% mark up.  I know the GC provides a service and deserves to be  compensated for his services, so long as he earns it.  But I am curious  to see what is the typical GC mark up.  My understanding is that most  GCs get paid  on a cost plus method similar to this one but I am shocked  by the margin of the mark up. The other 2 GCs are independent of the  interior designers.

Another issue, for another day, is the kick  back fee to the designers. I paid them a reasonable flat fee for there  services.  The fact they are pushing their contractors makes me  skeptical. I felt like they were pushy, but I assumed they wanted to  work with people they know.  I now know the real reason.  The fee  they would have made on the kick back would have doubled their income on the project.Their kickback fee was never disclosed. And I paid them up front

What I really want to know is what is a typical GC fee.  The renovation project should cost about 100k.

Emilio Ramirez · Answer

No such thing as a typical GC markup. Ask a Contractor how much to charge and he'll tell you, "As much as I can get." A Bidding situation can bring the price down, but when the market puts contractors in demand, it is reflected in their pricing.  You may be paying market value for your work. The contractor may be able to find a sub who they can control to provide the same service and quality for below market value. If so, who is entitled to that savings. You, who asked them to bid, or them who has spent their career building networks with subs and finding guys who can do the work below market value.

That being said. I prefer the Construction Management Delivery Method. In this situation, you hire a construction manager who acts as an agent on behalf of the Owner. Here's a brief description that I've put together describing this process.

Construction Management as a Stepping Stone to Collaboration

The CM delivery method serves to better align the Contractor’s Goals with those of the Owner.

1.Fixed Fee – no markups on change orders

2.Transparency – Open book bidding and accounting allows Owner complete access to project cost records.

3.Flexibility - Allows for multiple scopes to be bid and analyzed by the CM and Owner prior to committing resulting in huge flexibility on the project scope.

4.Collaboration – Owner can use the CM Agency as his “Right Hand Man” truly representing the Owner’s best interests.

5.Non-Adversarial – Because the CM is contracted on a fixed fee, there is no arguing over change orders. This results in the CM and Owner being able to maintain a professional, non-adversarial relationship.

6.No Middle Man – Agreements with Trade Contractors and Owner are direct. This limits the possibility of a GC not paying his subs. The Owner also knows exactly what he’s paying and to whom.

7.Savings – If the CM and Owner are able to bid the project for less than the budget, all savings stay with the Owner.

I'm curious, what did the bid come in at?

Manolo D. · Answer

Account Closed I might have had a couple of bottles when I was posting that.

And I apologize to the community of the inappropriate comment regarding that kind of markup. To correct the mistake, 50% in a residential world is not uncommon. You also have some unknowns, like if I hire someone under a fixed price (90% of the time they are hourly), just because I don't want to baby sit them and want a turn-key job, my expenses will be like this, for every dollar i spend on a fixed price, i have to pay ~15% in employer taces, and ~15-20% in workers comp (on average), that brings me to 35-40% and leaving me with 10-15% in gross profit. OR, if I have to babysit them during the day, then I have to pay someone or myself to ensure quality of work.

Account Closed · Answer

@Manolo D., touche my friend, yet are you talking about the 10 billion-dollar international construction services company?  Yes, I'd say that they're a bit out of context here.

Nonetheless, for those who may be reading, in that world, many of the costs of doing business (e.g., general conditions, general requirements, fees, bonds, etc.) are line items costs before the single digit markup is applied.  The residential world doesn't break things out quite like that.  Additionally, commercial firms may add significantly to their profit on the buy-out as a matter of practice, whereas the numbers simply aren't large enough in residential to have similar impacts.

Perspective... 5% of 10 billion dollars is 500 million dollars.... 5% of $100,000 is $5,000.

What kind of residential contractor can take on a $100K job at a 5% markup?  One that'll be the contractor someone's posting about in another thread...

Account Closed · Answer

@Ravi P. - markup in the 50% range on residential remodeling is not at all unusual in our market... particularly for those contractors who are in demand (i.e., reputable, quality, etc.). Keep in mind that a 50% markup is only a 33% gross margin, which is actually below much of the information one might find if searching the internet on this topic.  There are a lot of costs to cover before realizing net profit, which is often in the single digits for contractors (which, I presume, is the 3-5% figure that @Manolo D. refers to as I know of no business which can operate on a 3-5% markup).

Your post is unclear in defining that the project "should cost about $100K"... when you say "cost", are you referring to the hard costs of the job (less overhead and profit) or what you think the net cost of the project should be to you?  In either case, where is this figure coming from?

On another note, I couldn't agree more with @Emilio Ramirez's post!  The CM approach is a great way to go, and with the clients I've worked with in this manner, I have netted them savings in excess of my fees - it's a win-win in my experience!

Please let us know when you receive the other two bids and how the three compared (vetted and scoped of course).

Manolo D. · Answer

@Ravi P. Some GCs I know charge 3-5% while others at 100%. It depends on actual situation and how busy your contractors are. Being a GC, your subs have inclusions and exclusions, you have to cover all those exclusions, say for example the sub excludes trash removal or dumpster fees and only includes demolition and trash haul 30 feet from the driveway, meaning if you cant get a dumpster in there, you as the GC is responsible of paying all dumpster fees and all expenses of the hauling the extra few feet from that. Another is, if there will be no working bathrooms during the rehab, that means you as the GC will need to provide portable toilet for yours subs. If the project is 100k, I would at least mark it up around 20-25k.

Kickbacks are not really unusual, think of it as a motivation for them connecting you to the right contractors. And as a contractor, someone has to pay for it, above my bottom line, they are part of my costs, any and all commissions are. In a different scenario, if someone brings you a deal that is 50 cents on a dollar, then he asks from you 55 cents, 5 being his fee, you agree, then he comes back to the seller and asks if he could get them to sell it at 45, then the sellers agree, he gets income on two ends, will that bother you and make you walk out of a good deal? I'd still buy it at 55. Moral is, if your referred contractor is within your price range, why would it bother you how much he is making or who shares his income? Don't put judgement on how design companies make their income, no one is forcing you to hire that specific contractor, providing that they are within budget, and they pass your vetting. The way I see it is, they are additional layer for you, the design company had previously worked with that contractor, and actually delivered, that has some value since there are too many shady contractor out there. Connections aren't cheap, specially if they are the right one. I mean if you think you could do a better job at a cheaper price than that of your GC, why hire one?

Russell Brazil · Answer

I dont use GC's myself. They are great for the people who need them, but I can get the subcontractors in their myself to get the work done and not need to pay a GC to do it.  Now if you have a  day job and can not manage a project yourself you will need a GC....or if you have multiple projects going on at once you may need a GC.

GC margins?

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